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                                                                    EXHIBIT 10.2

                             1994 STOCK OPTION PLAN
                                       OF
                       FLUID PROPULSION TECHNOLOGIES, INC.

                  1.       PURPOSES OF THE PLAN. The purposes of the 1994
Stock Option Plan (the "Plan") of Fluid Propulsion Technologies, Inc., a
California corporation (the "Company"), are to:

                           (a) Encourage selected employees, directors and
consultants to improve operations and increase profits of the Company;

                           (b) Encourage selected employees, directors and
consultants to accept or continue employment or association with the Company or
its Affiliates; and

                           (c) Increase the interest of selected employees,
directors and consultants in the Company's welfare through participation in the
growth in value of the common stock of the Company (the "Common Stock").

                  Options granted under this plan ("Options") may be "incentive
stock options" ("ISOs") intended to satisfy the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").

                  2.       ELIGIBLE PERSONS. Every person who at the date of
grant of an Option is a full-time employee of the Company or of any Affiliate
(as defined below) of the Company is eligible to receive NQOs or ISOs under
this Plan. Every person who at the date of grant is a consultant to, or
non-employee director of, the Company or any Affiliate (as defined below) of
the Company is eligible to receive NQOs under this Plan. The term "Affiliate"
as used in the Plan means a parent or subsidiary corporation as defined in
the applicable provisions (currently Sections 424(e) and (f), respectively)
of the Code. The term "employee" includes an officer or director who is an
employee, of the Company. The term "consultant" includes persons employed by,
or otherwise affiliated with, a consultant.

                  3.       STOCK SUBJECT TO THIS PLAN. Subject to the
provisions of Section 6.1.1 of the Plan, the total number of shares of stock
which may be issued under options granted pursuant to this Plan shall not
exceed 500,000 shares of Common Stock. The shares covered by the portion of
any grant under the Plan which expires unexercised shall become available
again for grants under the Plan.

                  4.       ADMINISTRATION.

                           4.1 GENERAL. This plan shall be administered by the
Board of Directors of the Company (the "Board") or, either in its entirety or
only insofar as required pursuant to Section 4.2 hereof, by a committee (the
"Committee") of at least two Board members to which administration of the Plan,
or of part of the Plan, is delegated (in either case, the "Administrator").

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                           4.2 DISINTERESTED ADMINISTRATION. From and after such
time as the Company registers a class of equity securities under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), it is
intended that this Plan shall be administered in accordance with the
disinterested administration requirements of Rule 16b-3 promulgated by the
Securities and Exchange Commission ("Rule 16b-3"), or any successor rule
thereto.

                           4.3 AUTHORITY OF ADMINISTRATOR. Subject to the other
provisions of this Plan, the Administrator shall have the authority, in its
discretion: (i) to grant Options; (ii) to determine the fair market value of the
Common Stock subject to Options; (iii) to determine the exercise price of
Options granted; (iv) to determine the persons to whom, and the time or times at
which, Options shall be granted, and the number of shares subject to each
Option; (v) to interpret this Plan; (vi) to prescribe, amend, and rescind rules
and regulations relating to this Plan; (vii) to determine the terms and
provisions of each Option granted (which need not be identical), including but
not limited to, the time or times at which Options shall be exercisable; (viii)
with the consent of the optionee, to modify or amend any Option; (ix) to
authorize any person to execute on behalf of the Company any instrument
evidencing the grant of an Option; and (x) to make all other determinations
deemed necessary or advisable for the administration of this Plan. The
Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper.

                           4.4 INTERPRETATION BY ADMINISTRATOR. All questions of
interpretation, implementation, and application of this Plan shall be determined
by the Administrator. Such determinations shall be final and binding on all
persons.

                           4.5 RULE 16b-3. With respect to persons subject to
Section 16 of the Exchange Act, if any, transactions under this Plan are
intended to comply with the applicable conditions of Rule 16b-3, or any
successor rule thereto. To the extent any provision of this Plan or action by
the Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Administrator.
Notwithstanding the above, it shall be the responsibility of such persons, not
of the Company or the Administrator, to comply with the requirements of Section
16 of the Exchange Act; and neither the Company nor the Administrator shall be
liable if this Plan or any transaction under this Plan fails to comply with the
applicable conditions of Rule 16b-3 or any successor rule thereto, or if any
such person incurs any liability under Section 16 of the Exchange Act.

                  5.       GRANTING OF OPTIONS; OPTION AGREEMENT. No Options
shall be granted under this Plan after ten years from the date of adoption of
this Plan by the Board. Each Option shall be evidenced by a written stock
option agreement, in form satisfactory to the Company, executed by the
Company and the person to whom such Option is granted; provided, however,
that the failure by the Company, the optionee, or both to execute such an
agreement shall not invalidate the granting of an Option, although the
exercise of each option shall be subject to Section 6.1.3. The stock option
agreement shall specify whether each Option it evidences is a NQO or an ISO.
Subject to Section 6.3.3 with respect to ISOs, the Administrator may approve
the grant of Options under this Plan to persons who are expected to become
employees, directors or consultants of the Company, but are not employees,
directors or consultants at the date of approval.

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                  6.       TERMS AND CONDITIONS OF OPTIONS. Each Option
granted under this Plan shall be subject to the terms and conditions set
forth in Section 6.1. NQOs shall be also subject to the terms and conditions
set forth in Section 6.2, but not those set forth in Section 6.3. ISOs shall
also be subject to the terms and conditions set forth in Section 6.3, but not
those set forth in Section 6.2.

                           6.1 TERMS AND CONDITIONS TO WHICH ALL OPTIONS ARE
SUBJECT. All Options granted under this Plan shall be subject to the following
terms and conditions:

                               6.1.1 CHANGES IN CAPITAL STRUCTURE. Subject to
Section 6.1.2, if the stock of the Company is changed by reason of a stock
split, reverse stock split, stock dividend, or recapitalization, combination
or reclassification, appropriate adjustments shall be made by the Board in
(a) the number and class of shares of stock subject to this Plan and each
Option outstanding under this Plan, and (b) the exercise price of each
outstanding Option; provided, however, that the Company shall not be required
to issue fractional shares as a result of any such adjustments. Each such
adjustment shall be subject to approval by the Board in its sole discretion.

                               6.1.2 CORPORATE TRANSACTIONS. In the event
of the proposed dissolution or liquidation of the Company, the Administrator
shall notify each optionee at least 30 days prior to such proposed action. To
the extent not previously exercised, all Options will terminate immediately
prior to the consummation of such proposed action. In the event of a merger or
consolidation of the Company with or into another corporation or entity in which
the Company does not survive, or in the event of a sale of all or substantially
all of the assets of the Company in which the shareholders of the Company
receive securities of the acquiring entity or an affiliate thereof, all Options
shall be assumed or equivalent options shall be substituted by the successor
corporation (or other entity) or a parent or subsidiary of such successor
corporation (or other entity). If such successor does not agree to assume the
Options or to substitute equivalent options therefor, unless the Administrator
shall determine otherwise, the Options will expire upon such event.

                               6.1.3 TIME OF OPTION EXERCISE. Subject to
Section 5 and Section 6.3.4, Options granted under this Plan shall be
exercisable (a) immediately as of the effective date of the stock option
agreement granting the Option, or (b) in accordance with a schedule related to
the date of the grant of the Option, the date of first employment, or such other
date as may be set by the Administrator (in any case, the "Vesting Base Date")
and specified in the written stock option agreement relating to such Option;
provided, however, that the right to exercise an Option must vest at the rate of
at least 20% per year over five years from the date the option was granted. In
any case, no Option shall be exercisable until a written stock option agreement
in form satisfactory to the Company is executed by the Company and the optionee.

                               6.1.4 OPTION GRANT DATE. Except in the case
of advance approvals described in Section 5(d), the date of grant of an Option
under this Plan shall be the date as of which the Administrator approves the
grant.

                               6.1.5 NONASSIGNABILITY OF OPTION RIGHTS. No
Option granted under this Plan shall be assignable or otherwise transferable by
the optionee except by will or by

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the laws of descent and distribution. During the life of the optionee, an Option
shall be exercisable only by the optionee.

                               6.1.6 PAYMENT. Except as provided below,
payment in full, in cash, shall be made for all stock purchased at the time
written notice of exercise of an Option is given to the Company, and proceeds of
any payment shall constitute general funds of the Company. At the time an Option
is granted or exercised, the Administrator, in the exercise of its absolute
discretion after considering any tax or accounting consequences, may authorize
any one or more of the following additional methods of payment:

                                     (a) Acceptance of the optionee's full
recourse promissory note for all or part of the Option price, payable on such
terms and bearing such interest rate as determined by the Administrator (but
in no event less than the minimum interest rate specified under the Code at
which no additional interest would be imputed), which promissory note may be
either secured or unsecured in such manner as the Administrator shall approve
(including, without limitation, by a security interest in the shares of the
Company); and

                                     (b) Delivery by the optionee of Common
Stock already owned by the optionee for all or part of the Option price,
provided the value (determined as set forth in Section 6.1.11) of such Common
Stock is equal on the date of exercise to the Option price, or such portion
thereof as the optionee is authorized to pay by delivery of such stock;
provided, however, that if an optionee has exercised any portion of any
Option granted by the Company by delivery of Common Stock, the optionee may
not, within six months following such exercise, exercise any Option granted
under this Plan by delivery of Common Stock without the consent of the
Administrator.

                                6.1.7 TERMINATION OF EMPLOYMENT. If for any
reason other than death or permanent and total disability, an optionee ceases to
be employed by the Company or any of its Affiliates (such event being called a
"Termination"), Options held at the date of Termination (to the extent then
exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than
thirty days after the date of such Termination as is specified in the Option
Agreement (but in no event after the Expiration Date); PROVIDED, that if such
exercise of the Option would result in liability for the optionee under Section
16(b) of the Exchange Act, then such three-month period automatically shall be
extended until the tenth day following the last date upon which optionee has any
liability under Section 16(b) (but in no event after the Expiration Date). If an
optionee dies or becomes permanently and totally disabled while employed by the
Company or an Affiliate or within the period that the Option remains exercisable
after Termination, Options then held (to the extent then exercisable) may be
exercised, in whole or in part, by the optionee, by the optionee's personal
representative or by the person to whom the Option is transferred by devise or
the laws of descent and distribution, at any time within twelve months after the
death or eighteen months after the permanent and total disability of the
optionee, or such other period of not less than six months from the date of
Termination as is specified in the Option Agreement (but in no event after the
Expiration Date). For purposes of this Section 6.1.7, "employment" includes
service as a director or as a consultant. For purposes of this Section 6.1.7, an
optionee's employment shall not be deemed to terminate by reason of sick leave,
military leave or other leave of absence approved by the Administrator, if the
period of any such leave does not exceed

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90 days or, if longer, if the optionee's right to reemployment by the Company or
any Affiliate is guaranteed either contractually or by statute.

                               6.1.8 REPURCHASE OF STOCK. At the option of
the Administrator, the stock to be delivered pursuant to the exercise of any
Option granted to an employee, director or consultant under this Plan may be
subject to a right of repurchase in favor of the Company with respect to any
employee, or director or consultant whose employment, or director or consulting
relationship with the Company is terminated. Such right of repurchase either:

                                     (a) shall be at the Option exercise
price and (i) shall lapse at the rate of at least 20% per year over five
years from the date the Option is granted (without regard to the date it
becomes exercisable), and must be exercised for cash or cancellation of
purchase money indebtedness within 90 days of such termination and (ii) if
the right is assignable by the Company, the assignee must pay the Company
upon assignment of the right (unless the assignee is a 100% owned subsidiary
of the Company or is an Affiliate) cash equal to the difference between the
Option exercise price and the value (determined as set forth in Section
6.1.11) of the stock to be purchased if the Option exercise price is less
than such value; or

                                     (b) shall be at the higher of the Option
exercise price or the value (determined as set forth in Section 6.1.11) of
the stock being purchased on the date of termination, and must be exercised
for cash or cancellation of purchase money indebtedness within 90 days of
termination of employment, and such right shall terminate when the Company's
securities become publicly traded.

                  Determination of the number of shares subject to any such
right of repurchase shall be made as of the date the employee's employment by,
director's director relationship with, or consultant's consulting relationship
with, the Company terminates, not as of the date that any Option granted to such
employee, director or consultant is thereafter exercised.

                               6.1.9 WITHHOLDING AND EMPLOYMENT TAXES. At
the time of exercise of an Option or at such other time as the amount of such
obligations becomes determinable (the "Tax Date"), the optionee shall remit to
the Company in cash all applicable federal and state withholding and employment
taxes. If authorized by the Administrator in its sole discretion after
considering any tax or accounting consequences, an optionee may elect to (a)
deliver a promissory note on such terms as the Administrator deems appropriate,
(b) tender to the Company previously owned shares of Stock or other securities
of the Company, or (c) have shares of Common Stock which are acquired upon
exercise of the Option withheld by the Company to pay some or all of the amount
of tax that is required by law to be withheld by the Company as a result of the
exercise of such Option, subject to the following limitations:

                                     (i) Any election pursuant to clause (c)
above by an optionee subject to Section 16 of the Exchange Act shall either
(x) be made at least six months before the Tax Date and shall be irrevocable;
or (y) shall be made in (or made earlier to take effect in) any ten-day
period beginning on the third business day following the date of release for
publication of the Company's quarterly or annual summary statements of
earnings and shall be subject to approval by the Administrator, which
approval may be given at any time after such

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election has been made. In addition, in the case of (y), the Option shall be
held at least six months prior to the Tax Date.

                                     (ii) Any election pursuant to clause (b)
above, where the optionee is tendering Common Stock issued pursuant to the
exercise of an Option, shall require that such shares be held at least six
months prior to the Tax Date.

                  Any of the foregoing limitations may be waived (or additional
limitations may be imposed) by the Administrator, in its sole discretion, if the
Administrator determines that such foregoing limitations are not required (or
that such additional limitations are required) in order that the transaction
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3,
or any successor rule thereto. In addition, any of the foregoing limitations may
be waived by the Administrator, in its sole discretion, if the Administrator
determines that Rule 16b-3, or any successor rule thereto, is not applicable to
the exercise of the Option by the optionee or for any other reason.

                  Any securities tendered or withheld in accordance with this
Section 6.1.9 shall be valued by the Company as of the Tax Date.

                               6.1.10 OTHER PROVISIONS. Each Option granted
under this Plan may contain such other terms, provisions, and conditions not
inconsistent with this Plan as may be determined by the Administrator, and each
ISO granted under this Plan shall include such provisions and conditions as are
necessary to qualify the Option as an "incentive stock option" within the
meaning of Section 422 of the Code. If Options provide for a right of first
refusal in favor of the Company with respect to stock acquired by employees,
directors or consultants, such Options shall provide that the right of first
refusal shall terminate upon the earlier of (a) the closing of the Company's
initial registered public offering to the public generally, or (b) the date ten
years after the grant date as set forth in Section 6.1.4.

                               6.1.11 DETERMINATION OF VALUE. For purposes of
the Plan, the value of Common Stock or other securities of the Company shall
be determined as follows:

                                     (a) If the stock of the Company is
listed on any established stock exchange or a national market system,
including without limitation the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation System, its fair
market value shall be the closing sales price for such stock or the closing
bid if no sales were reported, as quoted on such system or exchange (or the
largest such exchange) for the date the value is to be determined (or if
there are no sales for such date, then for the last preceding business day on
which there were sales), as reported in the WALL STREET JOURNAL or similar
publication.

                                     (b) If the stock of the Company is
regularly quoted by a recognized securities dealer but selling prices are not
reported, its fair market value shall be the mean between the high bid and
low asked prices for the stock on the date the value is to be determined (or
if there are no quoted prices for the date of grant, then for the last
preceding business day on which there were quoted prices).

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                                     (c) In the absence of an established
market for the stock, the fair market value thereof shall be determined in
good faith by the Administrator, with reference to the Company's net worth,
prospective earning power, dividend-paying capacity, and other relevant
factors, including the goodwill of the Company, the economic outlook in the
Company's industry, the Company's position in the industry and its
management, and the values of stock of other corporations in the same or a
similar line of business.

                               6.1.12 OPTION TERM. Subject to Section 6.3.5,
no Option shall be exercisable more than ten years after the date of grant,
or such lesser period of time as is set forth in the stock option agreement
(the end of the maximum exercise period stated in the stock option agreement
is referred to in this Plan as the "Expiration Date").

                               6.1.13 EXERCISE PRICE. The exercise price of
any Option granted to any person who owns, directly or by attribution under
the Code currently Section 424(d), stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company or of
any Affiliate (a "Ten Percent Stockholder") shall in no event be less than
110% of the fair market value (determined in accordance with Section 6.1.11)
of the stock covered by the Option at the time the Option is granted.

                           6.2 TERMS AND CONDITIONS TO WHICH ONLY NQOS ARE
SUBJECT. Except as set forth in Section 6.1.13, the exercise price of a NQO
shall be not less than 85 % of the fair market value (determined in accordance
with Section 6.1.11) of the stock subject to the Option on the date of grant.

                           6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOS ARE
SUBJECT. Options granted under this Plan which are designated as ISOs shall be
subject to the following terms and conditions:

                               6.3.1 EXERCISE PRICE. Except as set forth in
Section 6.1.13, the exercise price of an ISO shall be determined in accordance
with the applicable provisions of the Code and shall in no event be less than
the fair market value (determined in accordance with Section 6.1.11) of the
stock covered by the Option at the time the Option is granted.

                               6.3.2 DISQUALIFYING DISPOSITIONS. If stock
acquired by exercise of an ISO granted pursuant to this Plan is disposed of in a
"disqualifying disposition" within the meaning of Section 422 of the Code, the
holder of the stock immediately before the disposition shall promptly notify the
Company in writing of the date and terms of the disposition and shall provide
such other information regarding the Option as the Company may reasonably
require.

                               6.3.3 GRANT DATE. If an ISO is granted in
anticipation of employment as provided in Section 5(d), the Option shall be
deemed granted, without further approval, on the date the grantee assumes the
employment relationship forming the basis for such grant, and, in addition,
satisfies all requirements of this Plan for Options granted on that date.

                               6.3.4 TERM. Notwithstanding Section 6.1.12,
no ISO granted to any Ten Percent Stockholder shall be exercisable more than
five years after the date of grant.

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                  7. MANNER OF EXERCISE. An optionee wishing to exercise an
Option shall give written notice to the Company at its principal executive
office, to the attention of the officer of the Company designated by the
Administrator, accompanied by payment of the exercise price as provided in
Section 6.1.6. The date the Company receives written notice of an exercise
hereunder accompanied by payment of the exercise price will be considered as the
date such Option was exercised. Promptly after receipt of written notice of
exercise of an Option, the Company shall, without stock issue or transfer taxes
to the optionee or other person entitled to exercise the Option, deliver to the
optionee or such other person a certificate or certificates for the requisite
number of shares of stock. An optionee or permitted transferee of an optionee
shall not have any privileges as a shareholder with respect to any shares of
stock covered by the Option until the date of issuance (as evidenced by the
appropriate entry on the books of the Company or a duly authorized transfer
agent) of such shares.

                  8. EMPLOYMENT OR CONSULTING RELATIONSHIP. Nothing in this Plan
or any Option granted thereunder shall interfere with or limit in any way the
right of the Company or of any of its Affiliates to terminate any optionee's
employment or consulting at any time, nor confer upon any optionee any right to
continue in the employ of, or consult with, the Company or any of its
Affiliates.

                  9. FINANCIAL INFORMATION. The Company shall provide to each
optionee during the period such optionee holds an outstanding Option, and to
each holder of Common Stock acquired upon exercise of Options granted under the
Plan for so long as such person is a holder of such Common Stock, annual
financial statements of the Company as prepared either by the Company or
independent certified public accountants of the Company. Such financial
statements shall include, at a minimum, a balance sheet and an income statement,
and shall be delivered as soon as practicable following the end of the Company's
fiscal year.

                  10. CONDITIONS UPON ISSUANCE OF SHARES. Shares of Common Stock
shall not be issued pursuant to the exercise of an Option unless the exercise of
such Option and the issuance and delivery of such shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended (the "Securities Act").

                  11. NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan shall
not be construed as creating any limitations on the power of the Company to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options other than under the Plan.

                  12. MARKET STANDOFF. Each Optionee, if so requested by the
Company or any representative of the underwriters in connection with any
registration of the offering of any securities of the company under the
Securities Act shall not sell or otherwise transfer any shares of Common Stock
acquired upon exercise of Options during that period following the effective
date of a registration statement of the Company filed under the Securities Act
agreed to by the Company and the representative(s) of the underwriters;
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

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stop-transfer instructions with respect to securities subject to the foregoing
restriction until the end of such period.

                  13. AMENDMENTS TO PLAN. The Board may at any time amend,
alter, suspend or discontinue this Plan. Without the consent of an optionee, no
amendment, alteration, suspension or discontinuance may adversely affect
outstanding Options except to conform this Plan and ISOs granted under this Plan
to the requirements of federal or other tax laws relating to incentive stock
options. No amendment, alteration, suspension or discontinuance shall require
shareholder approval unless (a) shareholder approval is required to preserve
incentive stock option treatment for federal income tax purposes, or (b) the
Board otherwise concludes that shareholder approval is advisable.

                  14. EFFECTIVE DATE OF PLAN. This Plan shall become effective
upon adoption by the Board provided, however, that no Option shall be
exercisable unless and until written consent of the shareholders of the Company,
or approval of shareholders of the Company voting at a validly called
shareholders' meeting, is obtained within 12 months after adoption by the Board.
If such shareholder approval is not obtained within such time, Options granted
hereunder shall terminate and be of no force and effect from and after
expiration of such 12-month period. Options may be granted and exercised under
this Plan only after there has been compliance with all applicable federal and
state securities laws.

Plan adopted by the Board of Directors on October 19, 1994.

Plan approved by Shareholders on _________________________________.

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                                   EXHIBIT C-2

                        Incentive Stock Option Agreement

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                       FLUID PROPULSION TECHNOLOGIES, INC.
                           1994 STOCK INCENTIIVE PLAN
                        INCENTIVE STOCK OPTION AGREEMENT

                  (A)    Name of Optionee:____________________________________
                  (B)    Grant Date:__________________________________________
                  (C)    Number of Shares:____________________________________
                  (D)    Exercise Price:______________________________________
                  (E)    Vesting Base Date:___________________________________
                  (F)    Effective Date:______________________________________

                  THIS INCENTIVE STOCK OPTION AGREEMENT (the "AGREEMENT"), is
made and entered into as of the date set forth in ITEM F above (the "EFFECTIVE
DATE") between Fluid Propulsion Technologies, Inc., a California corporation
(the "COMPANY") and the person named in ITEM A above (the "OPTIONEE").

                  THE PARTIES AGREE AS FOLLOWS:

                  1.       GRANT OF OPTION:  VESTING BASE DATE.

                           1.1 GRANT. The Company hereby grants to Optionee
pursuant to the Company's 1994 Stock Incentive Plan (the "PLAN"), a copy of
which is attached to this Agreement as EXHIBIT 1, an incentive stock option (the
"ISO") to purchase all or any part of an aggregate of the number of shares (the
"ISO SHARES") of the Company's Common Stock (as defined in the Plan) listed in
ITEM C above on the terms and conditions set forth herein and in the Plan, the
terms and conditions of the Plan being hereby incorporated into this Agreement
by reference.

                           1.2 VESTING BASE DATE. The parties hereby establish
the date set forth in ITEM E above as the Vesting Base Date (as defined in
Section 5.1 below).

                  2. EXERCISE PRICE. The exercise price for purchase of each
share of Common Stock covered by this ISO shall be the price set forth in ITEM D
above.

                  3. TERM. Unless otherwise specified on EXHIBIT 3 attached
hereto, if any (the absence of such exhibit indicating that no such exhibit was
intended), this ISO shall expire as provided in Section 6.1.11 of the Plan.

                  4. ADJUSTMENT OF ISOS. The Company shall adjust the number and
kind of shares and the exercise price thereof in certain circumstances in
accordance with the provisions of Section 6.1.1 of the Plan.

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                  5.       EXERCISE OF OPTIONS.

                           5.1 VESTING; TIME OF EXERCISE. This ISO shall be
exercisable according to the schedule set forth on EXHIBIT 5.1 attached hereto.
Such schedule shall commence as of the date set forth in ITEM E above (the
"VESTING BASE DATE"). The absence of EXHIBIT 5.1 indicates that no such exhibit
was intended and that the ISO Shares shall be subject to the Company's rights
set forth in Section 7.

                           5.2 EXERCISE AFTER TERMINATION OF STATUS AS AN
EMPLOYEE, DIRECTOR OR CONSULTANT. In the event of termination of Optionee's
continuous status as an employee, director or consultant, this ISO may be
exercised only in accordance with the provisions of Section 6.1.7 of the Plan.

                           5.3 MANNER OF EXERCISE. Optionee may exercise this
ISO, or any portion of this ISO, by giving written notice to the Company at its
principal executive office, to the attention of the officer of the Company
designated by the Plan Administrator, accompanied by a copy of the Employee
Stock Option Plan Stock Purchase Agreement in substantially the form attached
hereto as EXHIBIT 5.3 executed by Optionee (or at the option of the Company such
other form of stock purchase agreement as shall then be acceptable to the
Company), payment of the exercise price and payment of any applicable
withholding or employment taxes. The date the Company receives written notice of
an exercise hereunder accompanied by payment will be considered as the date this
ISO was exercised.

                           5.4 PAYMENT. Except as provided in EXHIBIT 5.4
attached hereto, if any (the absence of such exhibit indicating that no exhibit
was intended), payment may be made for ISO Shares purchased at the time written
notice of exercise of the ISO is given to the Company, by delivery of cash,
check, previously owned shares of Common Stock (provided that delivery of
previously owned shares may not be made more than once in any six-month period),
or a full recourse promissory note equal to up to 90% of the exercise price and
payable over no more than five years. The proceeds of any payment shall
constitute general funds of the Company.

                           5.5 DELIVERY OF CERTIFICATE. Promptly after receipt
of written notice of exercise of the ISO, the Company shall, without stock issue
or transfer taxes to the Optionee or other person entitled to exercise, deliver
to the Optionee or other person a certificate or certificates for the requisite
number of ISO Shares. An Optionee or transferee of an Optionee shall not have
any privileges as a shareholder with respect to any ISO Shares covered by the
option until the date of issuance of a stock certificate.

                  6. NONASSIGNABILITY OF ISO. This ISO is not assignable or
transferable by Optionee except by will or by the laws of descent and
distribution. During the life of Optionee, the ISO is exercisable only by the
Optionee. Any attempt to assign, pledge, transfer, hypothecate or otherwise
dispose of this ISO in a manner not herein permitted, and any levy of execution,
attachment, or similar process on this ISO, shall be null and void.

                  7. COMPANY'S REPURCHASE RIGHTS. The ISO Shares arising from
exercise of this ISO shall be subject to a right of repurchase in favor of the
Company (the "RIGHT OF REPURCHASE") to the extent set forth on EXHIBIT 7
attached hereto (the absence of such exhibit

                                       12
<PAGE>

indicating that no such exhibit was intended and that the ISO shall be subject
to the limitations set forth on EXHIBIT 5.1). If the Optionee's employment with
the Company terminates before the Right of Repurchase lapses in accordance with
EXHIBIT 7, the Company may purchase ISO Shares subject to the Right of
Repurchase (either by payment of cash or by cancellation of purchase money
indebtedness) for an amount equal to the price the Optionee paid for such ISO
Shares (exclusive of any taxes paid upon acquisition of the stock) by giving
notice at any time within the later of (a) 30 days after the acquisition of the
ISO Shares upon option exercise, or (b) 90 days after such termination of
employment that the Company is exercising its right of repurchase. The Company
shall include with such notice payment in full in cash or by evidence of
cancellation of purchase money indebtedness. The Optionee may not dispose of or
transfer ISO Shares while such shares are subject to the Right of Repurchase and
any such attempted transfer shall be null and void. The Company's rights under
this Section 7 shall be fully assignable, in whole or in part; PROVIDED, that if
the Company assigns such rights, the assignee (other than an assignee that is a
wholly-owned subsidiary or the sole parent of the Company) shall pay to the
Company upon assignment cash equal to the difference, if any, between the then
fair market value of the ISO Shares and the aggregate exercise price thereof.

                  8.       COMPANY'S RIGHT OF FIRST REFUSAL.

                           8.1 RIGHT OF FIRST REFUSAL. In the event that the
Optionee proposes to sell, pledge, or otherwise transfer any ISO Shares or any
interest in such shares to any person or entity, the Company shall have a right
of first refusal (the "RIGHT OF FIRST REFUSAL") with respect to such ISO Shares.
If Optionee desires to transfer ISO Shares, Optionee shall give a written notice
(the "TRANSFER NOTICE") to the Company describing fully the proposed transfer,
including the number of ISO Shares proposed to be transferred, the proposed
transfer price, and the name and address of the proposed transferee. The
Transfer Notice shall be signed both by Optionee and by the proposed transferee
and must constitute a binding commitment of both such parties for the transfer
of such ISO Shares. The Company may elect to purchase all, but not less than
all, of the ISO Shares subject to the Transfer Notice by delivery of a notice of
exercise of the Company's Right of First Refusal within 30 days after the date
the Transfer Notice is delivered to the Company. The purchase price paid by the
Company shall be the price per share equal to the proposed per share transfer
price, and shall be paid to the Optionee within 60 days after the date the
Transfer Notice is received by the Company, unless a longer period for payment
was offered by the proposed transferee, in which case the Company shall pay the
purchase price within such longer period. The Company's rights under this
Section 8.1 shall be freely assignable, in whole or in part. Notwithstanding the
foregoing, the Right of First Refusal does not apply to a transfer of shares by
gift or devise to the Optionee's immediate family (i.e., parents, spouse or
children or to a trust for the benefit of the Optionee or any of the Optionee's
immediate family members), but does apply to any subsequent transfer of such
shares by such immediate family members.

                           8.2 TRANSFER OF ISO SHARES. If the Company fails to
exercise the Right of First Refusal within 30 days after the date the Transfer
Notice is delivered to the Company, the Optionee may, not later than 75 days
following delivery to the Company of the Transfer Notice, conclude a transfer of
the ISO Shares subject to the Transfer Notice on the terms and conditions
described in the Transfer Notice. Any proposed transfer on terms and conditions
different from those described in the Transfer Notice, as well as any subsequent
proposed

                                       13
<PAGE>

transfer by the Optionee, shall again be subject to the Right of First Refusal
and shall require compliance by the Optionee with the procedure described in
Section 8.1 of this Agreement. If the Company exercises the Right of First
Refusal, the parties shall consummate the sale of ISO Shares on the terms, other
than price, as applicable under Section 8.1, set forth in the Transfer Notice;
provided, however, in the event the Transfer Notice provides for payment for the
ISO Shares other than in cash, the Company shall have the option of paying for
the ISO Shares by paying in cash the present value of the consideration
described in the Transfer Notice; and further provided that if the value of
noncash consideration is to be paid, the Optionee disagrees with the value
determined by the Company, the Optionee may request an independent appraisal by
an appraiser acceptable to the Optionee and the Company, the costs of such
appraisal to be borne equally by the Optionee and the Company.

                           8.3 BINDING EFFECT. The Right of First Refusal shall
inure to the benefit of the successors and assigns of the Company and shall be
binding upon any transferee of ISO Shares other than a transferee acquiring ISO
Shares in a transaction where the Company failed to exercise the Right of First
Refusal (a "FREE TRANSFEREE") or a transferee of a Free Transferee.

                           8.4 TERMINATION OF COMPANY'S RIGHT OF FIRST REFUSAL.
Notwithstanding anything in this Section 8, the Company shall have no Right of
First Refusal, and Optionee shall have no obligation to comply with the
procedures in Sections 8.1 through 8.3 after the earlier of (i) the closing of
the Company's initial public offering to the public generally, or (ii) the date
ten years after the Effective Date.

                  9. MARKET STANDOFF. Optionee hereby agrees that if so
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of the securities of the Company under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), Optionee shall not
sell or otherwise transfer the ISO Shares for that period following the
effective date of a Registration Statement filed under the Securities Act agreed
to by the Company and the representative(s) of the underwriters; provided that
such restrictions shall only apply to the first two registration statements of
the Company to become effective under the Securities Act which include
securities to be sold on behalf of the Company in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to the ISO Shares subject to the foregoing
restrictions until the end of each such period.

                  10.      RESTRICTION ON ISSUANCE OF SHARES.

                           10.1 LEGALITY OF ISSUANCE. The Company shall not be
obligated to sell or issue any ISO Shares pursuant to this Agreement if such
sale or issuance, in the opinion of the Company and the Company's counsel, might
constitute a violation by the Company of any provision of law, including without
limitation the provisions of the Securities Act.

                           10.2 REGISTRATION OR QUALIFICATION OF SECURITIES. The
Company may, but shall not be required to, register or qualify the sale of this
ISO or any ISO Shares under the Securities Act or any other applicable law. The
Company shall not be obligated to take any

                                       14
<PAGE>

affirmative action in order to cause the grant or exercise of this option or the
issuance or sale of any ISO Shares pursuant thereto to comply with any law.

                  11. RESTRICTION ON TRANSFER. Regardless whether the sale of
the ISO Shares has been registered under the Securities Act or has been
registered or qualified under the securities laws of any state, the Company may
impose restrictions upon the sale, pledge or other transfer of ISO Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and the Company's counsel, such restrictions are
necessary or desirable in order to achieve compliance with the provisions of the
Securities Act, the securities laws of any state, or any other law, or if the
Company does not desire to have a trading market develop for its securities.

                  12. STOCK CERTIFICATE. Stock certificate evidencing ISO Shares
may bear such restrictive legends as the Company and the Company's counsel deem
necessary or advisable under applicable law or pursuant to this Agreement.

                  13. DISQUALIFYING DISPOSITIONS. If stock acquired by exercise
of this ISO is disposed of within two years after the Effective Date or within
one year after date of such exercise (as determined under Section 5.3 of this
Agreement), the Optionee immediately prior to the disposition shall promptly
notify the Company in writing of the date and terms of the disposition and shall
provide such other information regarding the disposition as the Company may
reasonably require.

                  14. REPRESENTATIONS, WARRANTIES, COVENANTS, AND
ACKNOWLEDGMENTS OF OPTIONEE UPON EXERCISE OF ISO. Optionee hereby agrees that in
the event that the Company and the Company's counsel deem it necessary or
advisable in the exercise of their discretion, the issuance of ISO Shares may be
conditioned upon certain representations, warranties, and acknowledgments by the
person exercising the ISO.

                  15. ASSIGNMENT: BINDING EFFECT. Subject to the limitations set
forth in this Agreement, this Agreement shall be binding upon and inure to the
benefit of the executors, administrators, heirs, legal representatives, and
successors of the parties hereto; provided, however, that Optionee may not
assign any of Optionee's rights under this Agreement.

                  16. DAMAGES. Optionee shall be liable to the Company for all
costs and damages, including incidental and consequential damages, resulting
from a disposition of ISO Shares which is not in conformity with the provisions
of this Agreement.

                  17. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California excluding
those laws that direct the application of the laws of another jurisdiction.

                  18. NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless and until the Optionee is notified in
writing to the contrary, all notices, communications, and documents directed to
the Company and related to the Agreement, if not delivered by hand, shall be
mailed, addressed as follows:

                                       15
<PAGE>

                   Fluid Propulsion Technologies, Inc.
                   3350 Scott Boulevard, Bldg. 33
                   Santa Clara, California 95054
                   Attn: President and Chief Executive Officer

Unless and until the Company is notified in writing to the contrary, all
notices, communications, and documents intended for the Optionee and related to
this Agreement, if not delivered by hand, shall be mailed to Optionee's last
known address as shown on the Company's books. Notices and communications shall
be mailed by first class mail, postage prepaid; documents shall be mailed by
registered mail, return receipt requested, postage prepaid. All mailings and
deliveries related to this Agreement shall be deemed received when actually
received, if by hand delivery, and two business days after mailing, if by mail.

                                       16
<PAGE>

                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the Effective Date.

                                     FLUID PROPULSION TECHNOLOGIES, INC.

                                     By:
                                        ---------------------------------------
                                     Title:
                                           ------------------------------------

The Optionee hereby accepts and agrees to be bound by all of the terms and
conditions of this Agreement and the Plan.

                                     ------------------------------------------
                                     Optionee

Optionee's spouse indicates by the execution of this Option Agreement his or her
consent to be bound by the terms thereof as to his or her interests, whether as
community property or otherwise, if any, in the option granted hereunder, and in
any ISO Shares purchased pursuant to this Agreement.

                                     ------------------------------------------
                                     Optionee's Spouse

                                       17
<PAGE>

                                    EXHIBITS

Exhibit 1                  1994 Stock Incentive Plan

Exhibit 3                  Expiration of Incentive Stock Options
(if applicable)

Exhibit 5.1                Time of Exercise
(if applicable)

Exhibit 5.3                1994 Stock Incentive Plan Stock Option
                           Exercise and Purchase Agreement

Exhibit 5.4                Payment
(if applicable)

Exhibit 7                  Right of Repurchase
(if applicable)

                                        18
<PAGE>

                               EXHIBIT 5.1 TO THE
                        INCENTIVE STOCK OPTION AGREEMENT

         The ISO shall be exercisable with respect to twenty five percent (25%)
of the total number of ISO Shares one year after the Vesting Base Date and,
thereafter, with respect to an additional 2.083% of such shares on the last day
of each calendar month after the first anniversary of the Vesting Base Date, so
that all of the ISO Shares may be purchased on and after the fourth anniversary
of the Vesting Base Date.

Initialled by:                       FLUID PROPULSION TECHNOLOGIES, INC.

                                     By:
                                        ---------------------------------------
                                     Title:
                                           ------------------------------------

                                     ------------------------------------------
                                     Optionee

                                        19
<PAGE>

                                   EXHIBIT C-3

                       Nonqualified Stock Option Agreement

                                        20
<PAGE>

                       FLUID PROPULSION TECHNOLOGIES, INC.
                            1994 STOCK INCENTIVE PLAN
                       NONQUALIFIED STOCK OPTION AGREEMENT
                       -----------------------------------

                  (A)  Name of Optionee:____________________________________
                  (B)  Grant Date:__________________________________________
                  (C)  Number of Shares:____________________________________
                  (D)  Exercise Price:______________________________________
                  (E)  Vesting Base Date:___________________________________
                  (F)  Effective Date:______________________________________

                  THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "AGREEMENT"),
is made and entered into as of the date set forth in ITEM F above (the
"EFFECTIVE DATE") between Fluid Propulsion Technologies, Inc., a California
corporation (the "COMPANY") and the person named in ITEM A above (the
"OPTIONEE").

                  THE PARTIES AGREE AS FOLLOWS:

                  1.       GRANT OF OPTION; VESTING BASE DATE.

                           1.1 GRANT. The Company hereby grants to Optionee
pursuant to the Company's 1994 Stock Incentive Plan (the "PLAN"), a copy of
which is attached to this Agreement as Exhibit 1, a nonqualified stock option
(the "NQO") to purchase all or any part of an aggregate of the number of
shares (the "NQO Shares") of the Company's Common Stock (as defined in the
Plan) listed in ITEM C above on the terms and conditions set forth herein and
in the Plan, the terms and conditions of the Plan being hereby incorporated
into this Agreement by reference. This option does not constitute, and will
not be treated as, an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended.

                           1.2 VESTING BASE DATE. The parties hereby establish
the date set forth in ITEM E above as the Vesting Base Date (as defined in
Section 5.1 below).

                  2. EXERCISE PRICE. The exercise price for purchase of each
share of Common Stock covered by this NQO shall be the price set forth in ITEM
D above.

                  3. TERM. Unless otherwise specified on EXHIBIT 3 attached
hereto, if any (the absence of such exhibit indicating that no such exhibit
was intended), this NQO shall expire as provided in Section 6.1.12 of the Plan.

                  4. ADJUSTMENT OF NQOS. The Company shall adjust the number
and kind of shares and the exercise price thereof in certain circumstances in
accordance with the provisions of Section 6.1.1 of the Plan.

                                       21
<PAGE>

                  5.       EXERCISE OF OPTIONS.

                           5.1 VESTING; TIME OF EXERCISE. This NQO shall be
exercisable according to the schedule set forth on EXHIBIT 5.1 attached
hereto. Such schedule shall commence as of the date set forth in ITEM E above
(the "VESTING BASE DATE"). The absence of EXHIBIT 5.1 indicates that no such
exhibit was intended and that the ISO Shares shall be subject to the Company's
rights set forth in Section 7.

                           5.2 EXERCISE AFTER TERMINATION OF STATUS AS AN
EMPLOYEE, DIRECTOR OR CONSULTANT. In the event of termination of Optionee's
continuous status as an employee, director or consultant, this NQO may be
exercised only in accordance with the provisions of Section 6.1.7 of the Plan.

                           5.3 MANNER OF EXERCISE. Optionee may exercise this
NQO, or any portion of this NQO, by giving written notice to the Company at
its principal executive office, to the attention of the officer of the Company
designated by the Plan Administrator, accompanied by a copy of the Employee
Stock Option Plan Stock Purchase Agreement in substantially the form attached
hereto as EXHIBIT 5.3 executed by Optionee (or at the option of the Company
such other form of stock purchase agreement as shall then be acceptable to the
Company), payment of the exercise price and payment of any applicable
withholding or employment taxes. The date the Company receives written notice
of an exercise hereunder accompanied by payment will be considered as the date
this NQO was exercised.

                           5.4 PAYMENT. Except as provided in EXHIBIT 5.4
attached hereto, if any (the absence of such exhibit indicating that no
exhibit was intended), payment may be made for NQO Shares purchased at the
time written notice of exercise of the NQO is given to the Company, by
delivery of cash, check, previously owned shares of Common Stock (provided
that delivery of previously owned shares may not be made other than once in
any six-month period), or a full recourse promissory note equal to up to 90%
of the exercise price and payable over no more than five years. The proceeds
of any payment shall constitute general funds of the Company.

                           5.5 DELIVERY OF CERTIFICATE. Promptly after receipt
of written notice of exercise of the NQO, the Company shall, without stock
issue or transfer taxes to the Optionee or other person entitled to exercise,
deliver to the Optionee or other person a certificate or certificates for the
requisite number of NQO Shares. An Optionee or transferee of an Optionee shall
not have any privileges as a shareholder with respect to any NQO Shares
covered by the option until the date of issuance of a stock certificate.

                  6. NONASSIGNABILITY OF NQO. This NQO is not assignable or
transferable by Optionee except by will or by the laws of descent and
distribution. During the life of Optionee, the NQO is exercisable only by the
Optionee. Any attempt to assign, pledge, transfer, hypothecate or otherwise
dispose of this NQO in a manner not herein permitted, and any levy of
execution, attachment, or similar process on this NQO, shall be null and void.

                  7. COMPANY'S RIGHT OF REPURCHASE UPON TERMINATION OF
EMPLOYMENT. The NQO Shares arising from exercise of this NQO shall be subject
to a right of repurchase in favor

                                       22
<PAGE>

of the Company (the "RIGHT OF REPURCHASE") to the extent set forth on EXHIBIT
7 attached hereto (the absence of such exhibit indicating that no such exhibit
was intended and that the NQO shall be subject to the limitations set forth on
EXHIBIT 5.1). If the Optionee's employment with the Company terminates before
the Right of Repurchase lapses in accordance with EXHIBIT 7, the Company may
purchase NQO Shares subject to the Right of Repurchase (either by payment of
cash or by cancellation of purchase money indebtedness) for an amount equal to
the price the Optionee paid for such NQO Shares (exclusive of any taxes paid
upon acquisition of the stock) by giving notice at any time within the later
of (a) 30 days after the acquisition of the NQO Shares upon option exercise,
or (b) 90 days after such termination of employment that the Company is
exercising its right of repurchase. The Company shall include with such notice
payment in full in cash or by evidence of cancellation of purchase money
indebtedness. The Optionee may not dispose of or transfer NQO Shares while
such shares are subject to the Right of Repurchase and any such attempted
transfer shall be null and void. The Company's rights under this Section 7
shall be fully assignable, in whole or in part; PROVIDED, that if the Company
assigns such rights, the assignee (other than an assignee that is a
wholly-owned subsidiary or the sole parent of the Company) shall pay to the
Company upon assignment cash equal to the difference, if any, between the then
fair market value of the NQO Shares and the aggregate exercise price thereof.

                  8.       COMPANY'S RIGHT OF FIRST REFUSAL.

                           8.1 RIGHT OF FIRST REFUSAL. In the event that the
Optionee proposes to sell, pledge, or otherwise transfer any NQO Shares or any
interest in such shares to any person or entity, the Company shall have a
right of first refusal (the "RIGHT OF FIRST REFUSAL") with respect to such NQO
Shares. If Optionee desires to transfer NQO Shares, Optionee shall give a
written notice (the "TRANSFER NOTICE") to the Company describing fully the
proposed transfer, including the number of NQO Shares proposed to be
transferred, the proposed transfer price, and the name and address of the
proposed transferee. The Transfer Notice shall be signed both by Optionee and
by the proposed transferee and must constitute a binding commitment of both
such parties for the transfer of such NQO Shares. The Company may elect to
purchase all, but not less than all, of the NQO Shares subject to the Transfer
Notice by delivery of a notice of exercise of the Company's Right of First
Refusal within 30 days after the date the Transfer Notice is delivered to the
Company. The purchase price paid by the Company shall be the price per share
equal to the proposed per share transfer price, and shall be paid to the
Optionee within 60 days after the date the Transfer Notice is received by the
Company, unless a longer period for payment was offered by the proposed
transferee, in which case the Company shall pay the purchase price within such
longer period. The Company's rights under this Section 8.1 shall be freely
assignable, in whole or in part. Notwithstanding the foregoing, the Right of
First Refusal does not apply to a transfer of shares by gift or devise to the
Optionee's immediate family (i.e., parents, spouse or children or to a trust
for the benefit of the Optionee or any of the Optionee's immediate family
members), but does apply to any subsequent transfer of such shares by such
immediate family members.

                           8.2 TRANSFER OF NQO SHARES. If the Company fails to
exercise the Right of First Refusal within 30 days after the date the Transfer
Notice is delivered to the Company, the Optionee may, not later than 75 days
following delivery to the Company of the Transfer Notice, conclude a transfer
of the NQO Shares subject to the Transfer Notice on the

                                       23
<PAGE>

terms and conditions described in the Transfer Notice. Any proposed transfer
on terms and conditions different from those described in the Transfer Notice,
as well as any subsequent proposed transfer by the Optionee, shall again be
subject to the Right of First Refusal and shall require compliance by the
Optionee with the procedure described in Section 8.1 of this Agreement. If the
Company exercises the Right of First Refusal, the parties shall consummate the
sale of NQO Shares on the terms, other than price, as applicable under Section
8.1, set forth in the Transfer Notice; provided, however, in the event the
Transfer Notice provides for payment for the NQO Shares other than in cash,
the Company shall have the option of paying for the NQO Shares by paying in
cash the present value of the consideration described in the Transfer Notice;
and further provided that if the value of noncash consideration is to be paid,
and the Optionee disagrees with the value determine by the Company, the
Optionee may request an independent appraisal by an appraiser acceptable to
the Optionee and the Company, the costs of such appraisal to be home equally
by the Optionee and the Company.

                           8.3 BINDING EFFECT. The Right of First Refusal
shall inure to the benefit of the successors and assigns of the Company and
shall be binding upon any transferee of NQO Shares other than a transferee
acquiring NQO Shares in a transaction where the Company failed to exercise the
Right of First Refusal (a "FREE TRANSFEREE") or a transferee of a Free
Transferee.

                           8.4 TERMINATION OF COMPANY'S RIGHT OF FIRST
REFUSAL. Notwithstanding anything in this Section 8, the Company shall have no
Right of First Refusal, and Optionee shall have no obligation to comply with
the procedures in Sections 8.1 through 8.3 after the earlier of (i) the
closing of the Company's initial public offering to the public generally or
(ii) the date is 10 years after the Effective Date.

                  9. MARKET STANDOFF. Optionee hereby agrees that if so
requested by the Company or any representative of the underwriters in
connection with any registration of the offering of the securities of the
Company under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
Optionee shall not sell or otherwise transfer the NQO Shares for that period
following the effective date of a Registration Statement filed under the
Securities Act agreed to by the Company and the representative(s) of the
underwriters; provided that such restrictions shall apply only to the first
two registration statements of the Company to become effective under the
Securities Act which include securities to be sold on behalf of the Company in
an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to the NQO Shares subject to
the foregoing restrictions until the end of each such period.

                  10.      RESTRICTION ON ISSUANCE OF SHARES.

                           10.1 LEGALITY OF ISSUANCE. The Company shall not be
obligated to sell or issue any NQO Shares pursuant to this Agreement if such
sale or issuance, in the opinion of the Company and the Company's counsel,
might constitute a violation by the Company of any provision of law, including
without limitation the provisions of the Securities Act.

                           10.2 REGISTRATION OR QUALIFICATION OF SECURITIES.
The Company may, but shall not be required to, register or qualify the sale of
this NQO or any NQO Shares under the

                                       24
<PAGE>

Securities Act or any other applicable law. The Company shall not be obligated
to take any affirmative action in order to cause the grant or exercise of this
option or the issuance or sale of any NQO Shares pursuant thereto to comply
with any law.

                  11. RESTRICTION ON TRANSFER. Regardless whether the sale of
the NQO Shares has been registered under the Securities Act or has been
registered or qualified under the securities laws of any state, the Company
may impose restrictions upon the sale, pledge or other transfer of NQO Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and the Company's counsel, such restrictions are
necessary or desirable in order to achieve compliance with the provisions of
the Securities Act, the securities laws of any state, or any other law, or if
the Company does not desire to have a trading market develop for its
securities.

                  12. STOCK CERTIFICATE RESTRICTIVE LEGENDS. Stock
certificates evidencing NQO Shares may bear such restrictive legends as the
Company and the Company's counsel deem necessary or advisable under applicable
law or pursuant to this Agreement.

                  13. REPRESENTATIONS, WARRANTIES, COVENANTS, AND
ACKNOWLEDGMENTS OF OPTIONEE UPON EXERCISE OF NQO. Optionee hereby agrees that
in the event that the Company and the Company's counsel deem it necessary or
advisable in the exercise of their discretion, the issuance of NQO Shares may
be conditioned upon certain representations, warranties, and acknowledgments
by the person exercising the NQO.

                  14. ASSIGNMENT; BINDING EFFECT. Subject to the limitations
set forth in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the executors, administrators, heirs, legal representatives,
and successors of the parties hereto; provided, however, that Optionee may not
assign any of Optionee's rights under this Agreement.

                  15. DAMAGES. Optionee shall be liable to the Company for all
costs and damages, including incidental and consequential damages, resulting
from a disposition of NQO Shares which is not in conformity with the
provisions of this Agreement.

                  16. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California excluding
those laws that direct the application of the laws of another jurisdiction.

                  17. NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless and until the Optionee is notified in
writing to the contrary, all notices, communications, and documents directed
to the Company and related to the Agreement, if not delivered by hand, shall
be mailed, addressed as follows:

                       Fluid Propulsion Technologies, Inc.
                       3350 Scott Boulevard, Bldg. 33
                       Santa Clara, California 95054
                       Attn: President and Chief Executive Officer

Unless and until the Company is notified in writing to the contrary, all
notices, communications, and documents intended for the Optionee and related
to this Agreement, if not delivered by hand,

                                       25
<PAGE>

shall be mailed to Optionee's last known address as shown on the Company's
books. Notices and communications shall be mailed by first class mail, postage
prepaid; documents shall be mailed by registered mail, return receipt
requested, postage prepaid. All mailings and deliveries related to this
Agreement shall be deemed received when actually received, if by hand
delivery, and two business days after mailing, if by mail.

                                       26
<PAGE>

                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the Effective Date.

                                            FLUID PROPULSION TECHNOLOGIES, INC.

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

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

The Optionee hereby accepts and agrees to be bound by all of the terms and
conditions of this Agreement and the Plan.

                                            -----------------------------------
                                            Optionee

Optionee's spouse indicates by the execution of this Agreement his or her
consent to be bound by the terms thereof as to his or her interests, whether
as community property or otherwise, if any, in the option granted hereunder,
and in any NQO Shares purchased pursuant to this Agreement.

                                            -----------------------------------
                                            Optionee's Spouse

                                       27
<PAGE>

                                    EXHIBITS
                                    --------

Exhibit 1                        1994 Stock Incentive Plan

Exhibit 3                        Expiration of Incentive Stock Option
(if applicable)

Exhibit 5.1                      Time of Exercise
(if applicable)

Exhibit 5.3                      1994 Stock Incentive Plan Stock Option
                                 Exercise and Purchase Agreement

Exhibit 5.4                      Payment
(if applicable)

Exhibit 7                        Right of Repurchase
(if applicable)

                                        28
<PAGE>

                               EXHIBIT 5.1 TO THE
                       NONQUALIFIED STOCK OPTION AGREEMENT
                       -----------------------------------

                  The NQO shall be exercisable with respect to twenty five
percent (25%) of total number of NQO Shares one year after the Vesting Base
Date and, thereafter, with respect to an additional 2.083% of such shares on
the last day of each calendar month after the first anniversary of the Vesting
Base Date, so that all of the NQO Shares may be purchased on and after the
fourth anniversary of the Vesting Base Date.

                  Initialed by:             FLUID PROPULSION TECHNOLOGIES, INC.

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

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

                                            -----------------------------------
                                            Optionee

                                        29
<PAGE>

                                   EXHIBIT C-4
                                   -----------

                    Stock Purchase and Restriction Agreement

                                        30
<PAGE>

                       FLUID PROPULSION TECHNOLOGIES, INC.
                            1994 STOCK INCENTIVE PLAN
                    STOCK PURCHASE AND RESTRICTION AGREEMENT

         THIS STOCK PURCHASE AND RESTRICTION AGREEMENT (the "Agreement") is
made and entered into as of this ______ day of ________, 19__ between Fluid
Propulsion Technologies, Inc., a California corporation (the "Company"), and
___________________ ("EMPLOYEE"), an employee of the Company.

         1. PURCHASE OF SHARES. Pursuant to the Company's 1994 Stock Incentive
Plan (the "Plan") and subject to the terms and conditions of the Plan and this
Agreement, the Company hereby offers to Employee the right to purchase AT ANY
TIME PRIOR TO DATE 30 DAYS AFTER THE DATE OF THIS AGREEMENT SET FORTH ABOVE
__________________ (____) shares of the Company's no par value Common Stock
(the "SHARES"). Upon execution and delivery of this Agreement with the
purchase price for the Shares, the Company shall sell the Shares to Employee
at a price of $ _______, per share, or an aggregate purchase price of $_____,
payable in cash.

         2. MARKET STANDOFF. Employee agrees upon request from the Company or
any representative of the underwriters in connection with any registration of
the offering of any securities of the Company under the Securities Act of
1933, as amended (the "SECURITIES ACT"), not to sell or otherwise transfer any
Shares or other securities of the Company during that period following the
effective date of a registration statement of the Company filed under the
Securities Act agreed to by the Company and the representative(s) of the
underwriters; 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 include 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 periods.

         3. RIGHT OF COMPANY TO REPURCHASE SHARES.

            3.1 REPURCHASE RIGHT. The Company shall have the right (but not
the obligation) to repurchase all of the shares with respect to which the
Right of Repurchase has not yet expired in accordance with Schedule 3.1, at a
price of $____ per share if Employee ceases to be employed by the Company for
any reason whatsoever ("EMPLOYMENT TERMINATION"). Employee may not dispose of
or transfer any Shares while the Shares are subject to the Right of Repurchase
and any such attempted disposition or transfer shall be null and void. The
Company's rights under this Section 3.1 shall be freely assignable, in whole
or in part.

            3.2 COMPANY REPURCHASE PROCEDURE. The Company's Right of
Repurchase shall terminate if not exercised by written notice from the Company
to Employee within 90 days after the date of the Employment Termination. If
the Company exercises its Right of Repurchase, Employee shall, if necessary,
endorse and deliver to the Company the stock certificates representing the
Shares being repurchased, and the Company shall then promptly pay to Employee,
a sum equal to the product of (i) the number of shares being repurchased, and

                                       31
<PAGE>

(ii) the price per share at which Employee acquired such shares (the
"REPURCHASE PRICE"). Employee shall cease to have any rights with respect to
such repurchased Shares immediately upon receipt of the Repurchase Price. The
Company's rights under this Section 3 shall be freely assignable, in whole or
in part; PROVIDED, that if the Company assigns such rights, the assignee
(other than an assignee that is a wholly-owned subsidiary or the sole parent
of the Company) shall pay to the Company upon assignment cash equal to the
difference, if any, between the then fair market value of the Shares and the
aggregate exercise price thereof.

            3.3 BINDING EFFECT. The Company's Right of Repurchase shall inure
to the benefit of the successors and assigns of the Company and shall be
binding upon any representative, executor, administrator, heir, or legatee of
Employee.

         4. RIGHT OF FIRST REFUSAL. The Shares shall be subject to a right of
first refusal by the Company in the event that Employee or any transferee of
the Shares proposes to sell, pledge, or otherwise transfer the Shares or any
interest in the Shares to any person or entity. Any holder of the Shares
desiring to transfer the Shares or any interest in the Shares shall give a
written notice to the Company describing the proposed transfer, including the
number of Shares proposed to be transferred, the price and terms at which such
Shares are proposed to be transferred, and the name and address of the
proposed transferee. Unless otherwise agreed by the Company and the holder of
such Shares, repurchases by the Company under this Section shall be at the
proposed price and terms, including the number of Shares to be repurchased,
specified in the notice to the Company. The Company's rights under this
Section shall be freely assignable. If the Company fails to exercise its right
of first refusal within 30 days from the date on which the Company receives
the shareholder's notice, the shareholder may, within the next 90 days,
conclude a transfer to the proposed transferee of the exact number of Shares
covered by that notice on terms not more favorable to the transferee than
those described in the notice. Any subsequent proposed transfer shall again be
subject to the Company's right of first refusal. If the Company exercises its
right of first refusal, the shareholder shall endorse and deliver to the
Company the stock certificates representing the Shares being repurchased
(unless such stock certificates are being held by the Company in pledge
pursuant to this Agreement) and the Company shall promptly pay the shareholder
the total repurchase price. The holder of the Shares being repurchased shall
cease to have any rights with respect to such Shares immediately upon receipt
of the repurchase price. The right of first refusal set forth in this Section
shall terminate upon the earlier of (i) consummation of an underwritten public
offering of the Company's Common Stock registered under the Securities Act, or
(ii) registration of the Company's Common Stock under the Securities Exchange
Act of 1934, as amended.

         5. REPRESENTATIONS AND ACKNOWLEDGEMENTS OF EMPLOYEE. Employee hereby
represents, warrants, acknowledges, and agrees that:

            5.1 INVESTMENT. Employee is acquiring the Shares for Employee's
own account and not with a view to or for sale in connection with any
distribution of the Shares. Employee understands that he or she must bear the
economic risk of the investment for an indefinite period of time because the
Shares have not been registered under the Act.

                                      32
<PAGE>

            5.2 PREEXISTING RELATIONSHIP.  Purchaser has either:

                (a) a preexisting personal or business relationship with the
Company or one or more of its directors that is of a nature and duration which
enable him or her to be aware of the character, business acumen, and general
business and financial circumstances of the Company or the director(s) with
whom such relationship exists, or

                (b) such business or financial experience as to be able to
protect his or her own interests in connection with the purchase of the Shares.

                  Purchaser has the financial capacity to bear the risk of
this investment.

            5.3 LIMITED OPERATING HISTORY. Employee is aware that the Company
has a limited operating history, has only recently begun realizing revenues
from the license or sale of its products or services, and has realized only
limited revenues therefrom.

            5.4 SPECULATIVE INVESTMENT. Employee's investment in the Company
represented by the Shares is highly speculative in nature and is subject to a
high degree of risk or loss in whole, or in part; the amount of such
investment is within Employee's risk, capital means and is not so great in
relation to Employee's total financial resources as would jeopardize the
personal financial needs of Employee or Employee's family in the event such
investment were lost in whole or in part.

            5.5 TAX ADVICE. THE COMPANY HAS MADE NO WARRANTIES OR
REPRESENTATIONS TO EMPLOYEE WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EMPLOYEE IS IN NO MANNER
RELYING ON THE COMPANY OR ITS REPRESENTATIVES FOR AN ASSESSMENT OF ANY TAX
CONSEQUENCES RELATED TO THE OWNERSHIP, PURCHASE, OR DISPOSITION OF THE SHARES.
EMPLOYEE ASSUMES FULL RESPONSIBILITY FOR ALL SUCH CONSEQUENCES AND FOR THE
PREPARATION AND FILING OF ALL TAX RETURNS AND ELECTIONS WHICH MAY OR MUST BE
FILED IN CONNECTION WITH SUCH SHARES.

            5.6 UNREGISTERED SECURITIES. Employee must bear the economic risk
of investment for an indefinite period of time because the Shares have not
been registered under the Securities Act and therefore cannot and will not be
sold unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. The Company has made no
agreements, covenants, or undertakings whatsoever to register any of the
Shares under the Securities Act. The Company has made no representations,
warranties, or covenants whatsoever as to whether any exemption from the
Securities Act, including without limitation any exemption for limited sales
in routine brokers' transactions pursuant to Rule 144 under the Securities
Act, will become available and any such exemption pursuant to Rule 144, if
available at all, will not be available unless: (i) a public trading market
then exists in the Company's Common Stock, (ii) adequate information as to the
Company's financial and other affairs and operations is then available to the
public, and (iii) all other terms and conditions of Rule 144 have been
satisfied. Employee understands that the resale provisions of Rule 701 will
not apply until 90 days after the Company becomes subject to the reporting
obligations of the Securities

                                      33
<PAGE>

Exchange Act of 1934 (typically upon the effective date of an initial public
offering). Transfer of the Shares has not been registered or qualified under
any applicable state law regulating securities and therefore the Shares cannot
and will not be sold unless they are subsequently registered or qualified
under any such law or an exemption therefrom is available. The Company has
made no agreements, covenants or undertakings whatsoever to register or
qualify any of the Shares under any such law. The Company has made no
representations, warranties or covenants whatsoever as to whether any
exemption from any such law will become available.

            5.7 PUBLIC TRADING. The Common Stock is not presently publicly
traded, and the Company has made no representation, covenant, or agreement as
to whether any such market for the Common Stock will develop.

         6. LEGENDS. Stock certificates evidencing the Shares may bear such
restrictive legends as the Company and the Company's counsel deem necessary or
advisable under applicable law or pursuant to this Agreement including,
without limitation, the following legends:

            "The securities represented hereby may be subject to a right of
         repurchase by the Company pursuant to the provisions of the Stock
         Purchase and Restriction Agreement between the Company and the
         original purchaser of such securities, should the person initially
         issued these securities cease to be employed by the Company or any
         affiliate thereof, and such securities may not be sold or otherwise
         transferred if such securities are subject to such right of
         repurchase."

            "The securities represented hereby are subject to a right of first
         refusal in favor of the Company pursuant to a Stock Purchase and
         Restriction Agreement between the Company and the original purchaser
         of such securities, and may not be sold or otherwise transferred
         except in compliance with the terms of such right of first refusal."

             "The securities represented hereby are subject to restrictions on
         transfer for a period following the effective date of a registration
         statement under the Securities Act of 1933, as amended (the "ACT"),
         for an offering of the Company's securities pursuant to the market
         standoff provisions of the Stock Purchase and Restriction Agreement
         between the Company and the original purchaser of such securities."

            "The securities represented hereby have not been registered under
         the Act. Such securities may not be transferred unless a Registration
         Statement under the Act is in effect as to such transfer, or in the
         opinion of counsel for the Company such transfer may be made pursuant
         to Rule 144, or registration under the Act is otherwise unnecessary
         for such transfer to comply with the Act."

         7. BINDING EFFECT. Subject to the limitations set forth in this
Agreement, this Agreement shall be binding upon, and inure to the benefit of,
the executors, administrators, heirs, legal representatives, successors, and
assigns of the parties hereto.

         8. TAXES. Employee shall execute and deliver to the Company with this
executed Agreement a copy of the Acknowledgement and Statement of Decision
Regarding Election Pursuant to Section 83(b) of the Internal Revenue Code (the
"ACKNOWLEDGEMENT") attached

                                      34
<PAGE>

hereto as Exhibit 8A and a copy of the Election pursuant to Section 83(b) of
the Code, attached hereto as Exhibit 8B, if Employee has indicated in the
Acknowledgement his or her decision to make such an election. Employee should
consult his or her tax advisor to determine if there is a comparable election
to file in the state of his or her residence and whether such filing is
desirable under the circumstances.

         9.  DAMAGES. Employee shall be liable to the Company for all costs
and damages, including incidental and consequential damages, resulting from a
disposition of Shares which is not in conformity with the provisions of this
Agreement.

         10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
entered into and wholly to be performed within the State of California by
California residents.

         11. NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless and until Employee is notified in
writing to the contrary, all notices, communications and documents directed to
the Company and related to this Agreement, if not delivered by hand, shall be
mailed, addressed as follows:

                  Fluid Propulsion Technologies, Inc.
                  3350 Scott Boulevard, Bldg. 33
                  Santa Clara, California 95054
                  Attn: President and Chief Executive Officer

         Unless and until the Company is notified in writing to the contrary,
all notices, communications and documents intended for Employee and related to
this Agreement, if not delivered by hand, shall be mailed to Employee's last
known address as shown on the Company's books. Notices and communications
shall be mailed by certified mail, return receipt requested, postage prepaid.
All mailings and deliveries related to this Agreement shall be deemed received
when actually received if by hand delivery, and four business days after
mailing if by mail.

         12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties pertaining to the purchase of the Shares by Employee from the
Company, and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties.

                                      35
<PAGE>

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.

FLUID PROPULSION                               EMPLOYEE
TECHNOLOGIES, INC.

Date:                                          Date:
     ---------------------------                    ---------------------------

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

Title:                                         Name:
      --------------------------                    ---------------------------

                                      36
<PAGE>

         Employee's spouse indicates by the execution of this Agreement his or
her consent to be bound by the terms herein as to his or her interests, whether
as community property or otherwise, if any, in the Shares hereby purchased.

Employee's Spouse:
                  ---------------------------------

The Certificate for the Shares is to be registered as follows:

--------------------------------------------------

Schedule 3.1               Right of Repurchase

Exhibit 8A                 Acknowledgement Regarding Election Pursuant to
                           Section 83(b)

Exhibit 813                Section 83(b) Election

                                      37
<PAGE>

                       SCHEDULE 3.1 OF THE STOCK PURCHASE
                        PLEDGE, AND RESTRICTION AGREEMENT

         The Right of Repurchase shall expire with respect to 25% of the
Shares on __________________, 19___ and on the first day of each succeeding
month shall expire with respect to an additional 2.083% of the Shares.

Initialed by:

FLUID PROPULSION                                    EMPLOYEE
TECHNOLOGIES, INC.

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

                                      38

<PAGE>

                                   EXHIBIT 8A

               ACKNOWLEDGEMENT AND STATEMENT OF DECISION REGARDING
                       ELECTION PURSUANT TO SECTION 83(b)
                          OF THE INTERNAL REVENUE CODE

         The undersigned (which term includes the undersigned's spouse), a
purchaser of _______ shares of Common Stock of Fluid Propulsion Technologies,
Inc., a California corporation (the "COMPANY"), and a party to a Stock
Purchase and Restriction Agreement with the Company (the "Agreement"), hereby
states as follows:

         1.       The undersigned acknowledges receipt of a copy of the
Agreement. The undersigned has carefully reviewed the Agreement.

         2.       The undersigned either [CHECK AS APPLICABLE]:

                  (a)      ______ has consulted, and has been fully advised by,
                           the undersigned's own tax advisor,
                           _______________________________, whose business
                           address is _________________________, regarding the
                           federal, state, and local tax consequences of
                           purchasing shares under the Agreement, and
                           particularly regarding the advisability of making
                           elections pursuant to Section 83(b) of the Internal
                           Revenue Code of 1986, as amended (the "Code"), and
                           pursuant to the corresponding provisions, if any, of
                           applicable state laws; or

                  (b)      ______ has knowingly chosen not to consult such a tax
                           advisor.

         3.       The undersigned hereby states that the undersigned has
decided [CHECK AS APPLICABLE]:

                  (a)      ______ to make an election pursuant to Section 83(b)
                           of the Code and is submitting to the Company,
                           together with the undersigned's executed Agreement,
                           an executed form which is attached as Exhibit 8B to
                           the Agreement, or

                  (b)      ______ not to make an election pursuant to Section
                           83(b) of the Code.

         4.       Neither the Company nor any subsidiary or representative of
the Company has made any warranty or representation to the undersigned with
respect to the tax consequences of the undersigned's purchase of shares and
execution of the Agreement in connection therewith or of the making or failure
to make an election pursuant to Section 83(b) of the Code or the corresponding
provisions, if any, of applicable state law.

         5.       The undersigned is also submitting to the Company, together
with the Agreement, an executed original of an election, if any is made, of
the undersigned pursuant to provisions of

                                      39

<PAGE>

state law corresponding to Section 83(b) of the Code, if any, which are
applicable to the undersigned's purchase of shares under the Agreement.

Date:                                       Employee:
     -----------------------------                   ---------------------

Date:                                       Spouse:
     -----------------------------                   ---------------------------

                                      40

<PAGE>

                                   EXHIBIT 8B

                      ELECTION PURSUANT TO SECTION 83(b) OF
              THE INTERNAL REVENUE CODE TO INCLUDE IN GROSS INCOME
               THE EXCESS OVER THE PURCHASE PRICE, IF ANY, OF THE
            VALUE OF PROPERTY TRANSFERRED IN CONNECTION WITH SERVICES

         The undersigned hereby elects pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in the undersigned's
gross income for the ______ taxable year the excess (if any) of the fair
market value of the property described below, over the amount the undersigned
paid for such property, and supplies herewith the following information in
accordance with the Treasury regulations promulgated under Section 83(b).

         1.       The undersigned's name, address and taxpayer identification
(social security) number are:

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

                  Address:
                          ---------------------------------

                  TIN:
                      -------------------------------------

         2.       The property with respect to which the election is made
consists of _____________ common shares of Fluid Propulsion Technologies,
Inc., a California corporation (the "COMPANY").

         3.       The date on which the above property was transferred to the
undersigned was _________________,19___ and the taxable year to which this
election relates is ________.

         4.       The above property is subject to a right of repurchase by
the Company at the initial purchase price, if the undersigned ceases to be an
employee of, or a consultant to, the Company or an affiliate of the Company.

         5.       The fair market value of the above property at the time of
transfer (determined without regard to any restrictions other than those which
by their terms will never lapse) is $____ per share.

         6.       The amount paid for the above property by the undersigned
was $____ per share.

                                      41

<PAGE>

         7.       A copy of this election has been furnished to the Company,
and a copy will be filed with the income tax return of the undersigned to
which this election relates.

Date:
     ------------------------

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

                                      42
<PAGE>

                                   EXHIBIT C-5

                  Stock Option Exercise and Purchase Agreement

                                        43
<PAGE>

                       FLUID PROPULSION TECHNOLOGIES, INC.
                            1994 STOCK INCENTIVE PLAN
                  STOCK OPTION EXERCISE AND PURCHASE AGREEMENT

                  THIS STOCK OPTION EXERCISE AND PURCHASE AGREEMENT (the
"AGREEMENT") is made and entered into as of ______________, 19___, between
Fluid Propulsion Technologies, Inc., a California corporation (the "Company"),
and _________ ("Purchaser").

                  THE PARTIES AGREE AS FOLLOWS:

                  1.       PURCHASE OF SHARES. Pursuant to the Company's 1994
Stock Incentive Plan (the "Plan") and to a stock option agreement (the "OPTION
AGREEMENT") between the parties, the Company hereby sells to Purchaser, and
Purchaser hereby buys from the Company, _______ shares (the "PLAN SHARES") of
the Company's Common Stock, no par value ("COMMON STOCK") on the terms and
conditions set forth herein and in the Plan and the Option Agreement, the
terms and conditions of the Plan and the Option Agreement being hereby
incorporated into this Agreement by reference.

                  2.       PURCHASE PRICE. Purchaser shall purchase the Plan
Shares from the Company, and the Company shall sell the Plan Shares to
Purchaser, at a price of $_______ per share (the "EXERCISE PRICE"), for a
total purchase price of $_______ (the "PURCHASE PRICE").

                  3.       MANNER OF PAYMENT. Purchaser shall pay the Purchase
Price of the Plan Shares in cash (or in the manner set forth in Exhibit 3 to
this Agreement, the absence of any Exhibit 3 indicating that no such exhibit
was intended).

                  4.       RIGHT OF COMPANY TO REPURCHASE SHARES.

                           4.1    REPURCHASE RIGHT. If so provided in Section
7 of the Option Agreement, the Plan Shares shall be subject to a right (but
not an obligation) of repurchase by the Company (the "RIGHT TO REPURCHASE"),
at the Exercise Price of such shares, if Purchaser ceases to be employed by
the Company or an Affiliate (as defined in Section 2 of the Plan) for any
reason whatsoever ("EMPLOYMENT TERMINATION") prior to the expiration of the
Right of Repurchase in accordance with Schedule 7 of the Option Agreement.
Purchaser may not dispose of or transfer any Plan Shares while the Plan Shares
are subject to the Right of Repurchase and any such attempted disposition or
transfer shall be null and void. The Company's rights under this Section 4.1
shall be freely assignable, in whole or in part; PROVIDED, that if the Company
assigns such rights, the assignee (other than an assignee that is a
wholly-owned subsidiary or the sole parent of the Company) shall pay to the
Company upon assignment cash equal to the difference, if any, between the then
fair market value of the Plan Shares and the Purchase Price.

                           4.2    REPURCHASE PROCEDURE. The Company's Right of
Repurchase shall terminate if not exercised by written notice from the Company
to Purchaser within the later of (a) 30 days after the acquisition of the Plan
Shares by Purchaser, or (b) 90 days after Employment Termination. If the
Company exercises its Right of Repurchase, Purchaser shall endorse and deliver
to the Company the stock certificates representing the Plan Shares being

                                       44

<PAGE>

repurchased, and the Company shall then promptly pay, pursuant to the
provisions of Section 4.3 of this Agreement, the total repurchase price to
Purchaser.

                           4.3    REPURCHASE PAYMENT. If, at the time of
repurchase, any notes are outstanding which represent any portion of the
Purchase Price of the Plan Shares, the repurchase price shall be paid first by
cancellation of any obligation for accrued but unpaid interest under such
notes, next by cancellation of principal under such notes, and finally by
payment of cash.

                           4.4    BINDING EFFECT. The Company's Right of
Repurchase shall inure to the benefit of the successors and assigns of the
Company and shall be binding upon any transferee, representative, executor,
administrator, heir, or legatee of Purchaser.

                  5.       COMPANY'S RIGHT OF FIRST REFUSAL RESPECTING PLAN
SHARES.

                           5.1    RIGHT OF FIRST REFUSAL. In the event that
Purchaser proposes to sell, pledge, or otherwise transfer any Plan Shares or
any interest in such shares to any person or entity, the Company shall have a
right of first refusal (the "RIGHT OF FIRST REFUSAL") with respect to such
Plan Shares. If Purchaser desires to transfer Plan Shares, Purchaser shall
give a written notice (the "TRANSFER NOTICE") to the Company describing fully
the proposed transfer, including the number of Plan Shares proposed to be
transferred, the proposed transfer price and the name and address of the
proposed transferee. The Transfer Notice shall be signed both by Purchaser and
by the proposed transferee and must constitute a binding commitment of both
such parties for the transfer of such Plan Shares. The Company shall have the
right to purchase the Plan Shares subject to the Transfer Notice by delivery
of a notice of exercise of the Company's Right of First Refusal within 30 days
after the date the Transfer Notice is delivered to the Company. The purchase
price paid by the Company shall be at a price per share equal to the proposed
per share transfer price. The Company's rights under this Section 5.1 shall be
freely assignable, in whole or in part.

                           5.2    TRANSFER OF PLAN SHARES. If the Company
fails to exercise the Right of First Refusal within 30 days from the date the
Transfer Notice is delivered to the Company, Purchaser may, not later than 75
days following delivery to the Company of the Transfer Notice, conclude a
transfer of the Plan Shares subject to the Transfer Notice on the terms and
conditions described in the Transfer Notice. Any proposed transfer on terms
and conditions different from those described in the Transfer Notice, as well
as any subsequent proposed transfer by Purchaser, shall again be subject to
the Company's Right of First Refusal and shall require compliance by Purchaser
with the procedure described in Section 5.1 of this Agreement. If the Company
exercises the Right of First Refusal, the parties shall consummate the sale of
Plan Shares on the terms set forth in the Transfer Notice, subject to Section
5.1; provided, however, in the event the Transfer Notice provides for payment
for the Plan Shares other than in cash, the Company shall have the option of
paying for the Plan Shares by the discounted cash equivalent of the
consideration described in the Transfer Notice. Notwithstanding anything in
this Section to the contrary, any cash payment by the Company shall be made in
accordance with the payment provisions of Section 4.3 of this Agreement.

                           5.3    BINDING EFFECT OF RIGHT OF FIRST REFUSAL.
The Company's Right of First Refusal shall inure to the benefit of the
successors and assigns of the Company and shall be

                                       45

<PAGE>

binding upon any transferee of Plan Shares other than a transferee acquiring
Plan Shares in a transaction where the Company failed to exercise the Right of
First Refusal (a "FREE TRANSFEREE") or a transferee of a Free Transferee.

                           5.4    TERMINATION OF COMPANY'S RIGHT OF FIRST
REFUSAL. Notwithstanding anything in this Section 5, the Company shall have no
Right of First Refusal, and Purchaser shall have no obligation to comply with
the procedures in Sections 5.1 through 5.3 after the earlier of (a) the
Company's initial registered public offering to the public generally, or (b)
the date 10 years after the Effective Date (as defined in the Option
Agreement).

                  6.       STOCK CERTIFICATE RESTRICTIVE LEGENDS. Stock
certificates evidencing Plan Shares may bear such restrictive legends as the
Company and the Company's counsel deem necessary or advisable under applicable
law or pursuant to this Agreement, including without limitation, the following
legends:

                           "THE OFFERING AND SALE OF THE SECURITIES REPRESENTED
                  HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
                  1933, AS AMENDED (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES
                  WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT
                  IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL
                  FOR THE COMPANY SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR
                  SUCH TRANSFER TO COMPLY WITH THE ACT."

                           "THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO A
                  RIGHT OF FIRST REFUSAL BY THE COMPANY PURSUANT TO THE
                  PROVISIONS OF COMPANY'S STOCK OPTION PLAN AND A PURCHASE
                  AGREEMENT RELATING TO SUCH SECURITIES, AND MAY NOT BE SOLD OR
                  OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS OF
                  SUCH RIGHT OF FIRST REFUSAL."

                           "THE SECURITIES REPRESENTED HEREBY MAY BE SUBJECT TO
                  A RIGHT OF REPURCHASE BY THE COMPANY PURSUANT TO THE
                  PROVISIONS OF THE COMPANY'S EMPLOYEE STOCK OPTION PLAN AND THE
                  AGREEMENT RELATING TO THE ACQUISITION OF SUCH SECURITIES,
                  SHOULD THE PERSON INITIALLY ISSUED THESE SECURITIES CEASE TO
                  BE EMPLOYED BY THE COMPANY OR ANY AFFILIATE THEREOF, AND SUCH
                  SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IF SUCH
                  SECURITIES ARE SUBJECT TO SUCH RIGHT OF REPURCHASE."

                                       46

<PAGE>

                           "THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO
                  RESTRICTIONS ON TRANSFER FOR A PERIOD FOLLOWING THE EFFECTIVE
                  DATE OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
                  1933, AS AMENDED, FOR AN OFFERING OF THE COMPANY'S SECURITIES
                  AS MORE FULLY PROVIDED IN AN AGREEMENT RELATING TO THE OPTION
                  TO PURCHASE SUCH SECURITIES."

                  7.       REPRESENTATIONS, WARRANTIES, COVENANTS, AND
ACKNOWLEDGEMENTS OF PURCHASER. Purchaser hereby represents, warrants,
covenants, acknowledges and agrees that:

                           7.1    INVESTMENT. Purchaser is acquiring the Plan
Shares for Purchaser's own account, and not for the account of any other
person. Purchaser is acquiring the Plan Shares for investment and not with a
view to distribution or resale thereof except in compliance with applicable
laws regulating securities.

                           7.2    BUSINESS EXPERIENCE. Purchaser is capable of
evaluating the merits and risks of Purchaser's investment in the Company
evidenced by the purchase of the Plan Shares.

                           7.3    RELATION OF COMPANY. Purchaser is presently
an officer, director, or employee of, or consultant to, the Company and in
such capacity has become personally familiar with the business, affairs,
financial condition, and results of operations of the Company.

                           7.4    ACCESS TO INFORMATION. Purchaser has had the
opportunity to ask questions of, and to receive answers from, appropriate
executive officers of the Company with respect to the terms and conditions of
the transactions contemplated hereby and with respect to the business,
affairs, financial conditions, and results of operations of the Company.
Purchaser has had access to such financial and other information as is
necessary in order for Purchaser to make a fully-informed decision as to
investment in the Company by way of purchase of the Plan Shares, and has had
the opportunity to obtain any additional information necessary to verify any
of such information to which Purchaser has had access.

                           7.5    SPECULATIVE INVESTMENT. Purchaser's
investment in the Company o represented by the Plan Shares is highly
speculative in nature and is subject to a high degree of risk of loss in whole
or in part. The amount of such investment is within Purchaser's risk capital
means and is not so great in relation to Purchaser's total financial resources
as would jeopardize the personal financial needs of Purchaser or Purchaser's
family in the event such investment were lost in whole or in part.

                           7.6    REGISTRATION. Purchaser may bear the
economic risk of investment for an indefinite period of time because the sale
to Purchaser of the Plan Shares has not been registered under the Securities
Act of 1933, as amended (the "ACT") and the Plan Shares cannot be transferred
by Purchaser unless such transfer is registered under the Act or an exemption
from such registration is available. The Company has made

                                       47

<PAGE>

no agreements, covenants or undertakings whatsoever to register the transfer
of any of the Shares under the Act. The Company has made no representations,
warranties, or covenants whatsoever as to whether any exemption from the Act,
including without limitation any exemption for limited sales in routine
brokers' transactions pursuant to Rule 144, will be available; if the
exemption under Rule 144 is available at all, it will not be available until
at least two years after payment of cash for the Plan Shares and not then
unless: (a) a public trading market then exists in the Company's common stock;
(b) adequate information as to the Company's financial and other affairs and
operations is then available to the public; and (c) all other terms and
conditions of Rule 144 have been satisfied.

                           7.7    PUBLIC TRADING. None of the Company's
securities is presently publicly traded, and the Company has made no
representation, covenant or agreement as to whether there will be a public
market for any of its securities.

                           7.8    TAX ADVICE. THE COMPANY HAS MADE NO
WARRANTIES OR REPRESENTATIONS TO PURCHASER WITH RESPECT TO THE INCOME TAX
CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND PURCHASER
IS IN NO MANNER RELYING ON THE COMPANY OR ITS REPRESENTATIVES FOR AN
ASSESSMENT OF SUCH TAX CONSEQUENCES.

                  8.       BINDING EFFECT. Subject to the limitations set
forth in this Agreement, this Agreement shall be binding upon, and inure to
the benefit of, the executors, administrators, heirs, legal representatives,
successors and assigns of the parties hereto.

                  9.       TAXES. Purchaser shall execute and deliver to the
Company with this executed Agreement a copy of the Acknowledgement and
Statement of Decision Regarding Election Pursuant to Section 83(b) of the
Internal Revenue Code (the "ACKNOWLEDGEMENT") attached hereto as EXHIBIT 9A.
Purchaser shall execute and submit with the Acknowledgement a copy of the
Election Pursuant to Section 83(b) of the Code (the "ELECTION"), attached
hereto as EXHIBIT 9B, if Purchaser has indicated in the Acknowledgement his
decision to make such an election. Purchaser should consult his tax advisor to
determine if there is a comparable election to file in the state of his
residence and whether such filing is desirable under the circumstances. The
Company may withhold from Purchaser's wages, or require Purchaser to pay to
the Company, any applicable withholding or employment taxes resulting from the
purchase of Plan Shares hereunder or from the lapse of any restrictions
imposed on the Plan Shares.

                  10.      DISQUALIFYING DISPOSITIONS OF ISO STOCK. If stock
acquired by exercise of an ISO (as defined in the Plan) is disposed of within
two years from the date of grant of the ISO or within one year after the
transfer of the stock to Purchaser, Purchaser immediately prior to the
disposition shall promptly notify the Company in writing of the date and terms
of the disposition and shall provide such other information regarding the
disposition as the Company may reasonably require.

                  11.      DAMAGES. Purchaser shall be liable to the Company
for all costs and damages, including incidental and consequential damages,
resulting from a disposition of Plan Shares which is not in conformity with
the provisions of this Agreement.

                                       48

<PAGE>

                  12.      GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California
applicable to contracts entered into and wholly to be performed within the
State of California by California residents.

                  13.      NOTICES. All notices and other communications under
this Agreement shall be in writing. Unless and until Purchaser is notified in
writing to the contrary, all notices, communications and documents directed to
the Company and related to the Agreement, if not delivered by hand, shall be
mailed, addressed as follows:

                          Fluid Propulsion Technologies, Inc.
                          3350 Scott Boulevard, Bldg. 33
                          Santa Clara, California 95054
                          Attn: President and Chief Executive

Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for Purchaser and related to
this Agreement, if not delivered by hand, shall be mailed to Purchaser's last
known address as shown on the Company's books. Notices and communications
shall be mailed by registered mail, return receipt requested, postage prepaid.
All mailings and deliveries related to this Agreement shall be deemed received
only when actually received.

                                       49

<PAGE>

                  IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.

                                             FLUID PROPULSION TECHNOLOGIES, INC.

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

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

                  Purchaser hereby accepts and agrees to be bound by all of
the terms and conditions of this Agreement and the Plan.

                                             -----------------------------------
                                             Purchaser

                  Purchaser's spouse indicates by the execution of this
Agreement his or her consent to be bound by the terms herein as to his or her
interests, whether as community property or otherwise, if any, in the Plan
Shares hereby purchased.

                                             -----------------------------------
                                             Purchaser's Spouse

<TABLE>
<CAPTION>
                                Exhibits
                                --------
<S>                        <C>
Exhibit 9A                 Acknowledgement Regarding Election Pursuant to Section 83(b)
Exhibit 9B                 Section 83(b) Election

</TABLE>

                                       50
<PAGE>

                                   EXHIBIT 9A

                        ACKNOWLEDGEMENT AND STATEMENT OF
                     DECISION REGARDING ELECTION PURSUANT TO
                   SECTION 83(b) OF THE INTERNAL REVENUE CODE

                  The undersigned (which term includes the undersigned's
spouse), a purchaser of ____ shares of Common Stock, no par value, of Fluid
Propulsion Technologies, Inc., a California corporation (the "COMPANY") by
exercise of an option (the "OPTION") granted pursuant to the Company's 1994
Stock Incentive Plan (the "PLAN"), hereby states as follows:

                  1.       The undersigned acknowledges receipt of a copy of
the Plan relating to the offering of such shares. The undersigned has
carefully reviewed the Plan and the option agreement pursuant to which the
Option was granted.

                  2.       The undersigned either [check and complete as
applicable]:

                  _________  (a) has consulted, and has been fully advised by,
                             the undersigned's own tax advisor, _______________,
                             whose business address is
                             _____________________________________________,
                             regarding the federal, state and local tax
                             consequences of purchasing shares under the Plan,
                             and particularly regarding the advisability of
                             making elections pursuant to Section 83(b) of the
                             Internal Revenue Code of 1986, as amended (the
                             "CODE") and pursuant to the corresponding
                             provisions, if any, of applicable state law; or

                  _________  (b) has knowingly chosen not to consult such a tax
                             advisor.

                  3.       The undersigned hereby states that the undersigned
has decided [check as applicable]:

                  _________  (a) to make an election pursuant to Section 83(b)
                             of the Code, and is submitting to the Company,
                             together with the undersigned's executed Stock
                             Purchase Agreement, an executed form entitled
                             "Election Pursuant to Section 83(b) of the Internal
                             Revenue Code With Respect to Property Acquired by
                             Exercise of a Stock Option; or

                  _________  (b) not to make an election pursuant to Section
                             83(b) of the Code.

                                        51
<PAGE>

                  4.       Neither the Company nor any subsidiary or
representative of the Company has made any warranty or representation to the
undersigned with respect to the tax consequences of the undersigned's purchase
of shares under the Plan or of the making or failure to make an election
pursuant to Section 83(b) of the Code or the corresponding provisions, if any,
of applicable state law.

Date:
     ------------------------                   --------------------------------
                                                Purchaser

Date:
     ------------------------                   --------------------------------
                                                Purchaser's Spouse

                                        52
<PAGE>

                                   EXHIBIT 9B

                    ELECTION PURSUANT TO SECTION 83(b) OF THE
                      INTERNAL REVENUE CODE WITH RESPECT TO
                 PROPERTY ACQUIRED BY EXERCISE OF A STOCK OPTION

                  The undersigned hereby elects pursuant to Section 830 of
the Internal Revenue Code of 1986, as amended (the "Code") to include in the
undersigned's gross income the excess (if any) of the fair market value of the
property described below over the sum of the amount the undersigned paid for
such property plus, if the shares to which this election relates were acquired
by exercise of an "incentive stock option" within the meaning of Section 422
of the Code, the amount excluded from the undersigned's income pursuant to
Sections 421 and 422 of the Code.

                  This election is made to the same effect, and with the same
limitations, with respect to the analogous provisions of Sections 83(b) (and,
if applicable, Sections 421 and 422) of the Code under any applicable state
statute.

                  Pursuant to Treasury Regulations, the following information
is provided:

                  1.       The undersigned's name, address and Social Security
Number are:

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

                           Address:
                                      ------------------------------------------
                                      ------------------------------------------

                           Social Security #:
                                              ----------------------------------

                  2.       The property with respect to which the election is
made consists of _____________ shares of Common Stock, no par value, of Fluid
Propulsion Technologies, Inc., a California corporation (the "COMPANY").

                  3.       The date on which the above property was
transferred to the undersigned was _____________,19 ___, and the taxable year
for which this election is made is 19___.

                  4.       The above property is subject to the following
restrictions checked below:

                  _____    a right of repurchase by the Company at the initial
                           purchase price, if the undersigned ceases to be an
                           employee of the Company or of an affiliate of the
                           Company within a specified period;

                                        53
<PAGE>

                  _____    a right of first refusal by the Company should the
                           undersigned wish to transfer the shares to a person
                           or entity other than the Company;

                  _____    restrictions as may be imposed by Section 16(b) of
                           the Securities Exchange Act of 1934, as amended, if
                           any.

                  5.       The fair market value of the above property at the
time of transfer (determined without regard to any lapse restrictions as
defined in Treasury Regulations ss. 1.83-3(i)) was $______ per share.

                  6.       The amount paid for the above property by the
undersigned was $_________ per share.

                  7.       Copies of this election have been furnished to the
Company and to the Internal Revenue Service Center to which the undersigned
submits his or her federal income tax return, and a copy will be filed with
the income tax return of the undersigned for the year to which this election
relates.

                  8.       If the shares to which this election relates were
acquired by exercise of an "incentive stock option" within the meaning of
Section 422 of the Code, except for purposes of Section 56(b)(3) of the Code
relating to the treatment of incentive stock options for purposes of the
alternative minimum tax or in the event of a "disqualifying disposition" of
the property, this election is protective only, is made solely to bar
application of Section 83(a) of the Code, and is not an election of the
undersigned actually to recognize income which apart from this election is
protected from recognition by Sections 421 and 422 of the Code. If the shares
to which this election relates were acquired by exercise of an incentive stock
option, the amount expressly excluded from income pursuant to Section 421 and
422 of the Code is $____ per share.

Date:
     ------------------------                   --------------------------------
                                                Purchaser

                                        54<PAGE>

                                                                    EXHIBIT 10.3

                               1996 STOCK PLAN OF

                                  AEROGEN, INC.

                         AS ADOPTED ON OCTOBER 21, 1996

AMENDED ON JANUARY 23, 1998, DECEMBER 8, 1999, MARCH 10, 2000 AND JULY 21, 2000

SECTION 1.    ESTABLISHMENT AND PURPOSE.

         The Plan was established in 1996 to offer selected employees,
Directors, advisers and Consultants an opportunity to acquire a proprietary
interest in the success of the Company, or to increase such interest, by
purchasing Shares of the Company's Common Stock. The Plan was adopted by the
Board of Directors on October 21, 1996 and requires approval by the Company's
shareholders within twelve months of its adoption. The Plan provides both for
the direct award or sale of Shares and for the grant of Options to purchase
Shares. Options granted under the Plan may include Nonstatutory Options as well
as IS0s intended to qualify under section 422A of the Code.

SECTION 2.    DEFINITIONS.

                  (a)      "BOARD OF DIRECTORS" shall mean the Board of
Directors of the Company, as constituted from time to time.

                  (b)      "CODE" shall mean the Internal Revenue Code of 1986,
as amended.

                  (c)      "COMMITTEE" shall mean a committee of the Board of
Directors, as described in Section 3(a).

                  (d)      "COMPANY" shall mean AeroGen, Inc., a Delaware
corporation.

                  (e)      "CONSULTANT" means any person, including an advisor,
(i) engaged by the Company or an Affiliate to render consulting or advisory
services and who is compensated for such services or (ii) who is a member of the
Board of Directors of an Affiliate. However, the term "Consultant" shall not
include either Directors who are not compensated by the Company for their
services as Directors or Directors who are merely paid a director's fee by the
Company for their services as Directors.

                  (f)      "DIRECTOR" means a member of the Board of Directors
of the Company.

                  (g)      "EMPLOYEE" shall mean (i) any individual who is a
common-law employee of the Company or of a Subsidiary, (ii) a member of the
Board of Directors and (iii) an independent contractor who performs services for
the Company or a Subsidiary. Service as a

                                       1.
<PAGE>

member of the Board of Directors or as an independent contractor shall be
considered employment for all purposes of the Plan except the second sentence of
Section 4(a).

                  (h)      "EXERCISE PRICE" shall mean the amount for which one
Share may be purchased upon exercise of an Option, as specified by the Committee
in the applicable Stock Option Agreement.

                  (i)      "FAIR MARKET VALUE" shall mean the fair market value
of a Share, as determined by the Committee in good faith. Such determination
shall be conclusive and binding on all persons.

                  (j)      "ISO" shall mean an employee incentive stock option
described in section 422A(b) of the Code.

                  (k)      "LISTING DATE" means the first date upon which any
security of the Company is listed (or approved for listing) upon notice of
issuance on any securities exchange or designated (or approved for designation)
upon notice of issuance as a national market security on an interdealer
quotation system if such securities exchange or interdealer quotation system has
been certified in accordance with the provisions of Section 25100(o) of the
California Corporate Securities Law of 1968.

                  (l)      "NONSTATUTORY OPTION" shall mean an employee stock
option not described in section 422(b), 422A(b), 423(b) or 424(b) of the Code.

                  (m)      "OFFEREE" shall mean an individual to whom the
Committee has offered the right to acquire Shares under the Plan (other than
upon exercise of an Option).

                  (n)      "OFFICER" means (i) before the Listing Date, any
person designated by the Company as an officer and (ii) on and after the Listing
Date, 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.

                  (o)      "OPTION" shall mean an ISO or Nonstatutory Option
granted under the Plan and entitling the holder to purchase Shares.

                  (p)      "OPTIONEE" shall mean an individual who holds an
Option.

                  (q)      "PLAN" shall mean this 1996 Stock Plan of AeroGen,
Inc.

                  (r)      "PURCHASE PRICE" shall mean the consideration for
which one Share may be acquired under the Plan (other than upon exercise of an
Option), as specified by the Committee.

                  (s)      "SERVICE" shall mean service as an Employee.

                  (t)      "SHARE" shall mean one share of Stock, as adjusted in
accordance with Section 9 (if applicable).

                                       2.
<PAGE>

                  (u)      "STOCK" shall mean the Common Stock of the Company.

                  (v)      "STOCK OPTION AGREEMENT" shall mean the agreement
between the Company and an Optionee which contains the terms, conditions and
restrictions pertaining to such Optionee's Option.

                  (w)      "STOCK PURCHASE AGREEMENT" shall mean the agreement
between the Company and an Offeree who acquires Shares under the Plan which
contains the terms, conditions and restrictions pertaining to the acquisition of
such Shares.

                  (x)      "SUBSIDIARY" shall mean any corporation, if the
Company and/or one or more other Subsidiaries own not less than 50 percent of
the total combined voting power of all classes of outstanding stock of such
corporation. A corporation that attains the status of a Subsidiary on a date
after the adoption of the Plan shall be considered a Subsidiary commencing as of
such date.

                  (y)      "TOTAL AND PERMANENT DISABILITY" shall mean that the
Optionee is unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or which has lasted, or can be expected to last, for a
continuous period of not less than one year.

SECTION 3. ADMINISTRATION.

                  (a)      COMMITTEE MEMBERSHIP. The Plan shall be administered
by the Committee, which shall consist of members of the Board of Directors. The
members of the Committee shall be appointed by the Board of Directors. If no
Committee has been appointed, the entire Board of Directors shall constitute the
Committee.

                  (b)      COMMITTEE PROCEDURES. The Board of Directors shall
designate one of the members of the Committee as chairman. The Committee may
hold meetings at such times and places as it shall determine. The acts of a
majority of the Committee members present at meetings at which a quorum exists,
or acts reduced to or approved in writing by all Committee members, shall be
valid acts of the Committee.

                  (c)      COMMITTEE RESPONSIBILITIES. Subject to the provisions
of the Plan, the Committee shall have full authority and discretion to take the
following actions:

                           (i)      To interpret the Plan and to apply its
provisions;

                           (ii)     To adopt, amend or rescind rules, procedures
and forms relating to the Plan;

                           (iii)    To authorize any person to execute, on
behalf of the Company, any instrument required to carry out the purposes of the
Plan;

                                       3.
<PAGE>

                           (iv)     To determine when Shares are to be awarded
or offered for sale and when Options are to be granted under the Plan;

                           (v)      To select the Offerees and Optionees;

                           (vi)     To determine the number of Shares to be
offered to each Offeree or to be made subject to each Option;

                           (vii)    To prescribe the terms and conditions of
each award or sale of Shares, including (without limitation) the Purchase Price,
and to specify the provisions of the Stock Purchase Agreement relating to such
award or sale;

                           (viii)   To prescribe the terms and conditions of
each Option, including (without limitation) the Exercise Price, to determine
whether such Option is to be classified as an ISO or as a Nonstatutory Option,
and to specify the provisions of the Stock Option Agreement relating to such
Option;

                           (ix)     To amend any outstanding Stock Purchase
Agreement or Stock Option Agreement, subject to applicable legal restrictions
and to the consent of the Offeree or Optionee who entered into such agreement;

                           (x)      To prescribe the consideration for the grant
of each Option or other right under the Plan and to determine the sufficiency of
such consideration; and

                           (xi)     To take any other actions deemed necessary
or advisable for the administration of the Plan. All decisions, interpretations
and other actions of the Committee shall be final and binding on all Offerees,
all Optionees, and all persons deriving their rights from an Offeree or
Optionee. No member of the Committee shall be liable for any action that he has
taken or has failed to take in good faith with respect to the Plan, any Option,
or any right to acquire Shares under the Plan.

                  (d)      FINANCIAL REPORTS. Not less often than annually, the
Company shall furnish to Optionees and Offerees reports of its financial
condition, unless such Optionees and Offerees have access to equivalent
information through their employment. Such reports need not be audited.

SECTION 4. ELIGIBILITY.

                  (a)      GENERAL RULE. Only Employees shall be eligible for
designation as Optionees or Offerees by the Committee. In addition, only
individuals who are employed as common-law employees by the Company or a
Subsidiary shall be eligible for the grant of ISOs.

                  (b)      TEN-PERCENT SHAREHOLDERS. An Employee who owns more
than 10 percent of the total combined voting power of all classes of outstanding
stock of the Company or any of its Subsidiaries shall not be eligible for
designation as an Optionee or Offeree unless (i) the Exercise Price or Purchase
Price (if any) is at least 110 percent of the Fair Market Value of a

                                       4.
<PAGE>

Share on the date of grant and (ii) in the case of an ISO, such ISO by its terms
is not exercisable after the expiration of five years from the date of grant.

                  (c)      ATTRIBUTION RULES. For purposes of Subsection (b)
above, in determining stock ownership, an Employee shall be deemed to own the
stock owned, directly or indirectly, by or for such Employee's brothers,
sisters, spouse, ancestors and lineal descendants. Stock owned, directly or
indirectly, by or for a corporation, partnership, estate or trust shall be
deemed to be owned proportionately by or for its shareholders, partners or
beneficiaries. Stock with respect to which such Employee holds an option shall
not be counted.

                  (d)      OUTSTANDING STOCK. For purposes of Subsection (b)
above, "outstanding stock" shall include all stock actually issued and
outstanding immediately after the grant. "Outstanding stock" shall not include
shares authorized for issuance under outstanding options held by the Employee or
by any other person.

SECTION 5. STOCK SUBJECT TO PLAN.

                  (a)      BASIC LIMITATION. Shares offered under the Plan
shall be authorized but unissued Shares or treasury Shares. The aggregate
number of Shares which may be issued under the Plan (upon exercise of Options
or other rights to acquire Shares) shall not exceed seven million eight
hundred thousand (7,800,000) Shares, subject to adjustment pursuant to
Section 9. The number of Shares which are subject to Options or other rights
outstanding at any time under the Plan shall not exceed the number of Shares
which then remain available for issuance under the Plan. The Company, during
the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.

                  (b)      ADDITIONAL SHARES. In the event that any outstanding
Option or other right for any reason expires or is canceled or otherwise
terminated, the Shares allocable to the unexercised portion of such Option or
other right shall again be available for the purposes of the Plan. In the event
that Shares issued under the Plan are reacquired by the Company pursuant to a
forfeiture provision, a right of repurchase or a right of first offer, such
Shares shall again be available for the purposes of the Plan.

SECTION 6. TERMS AND CONDITIONS OF AWARDS OR SALES.

                  (a)      STOCK PURCHASE AGREEMENT. Each award or sale of
Shares under the Plan (other than upon exercise of an Option) shall be evidenced
by a Stock Purchase Agreement between the Offeree and the Company. Such award or
sale shall be subject to all applicable terms and conditions of the Plan and may
be subject to any other terms and conditions which are not inconsistent, with
the Plan and which the Committee deems appropriate for inclusion in a Stock
Purchase Agreement. The provisions of the various Stock Purchase Agreements
entered into under the Plan need not be identical.

                  (b)      DURATION OF OFFERS AND NONTRANSFERABILITY OF RIGHTS.
Any right to acquire Shares under the Plan (other than an Option) shall
automatically expire if not exercised by the Offeree within 30 days after the
grant of such right was communicated to him by the

                                       5.
<PAGE>

Committee. Such right shall not be transferable and shall be exercisable only by
the Offeree to whom such right was granted.

                  (c)      PURCHASE PRICE. The Purchase Price of Shares to be
offered under the Plan shall not be less than 85 percent of the Fair Market
Value of such Shares, except as otherwise provided in Section 4(b). Subject to
the preceding sentence, the Purchase Price shall be determined by the Committee
at its sole discretion. The Purchase Price shall be payable in a form described
in Section 8.

                  (d)      WITHHOLDING TAXES. As a condition to the purchase of
Shares, the Offeree shall make such arrangements as the Committee may require
for the satisfaction of any federal, state or local withholding tax obligations
that may arise in connection with such purchase.

                  (e)      RESTRICTIONS ON TRANSFER OF SHARES. Any Shares
awarded or sold under the Plan shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first offer and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Purchase Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Shares. Any
service-based vesting conditions shall not be less rapid than as set forth in
Section 7(e).

SECTION 7. TERMS AND CONDITIONS OF OPTIONS.

                  (a)      STOCK OPTION AGREEMENT. Each grant of an Option under
the Plan shall be evidenced by a Stock Option Agreement between the Optionee and
the Company. Such Option shall be subject to all applicable terms and conditions
of the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.

                  (b)      NUMBER OF SHARES. Each Stock Option Agreement shall
specify the number of Shares that are subject to the Option and shall provide
for the adjustment of such number in accordance with Section 9. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.

                  (c)      EXERCISE PRICE. Each Stock Option Agreement shall
specify the Exercise Price. The Exercise Price of an ISO shall not be less than
100 percent of the Fair Market Value of a Share on the date of grant, except as
otherwise provided in Section 4(b). The Exercise Price of a Nonstatutory Option
shall not be less than 85 percent of the Fair Market Value of a Share on the
date of grant, except as otherwise provided in Section 4(b). Subject to the
pre-ceding two sentences, the Exercise Price under any Option shall be
determined by the Committee at its sole discretion. The Exercise Price shall be
payable in a form described in Section 8.

                  (d)      WITHHOLDING TAXES. As a condition to the exercise of
an Option, the Optionee shall make such arrangements as the Committee may
require for the satisfaction of any federal, state or local withholding tax
obligations that may arise in connection with such

                                       6.
<PAGE>

exercise. The Optionee shall also make such arrangements as the Committee may
require for the satisfaction of any federal, state or local withholding tax
obligations that may arise in connection with the disposition of Shares acquired
by exercising an Option.

                  (e)      EXERCISABILITY AND TERM.

                           (i)      Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
vesting of any Option shall be determined by the Committee at its sole
discretion; provided, however, to the extent required by law, an Option shall
become exercisable at a rate no less than twenty percent per year over a five
year period.

                           (ii)     The Stock Option Agreement may, but need
not, include a provision whereby the Optionee may elect at any time before the
Optionee's Service terminates to exercise the Option as to any part or all of
the Shares of Stock subject to the Option prior to the full vesting of the
Option. Subject to the "Repurchase Limitation" in subsection 8(e), any unvested
Shares of Stock so purchased may be subject to a repurchase option in favor of
the Company or to any other restriction the Board determines to be appropriate.

                           (iii)    The Stock Option Agreement shall also
specify the term of the Option. The term shall not exceed 10 years from the date
of grant, except as otherwise provided in Section 4(b). Subject to the preceding
sentence, the Committee at its sole discretion shall determine when an Option is
to expire.

                  (f)      TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. 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
Optionee only by the Optionee. Notwithstanding the foregoing, the Optionee 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.

                  (g)      TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A
Nonstatutory Stock Option shall be transferable to the extent provided in the
Stock Option Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory 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 Optionee only by the Optionee.
Notwithstanding the foregoing, the Optionee 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.

                  (h)      TERMINATION OF SERVICE (EXCEPT BY DEATH). If an
Optionee's Service terminates for any reason or other than such Optionee's
death, then Optionee's Option(s) shall expire on the earliest of the following
occasions:

                           (i)      The expiration date determined pursuant to
Subsection (e) above;

                                       7.
<PAGE>

                           (ii)     The date 30 days after the termination of
Optionee's Service for any reason other than Total and Permanent Disability; or

                           (iii)    The date six months after the termination of
Optionee's Service by reason of Total and Permanent Disability. The Optionee may
exercise all or part of such Optionee's Option(s) at any time before the
expiration of such Option(s) under the preceding sentence, but only to the
extent that such Option(s) had become exercisable before such Optionee's Service
terminated or became exercisable as a result of the termination. The balance of
such Option(s) shall lapse when the Optionee's Service terminates. In the event
that the Optionee dies after the termination of such Optionee's Service but
before the expiration of such Optionee's Option(s), all or part of such
Option(s) may be exercised (prior to expiration) by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Option(s) directly from him by bequest or inheritance, but only to the extent
that such Option(s) had become exercisable before such Optionee's Service
terminated or became exercisable as a result of the termination.

                  (i)      LEAVES OF ABSENCE. For purposes of Subsection (g)
above, Service shall be deemed to continue while the Optionee is on military
leave, sick leave or other bona fide leave of absence (as determined by the
Committee). The foregoing notwithstanding, in the case of an ISO granted under
the Plan, Service shall not be deemed to continue beyond the first 90 days of
such leave, unless the Optionee's reemployment rights are guaranteed by statute
or by contract.

                  (j)      DEATH OF OPTIONEE. If an Optionee dies while he is in
Service, then such Optionee's Option(s) shall expire on the earlier of the
following dates:

                           (i)      The expiration date determined pursuant to
Subsection (e) above; or

                           (ii)     The date six months after such Optionee's
death.

         All or part of the Optionee's Option(s) may be exercised at any time
before the expiration of such Option(s) under the preceding sentence by the
executors or administrators of such Optionee's estate or by any person who has
acquired such Option(s) directly from him by bequest or inheritance, but only to
the extent that such Option(s) had become exercisable before such Optionee's
death or became exercisable as a result of such Optionee's death. The balance of
such Option(s) shall lapse when the Optionee dies.

                  (k)      NO RIGHTS AS A SHAREHOLDER. An Optionee, or a
transferee of an Optionee, shall have no rights as a shareholder with respect to
any Shares covered by such Optionee's Option until the date of the issuance of a
stock certificate for such Shares. No adjustments shall be made, except as
provided in Section 9.

                  (l)      MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.
Within the limitations of the Plan, the Committee may modify, extend or renew
outstanding Options or may accept the cancellation of outstanding Options (to
the extent not previously exercised) in return

                                       8.
<PAGE>

for the grant of new Options at the same or a different price. The foregoing
notwithstanding, no modification of an Option shall, without the consent of the
Optionee, impair such Optionee's rights or increase such Optionee's obligations
under such Option.

                  (m)      RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first offer and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Shares. Any
service-based vesting conditions shall not be less rapid than as set forth in
Subsection (e) above.

SECTION 8. PAYMENT FOR SHARES.

                  (a)      GENERAL RULE. The entire Purchase Price or Exercise
Price of Shares issued under the Plan shall be payable in lawful money of the
United States of America at the time when such Shares are purchased, except as
follows:

                           (i)      In the case of Shares sold under the terms
of a Stock Purchase Agreement subject to the Plan, payment shall be made only
pursuant to the express provisions of such Stock Purchase Agreement. However,
the Committee (at its sole discretion) may specify in the Stock Purchase
Agreement that payment may be made in one or both of the forms described in
Subsections (c) and (d) below.

                           (ii)     In the case of an ISO granted under the
Plan, payment shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement. However, the Committee (at its sole
discretion) may specify in the Stock Option Agreement that payment may be made
in one or both of the forms described in Subsections (b) and (d) below.

                           (iii)    In the case of a Nonstatutory Option granted
under the Plan, the Committee (at its sole discretion) may accept payment in one
or both of the forms described in Subsections (b) and (d) below.

                  (b)      SURRENDER OF STOCK. To the extent that this
Subsection (b) is applicable and allowed in the provisions of the applicable
Stock Option Agreement, payment may be made all or in part with Shares which
have already been owned by the Optionee or such Optionee's representative for
more than 12 months and which are surrendered to the Company in good form for
transfer. Such Shares shall be valued at their Fair Market Value on the date
when the new Shares are purchased under the Plan.

                  (c)      SERVICES RENDERED. To the extent that this Subsection
(c) is applicable, Shares may be awarded under the Plan in consideration of
services rendered to the Company or a Subsidiary prior to the award. If Shares
are awarded without the payment of a Purchase Price in cash, the Committee shall
make a determination (at the time of the award) of the value of the services
rendered by the Offeree and the sufficiency of the consideration to meet the
requirements of Section 6(c).

                                       9.
<PAGE>

                  (d)      PROMISSORY NOTE. To the extent that this Subsection
(d) is applicable, a portion of the Purchase Price or Exercise Price, as the
case may be, of Shares issued under the Plan may be payable by a full recourse
promissory note, provided that (i) the par value of such Shares must be paid in
lawful money of the United States of America at the time when such Shares are
purchased, (ii) the Shares are security for payment of the principal amount of
the promissory note and interest thereon, and (iii) the interest rate payable
under the terms of the promissory note shall be no less than the minimum rate
(if any) required to avoid the imputation of additional interest under the Code.
Subject to the foregoing, the Committee (at its sole discretion) shall specify
the term, interest rate, amortization requirements (if any), and other
provisions of such note.

                  (e)      REPURCHASE LIMITATION. The terms of any repurchase
option shall be specified in the Stock Option Agreement or the Stock Purchase
Agreement and may be either at Fair Market Value at the time of repurchase or at
not less than the original purchase price. To the extent required by Section
260.140.41 and Section 260.140.42 of Title 10 of the California Code of
Regulations at the time an Option is granted or at the time there is an award or
sale of Shares under the Plan, any repurchase option contained in a Stock Option
Agreement or Stock Purchase Award prior to the Listing Date to a person who is
not an Officer, Director or Consultant shall be upon the terms described below:

                           (i)      FAIR MARKET VALUE. If the repurchase option
gives the Company the right to repurchase the Shares of Stock upon termination
of employment at not less than the Fair Market Value of the Shares of Stock to
be purchased on the date of termination of Service, then (i) the right to
repurchase shall be exercised for cash or cancellation of purchase money
indebtedness for the Shares of Stock within ninety (90) days of termination of
Service (or in the case of Shares of Stock issued upon exercise of award or sale
of Shares after such date of termination, within ninety (90) days after the date
of the exercise) or such longer period as may be agreed to by the Company and
the Optionee or Offeree, as applicable, (for example, for purposes of satisfying
the requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock") and (ii) the right terminates when the Shares of Stock
following the listing date.

                           (ii)     ORIGINAL PURCHASE PRICE. If the repurchase
option gives the Company the right to repurchase the Shares of Stock upon
termination of Service at the original purchase price, then (i) the right to
repurchase at the original purchase price shall lapse at the rate of at least
twenty percent (20%) of the Shares of Stock per year over five (5) years from
the date the Option or award or sale of Shares is granted (without respect to
the date the Option or award or sale of Shares was exercised or became
exercisable) and (ii) the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the Shares of Stock within
ninety (90) days of termination of Service (or in the case of Shares of Stock
issued upon exercise of Options after such date of termination, within ninety
(90) days after the date of the exercise) or such longer period as may be agreed
to by the Company and the Optionee or Offeree, as applicable, (for example, for
purposes of satisfying the requirements of Section 1202(c)(3) of the Code
regarding "qualified small business stock").

                                      10.
<PAGE>

SECTION 9. ADJUSTMENT OF SHARES.

                  (a)      GENERAL. In the event of a subdivision of the
outstanding Stock, a declaration of a dividend payable in Shares, a declaration
of a dividend payable in a form other than Shares in an amount that has a
material effect on the value of Shares, a combination or consolidation of the
outstanding Stock (by reclassification or otherwise) into a lesser number of
Shares, a recapitalization or a similar occurrence, the Committee shall make
appropriate adjustments in one or more of (i) the number of Shares available for
future grants under Section 5, (ii) the number of Shares covered by each
outstanding Option or (iii) the Exercise Price under each outstanding Option.

                  (b)      REORGANIZATIONS. In the event that the Company is a
party to a merger or other reorganization, outstanding Options shall be subject
to the agreement of merger or reorganization. Such agreement shall provide for
the assumption of outstanding Options by the surviving corporation or its
parent, for their continuation by the Company (if the Company is a surviving
corporation), for payment of a cash settlement equal to the difference between
the amount to be paid for one Share under such agreement and the Exercise Price,
or for the acceleration of their exercisability followed by the cancellation of
Options not exercised, in all cases without the Optionees' consent. Any
cancellation shall not occur earlier than 30 days after such acceleration is
effective and Optionees have been notified of such acceleration. In the case of
Options that have been outstanding for less than 12 months, a cancellation need
not be preceded by an acceleration.

                  (c)      RESERVATION OF RIGHTS. Except as provided in this
Section 9, an Optionee or Offeree shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class, the payment of any
dividend or any other increase or decrease in the number of shares of stock of
any class. Any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the 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, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.

SECTION 10. SECURITIES LAWS.

         Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange on which the
Company's securities may then be listed.

SECTION 11. NO EMPLOYMENT RIGHTS.

                                      11.
<PAGE>

         No provision of the Plan, nor any right or Option granted under the
Plan, shall be construed to give any per-son any right to become, to be treated
as, or to remain an Employee. The Company and its Subsidiaries reserve the right
to terminate any person's Service at any time and for any reason.

SECTION 12.   DURATION AND AMENDMENTS.

                  (a)      TERM OF THE PLAN. The Plan, as set forth herein,
shall become effective on the date of its adoption by the Board of Directors. In
the event that the shareholders fail to approve the Plan within 12 months after
its initial adoption by the Board of Directors, any Option grants or Stock
awards already made shall be null and void, and no additional Option grants or
Stock awards shall be made after such date. The Plan shall terminate
automatically 10 years after its initial adoption by the Board of Directors and
may be terminated on any earlier date pursuant to Subsection (b) below.

                  (b)      RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of
Directors may amend, suspend or terminate the Plan at any time and for any
reason; provided, however, that any amendment of the Plan which increases the
number of Shares available for issuance under the Plan (except as provided in
Section 9), or which materially changes the class of persons who are eligible
for the grant of IS0s, shall be subject to the approval of the Company's
shareholders. Shareholder approval shall not be required for any other amendment
of the Plan.

                  (c)      EFFECT OF AMENDMENT OR TERMINATION. No Shares shall
be issued or sold under the Plan after the termination thereof, except upon
exercise of an Option granted prior to such termination. The termination of the
Plan, or any amendment thereof, shall not affect any Share previously issued or
any Option previously granted under the Plan.

SECTION 13. EXECUTION.

         To record the adoption of the Plan by the Board of Directors on
December   , the Company has caused its authorized officer to execute the same.

                                  AEROGEN, INC.

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

                                           -------------------------
                                           President and CEO
                                           December
                                                    ----------------

                                      12.
<PAGE>

         THE OPTION GRANTED PURSUANT TO THIS NONSTATUTORY STOCK OPTION AGREEMENT
(THE "OPTION") AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE OPTION OR THE SHARES UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL,
WHICH IS SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED.

                        1996 STOCK PLAN OF AEROGEN, INC.

                       NONSTATUTORY STOCK OPTION AGREEMENT

                (ALLOWING FOR TRANSFERABILITY AND EARLY EXERCISE)

         THIS AGREEMENT is entered into as of (DATE) between AEROGEN, INC., a
Delaware corporation (the "Company"), and (NAME) (the "Optionee").

                              W I T N E S S E T H:

         WHEREAS, the Company's Board of Directors has established the 1996
Stock Plan of AeroGen, Inc., in order to provide selected employees, directors,
consultants and advisors of the Company and its Subsidiaries with an opportunity
to acquire Common Stock of the Company; and

         WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the Nonstatutory Stock
Option described in this Agreement to the Optionee as an inducement to enter
into or remain in the service of the Company and as an incentive for
extraordinary efforts during such service:

         NOW, THEREFORE, it is agreed as follows:

         1.   GRANT OF OPTION.

         (a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase (AMOUNT) Shares for the sum
of $     ($0.20) per Share, which is agreed to be 100% of the fair market value
thereof on the Date of Grant. This option is not intended to be an Incentive
Stock Option.

         (b) STOCK PLAN. This option is granted pursuant to the Plan, a copy of
which the Optionee acknowledges having received and read. The provisions of the
Plan are incorporated into this Agreement by this reference.

                                       1.
<PAGE>

         (c) STOCKHOLDER APPROVAL. This option is granted subject to approval of
the Plan by the stockholders of the Company. Should the Plan not be approved by
the stockholders of the Company, this grant shall be null and void.

         2.   TRANSFERABILITY OF OPTION.

         Except as otherwise provided in this Agreement, this option is not
transferable, except (i) by will or by the laws of descent and distribution,
(ii) with the prior written approval of the Company, by instrument to an inter
vivos or testamentary trust, in a form accepted by the Company, in which the
option is to be passed to beneficiaries upon the death of the trustor (settlor)
and (iii) with the prior written approval of the Company, by gift, in a form
accepted by the Company, to Optionee's "family member" as that term is defined
in 17 CFR 230.701(c)(3). The term "family member" is defined in 17 C.F.R.
230.701(c)(3) to mean any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing in the employee's household (other than a
tenant or employee), a trust in which these persons have more than fifty percent
of the beneficial interest, a foundation in which these persons (or the
employee) control the management of assets, and any other entity in which these
persons (or the employee) own more than fifty percent of the voting interests.
This option is exercisable during the life of the Optionee, only by the
Optionee, or a transferee satisfying the above-stated conditions. The right of a
transferee to exercise the transferred portion of the option after the
Optionee's termination of Service shall terminate in accordance with the right
to exercise such option as specified in the option. In the event that the
Service of the Optionee terminates due to the death of the Optionee, the
Optionee's transferee will be treated as a person who acquired the right to
exercise such option by bequest or inheritance. In addition to the foregoing,
the Company may require, as a condition of the transfer of such option to a
trust, by gift, or otherwise, that Optionee's transferee enter into an option
transfer agreement provided by, or acceptable to, the Company. The terms of
option shall be binding upon your transferees, executors, administrators, heirs,
successors, and assigns. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, Optionee may
designate a third party who, in the event of Optionee's death, shall thereafter
be entitled to exercise Optionee's option.

         3. VESTING/RIGHT TO EXERCISE.

         (a) VESTING. The option shall vest as to 25% of the Shares on the first
anniversary of the Vesting Commencement date which shall be         , 199  (the
"Vesting Commencement Date") and 1/48th of the Shares shall vest monthly
thereafter. The percentage of the total number of Shares subject to this option
with respect to which this option is vested at any time after the first
anniversary of the Vesting Commencement Date shall be equal to the product of
1/48 times the number of whole months that have elapsed since the Vesting
Commencement Date.

                                       2.
<PAGE>

         (b) PERIODS OF NONEXERCISABILITY. Any other provision of this Agreement
notwithstanding, the Company shall have the right to designate one or more
periods of time, each of which shall not exceed 18 consecutive months in length,
during which this option shall not be exercisable if the Company determines (in
its sole discretion) that such limitation on exercise could in any way
facilitate a lessening of any restriction on transfer pursuant to the Securities
Act or any state securities laws with respect to any issuance of securities by
the Company, facilitate the registration or qualification of any securities by
the Company under the Securities Act or any state securities laws, or facilitate
the perfection of any exemption from the registration or qualification
requirements of the Securities Act or any applicable state securities laws for
the issuance or transfer of any securities. Such limitation on exercise shall
not alter the vesting schedule set forth in Section 3(a) other than to limit the
periods during which this option shall be exercisable. The Optionee shall be
notified in writing in advance of any such designation by the Company.

         (c) STOCKHOLDER APPROVAL. Any other provision of this Agreement
notwithstanding, this option shall not be exercisable at any time prior to the
approval of the Plan by the holders of a majority of the outstanding stock of
the Company.

         4.   EXERCISE PROCEDURES.

         (a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative
may exercise this option by giving written notice to the Chief Financial
Officer, Secretary, or an Assistant Secretary of the Company pursuant to Section
12(d). The notice shall specify the election to exercise this option, the number
of Shares for which it is being exercised and the form of payment. The notice
shall be signed by the person or persons exercising this option. In the event
that this option is being exercised by the representative of the Optionee, the
notice shall be accompanied by proof (satisfactory to the Company) of the
representative's right to exercise this option. The Optionee or the Optionee's
representative shall deliver to the Chief Financial Officer, Secretary or an
Assistant Secretary of the Company, at the time of giving the notice, payment in
a form permissible under Section 5 for the full amount of the Purchase Price.

         (b) ISSUANCE OF SHARES. After receiving a proper notice of exercise,
the Company shall cause to be issued a certificate or certificates for the
Shares as to which this option has been

                                       3.
<PAGE>

exercised, registered in the name of the person exercising this option (or in
the names of such person and his or her spouse as community property or as joint
tenants with right of survivorship). The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising this
option.

         (c) EARLY EXERCISE. Subject to the provisions of this Agreement,
Optionee may elect at any time that is both (A) during the period of Optionee's
Service and (B) during the term of Optionee's option, to exercise all or part of
such option, including the nonvested portion of such option; provided, however,
that:
                  (i)      a partial exercise of such option shall be deemed to
         cover first vested Shares of Stock and then the earliest vesting
         installment of unvested Shares of Stock;

                  (ii)     any Shares of Stock so purchased from installments
         that have not vested as of the date of exercise shall be subject to the
         purchase option in favor of the Company as described in the Company's
         form of Early Exercise Stock Purchase Agreement;

                  (iii)    Optionee shall enter into the Company's form of Early
         Exercise Stock Purchase Agreement with a vesting schedule that will
         result in the same vesting as if no early exercise had occurred.

         5.   PAYMENT FOR STOCK.

         The entire Purchase Price may be paid in lawful money of the United
States of America.

         6.   TERM AND EXPIRATION.

         (a) BASIC TERM. This option shall in any event expire on the date 10
years after the Date of Grant.

         (b) TERMINATION OF SERVICE (EXCEPT BY DEATH). If the Optionee's service
as an Employee terminates for any reason other than death, then this option
shall expire on the earliest of the following occasions:

                  (i)      The expiration date determined pursuant to subsection
         (a) above;

                  (ii)     The date 90 days after the termination of the
         Optionee's service as an Employee for any reason other than Total and
         Permanent Disability; or

                                       4.
<PAGE>

                  (iii)    The date six months after the termination of the
         Optionee's service as an Employee by reason of Total and Permanent
         Disability.

The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
had become exercisable before the Optionee's service terminated. The balance of
this option shall lapse when the Optionee's service as an Employee terminates.
In the event that the Optionee dies after the termination of service but before
the expiration of this option, all or part of this option may be exercised
(prior to expiration) by the executors or administrators of the Optionee's
estate or by any person who has acquired this option directly from the Optionee
by bequest or inheritance, but only to the extent that this option had become
exercisable before the Optionee's service terminated.

         (c) DEATH OF OPTIONEE. If the Optionee dies as an Employee, then this
option shall expire on the earlier of the following dates:

                  (i)      The expiration date determined pursuant to subsection
         (a) above; or

                  (ii)     The date six months after the Optionee's death.

All or part of this option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this option directly from
the Optionee by bequest or inheritance, but only to the extent that this option
had become exercisable before the Optionee's death. The balance of this option
shall lapse when the Optionee dies.

         (d) LEAVES OF ABSENCE. For purposes of this Section 6, the Employee
relationship shall be deemed to continue during any period when the Optionee is
on military leave, sick leave or other bona fide leave of absence (to be
determined in the sole discretion of the Committee). However, if the Optionee's
reemployment rights are not guaranteed by statute or by contract, then the
Employee relationship shall not be deemed to continue beyond the 90th day of
such period.

         7.   THE COMPANY'S RIGHT OF FIRST OFFER.

         In the event that the Optionee proposes to sell, pledge or otherwise
transfer to any person any Shares acquired under this Agreement, or any interest
in such Shares, such Shares shall first be offered to the Company as follows:

         (a) The Optionee shall promptly deliver a notice ("Notice") to the
Company stating (i) Optionee's bona fide intention to sell or transfer such
Shares, (ii) the number of such Shares to be sold or transferred, and the basic
terms and conditions of such sale or transfer, (iii) the price for which
Optionee proposes to sell or transfer such Shares, (iv) the name of the proposed
purchaser

                                       5.
<PAGE>

or transferee, and (v) proof satisfactory to the Company that the proposed sale
or transfer will not violate any applicable federal or state securities laws.
The Notice shall be signed by both Optionee and the proposed purchaser or
transferee and must constitute a binding commitment subject to the Company's
rights of first offer as set forth herein.

         (b) Within 30 days after receipt of the Notice, the Company may elect
to purchase all of the Shares to which the Notice refers, at the price per Share
specified in the Notice. If the Company elects not to purchase all such Shares,
the Company may assign its right to purchase all such Shares. The assignees may
elect within 30 days after receipt by the Company of the Notice to purchase all
Shares to which the Notice refers, at the price per Share specified in the
Notice. An election to purchase shall be made by written notice to Optionee.
Payment for all Shares elected to be purchased pursuant to this Section 7 shall
be made within 30 days of the receipt by the Company of the Notice.

         (c) If the Shares to which the Notice refers are not elected to be
purchased, as provided in subsection (b) above, the Optionee may sell the Shares
to any person named in the Notice at the price specified in the Notice, provided
that such sale or transfer is consummated within three months of the date of
said Notice to the Company, and provided, further, that any such sale is made in
compliance with applicable federal and state securities laws and not in
violation of any other contractual restrictions to which the Optionee is bound.
The third party Transferee shall acquire the Shares of Stock free and clear of
the Company's right of first offer.

         (d) Any proposed transfer on terms and conditions different from those
set forth in the notice of transfer, as well as any subsequent proposed
transfer, shall again be subject to the Company's right of first offer and shall
require compliance with the procedures described in this Section 7.

         (e) Optionee agrees to cooperate affirmatively with the Company, to the
extent reasonably requested by the Company, to enforce rights and obligations
pursuant to this Agreement.

         (f) Notwithstanding the above, neither the Company nor any assignee of
the Company under this Section 7 shall have any right under this Section 7 at
any time subsequent to the closing of a public offering of the common stock of
the Company pursuant to a registration statement declared effective under the
Securities Act of 1933.

                                       6.
<PAGE>

         (g) This Section 7 shall not apply to a transfer by will or intestate
succession, provided that the Transferee agrees in writing to be bound by the
terms of this Agreement.

         (h) If the Company makes available, at the time and place and in the
amount and form provided in this Agreement, the consideration for the Shares to
be purchased in accordance with the provisions of this Section 7, then from and
after such time the person from whom such Shares are to be purchased shall no
longer have any rights as a holder of such Shares (other than the right to
receive payment of such consideration in accordance with this Agreement). Such
Shares shall be deemed to have been purchased in accordance with the applicable
provisions hereof, whether or not the certificate(s) therefor have been
delivered as required by this Agreement.

         (i) The Optionee shall have the right to transfer all or any portion of
Optionee's interest in the Shares issued under this Agreement which have been
delivered to Optionee, to a trust established by the Optionee for the benefit of
Optionee, Optionee's spouse or children, without being subject to the provisions
of this Section 7, provided that the trustee on behalf of the trust shall agree
in writing to be bound by the terms and conditions of this Agreement. The
transferee shall execute a copy of the attached Exhibit A and file the same with
the Secretary of the Company.

         (j) All certificates representing the Shares issued upon exercise of
this Option shall, where applicable, have endorsed thereon the following legend:

                  "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
         CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES
         SET FORTH IN AN AGREEMENT BETWEEN AEROGEN, INC. AND THE REGISTERED
         HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST. SUCH AGREEMENT
         IMPOSES CERTAIN TRANSFER RESTRICTIONS AND GRANTS CERTAIN RIGHTS OF
         FIRST OFFER TO THE CORPORATION (OR ITS ASSIGNS) UPON THE SALE OF THE
         SHARES. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF
         THE CORPORATION AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE CHIEF
         FINANCIAL OFFICER, SECRETARY OR AN ASSISTANT SECRETARY OF THE
         CORPORATION BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS
         CERTIFICATE."

         8.   LEGALITY OF INITIAL ISSUANCE.

                                       7.
<PAGE>

         No Shares shall be issued upon the exercise of this option unless and
until the Company has determined that:

         (a) It and the Optionee have taken any actions required to register the
Shares under the Securities Act or to perfect an exemption from the registration
requirements thereof;

         (b) Any applicable listing requirement of any stock exchange on which
Stock is listed has been satisfied; and

         (c) Any other applicable provision of state or federal law has been
satisfied.

         9.   NO REGISTRATION RIGHTS.

         The Company may, but shall not be obligated to, register or qualify the
sale of Shares under the Securities Act or any other applicable law. The Company
shall not be obligated to take any affirmative action in order to cause the sale
of Shares under this Agreement to comply with any law.

         10. RESTRICTIONS ON TRANSFER OF SHARES.

         (a) RESTRICTIONS. Regardless of whether the offering and sale of Shares
under the Plan have been registered under the Securities Act or have been
registered or qualified under the securities laws of any state, the Company may
impose restrictions upon the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and its counsel, such restrictions are necessary or
desirable in order to achieve compliance with the provisions of the Securities
Act, the securities laws of any state or any other law.

         (b) INVESTMENT INTENT AT GRANT. The Optionee represents and agrees that
the Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.

         (c) INVESTMENT INTENT AT EXERCISE. In the event that the sale of Shares
under the Plan is not registered under the Securities Act but an exemption is
available which requires an investment representation or other representation,
the Optionee shall represent and agree at the time of exercise that the Shares
being acquired upon exercising this option are being acquired for investment,
and not with a view to the sale or distribution thereof, and shall make such
other representations as are deemed necessary or appropriate by the Company and
its counsel.

                                       8.
<PAGE>

         (d) LEGEND. All certificates evidencing Shares acquired under this
Agreement in an unregistered transaction shall bear the following restrictive
legend (and such other restrictive legends as are required or deemed advisable
under the provisions of any applicable law):

         "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
         OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
         SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
         COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."

         (e) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.

         (f) ADMINISTRATION. Any determination by the Company and its counsel in
connection with any of the matters set forth in this Section 10 shall be
conclusive and binding on the Optionee and all other persons.

         (g) MARKET STAND-OFF. Each Optionee hereby agrees that, if so requested
by the Company, such Optionee shall not sell or otherwise transfer any Shares of
the Company during such period following the effective date of a registration
statement of the Company filed under the Securities Act as agreed to between the
Company and the Underwriter's Representative(s); provided that such restriction
shall only apply to the first two registration statements of the Company to
become effective which include securities to be sold on behalf of the Company to
the public in an underwritten offering.

         11.  SHARES AND ADJUSTMENTS.

         (a) GENERAL. In the event of a subdivision of the outstanding Shares, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Shares (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization or a similar occurrence, the Committee shall make appropriate
adjustments in one or both of (i) the number of Shares covered by this option or
(ii) the Exercise Price.

                                       9.
<PAGE>

         (b) MERGERS; CONSOLIDATIONS. In the event that the Company is a party
to a merger or consolidation, this option shall be subject to the agreement of
merger or consolidation. Such agreement shall provide for the assumption of this
option by the surviving corporation or its parent or for continuation thereof by
the Company (if the Company is a surviving corporation). In the event the
Company is not the surviving corporation and the surviving corporation will not
assume this option, the agreement of merger or consolidation will provide for
payment of a cash settlement equal to the difference between the amount to be
paid for one Share under this agreement and the Exercise Price or for the
acceleration of the exercisability of this option followed by its cancellation
if not exercised, in any case without the Optionee's consent. Any cancellation
shall not occur earlier than 30 days after such acceleration is effective and
the Optionee has been notified of such acceleration. If this option has been
outstanding for less than 12 months, a cancellation need not be preceded by an
acceleration.

         (c) RESERVATION OF RIGHTS. Except as provided in this Section 11, the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, the payment of any dividend or any other increase
or decrease in the number of shares of stock of any class. Any issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or Exercise Price of the Shares
subject to this option. The grant of this option 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, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.

         12.  MISCELLANEOUS PROVISIONS.

         (a) WITHHOLDING TAXES. In the event that the Company determines that it
is required to withhold foreign, federal, state or local tax as a result of the
exercise of this option, the Optionee, as a condition to the exercise of this
option, shall make arrangements satisfactory to the Company to enable it to
satisfy all withholding requirements. The Optionee shall also make arrangements
satisfactory to the Company to enable it to satisfy any withholding requirements
that may arise in connection with the disposition of Shares purchased by
exercising this option.

                                      10.
<PAGE>

         (b) RIGHTS AS A STOCKHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a stockholder with respect to any Shares
subject to this option until such Shares have been issued in the name of the
Optionee or the Optionee's representative.

         (c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be construed
as giving the Optionee the right to be retained as an Employee. The Company
reserves the right to terminate the Optionee's service at any time, with or
without cause.

         (d) NOTICE. Any notice required by the terms of this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States Postal Service, by registered or certified mail
with postage and fees prepaid and addressed to the party entitled to such notice
at the address shown below such party's signature on this Agreement, or at such
other address as such party may designate by 10 days' written notice to the
other party to this Agreement.

         (e) ENTIRE AGREEMENT. This Agreement and the Plan constitute the entire
contract between the parties hereto with regard to the subject matter hereof.

         (f) CHOICE OF LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, as such laws are
applied to contracts entered into and performed in such State. The parties agree
that any action brought by either party to interpret or enforce any provision of
this Agreement shall be brought in, and each party agrees to, and does hereby,
submit to the jurisdictional and venue of, the appropriate state or federal
court located in California.

         13.  DEFINITIONS.

         (a)  "AGREEMENT" shall mean this Nonstatutory Stock Option Agreement.

         (b) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.

         (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.

         (d) "COMMITTEE" shall mean the committee of the Board described in
Section 3 of the Plan or, if none has been appointed, the full Board.

                                      11.
<PAGE>

         (e) "DATE OF GRANT" shall mean the date on which the Committee resolved
to grant this option, which is also the date as of which this Agreement is
entered into.

         (f) "EMPLOYEE" shall mean (i) any individual who is a common-law
employee of the Company or of a Subsidiary, (ii) a member of the Board of
Directors and (iii) an independent contractor who performs services for the
Company or a Subsidiary. Service as a member of the Board of Directors or as an
independent contractor shall be considered employment for all purposes of the
Plan except the second sentence of Section 4(a).

         (g) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of this option, as specified in Section 1(a).

         (h) "INCENTIVE STOCK OPTION" shall mean an employee incentive stock
option described in section 422A(b) of the Code.

         (i) "NONSTATUTORY STOCK OPTION" shall mean an employee stock option not
described in section 422(b), 422A(b), 432(b) or 424(b) of the Code.

         (j) "PLAN" shall mean the 1996 Stock Plan of AeroGen, Inc., as in
effect on the Date of Grant.

         (k) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this option is being exercised.

         (l) "RIGHT OF FIRST OFFER" shall mean the Company's right of first
offer described in Section 7.

         (m) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.

         (n) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 11 (if applicable).

         (o) "STOCK" shall mean the Common Stock of the Company.

         (p) "SUBSIDIARY" shall mean any corporation, if the Company and/or one
or more other Subsidiaries own not less than 50% of the total combined voting
power of all classes of outstanding stock of such corporation. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

         (q) "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental

                                      12.
<PAGE>

impairment which can be expected to result in death or which has lasted, or
can be expected to last, for a continuous period of not less than one year.

         (r) "TRANSFEREE" shall mean any person to whom the Optionee has
directly or indirectly transferred any Share acquired under this Agreement.

                                      13.
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its officer duly authorized to act on behalf of the
Committee, and the Optionee has personally executed this Agreement.

                                       AEROGEN, INC.

                                       By
                                          --------------------------------------
                                           Jane E. Shaw, Ph.D.

                                           Chairman and Chief Executive Officer

                                       Address:

                                           1310 Orleans Drive

                                           Sunnyvale, CA 94089

                                       OPTIONEE:

                                       -----------------------------------------

                                       Address:

                                      14.
<PAGE>

                                    EXHIBIT A

                   ACKNOWLEDGMENT OF AND AGREEMENT TO BE BOUND

                  BY THE NONSTATUTORY STOCK OPTION AGREEMENT OF

                                 AEROGEN, INC.,

                             A DELAWARE CORPORATION

         The undersigned, as transferee of shares of AEROGEN, INC., hereby
acknowledges that he has read and reviewed the terms of the Nonstatutory Stock
Option Agreement of AeroGen, Inc. and hereby agrees to be bound by the terms and
conditions thereof, as if the undersigned had executed said Agreement as an
original party thereto.

         Dated: ______________________, 19__.

                                                --------------------------------

                                      15.
<PAGE>

         THE OPTION GRANTED PURSUANT TO THIS INCENTIVE STOCK OPTION AGREEMENT
(THE "OPTION") AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE OPTION OR THE SHARES UNDER THE SECURITIES ACT, OR AN OPINION OF COUNSEL,
WHICH IS SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED.

                        1996 STOCK PLAN OF AEROGEN, INC.

                        INCENTIVE STOCK OPTION AGREEMENT

                          (ALLOWING FOR EARLY EXERCISE)

         THIS AGREEMENT is entered into as of __________, 199_ between AEROGEN,
INC., a Delaware corporation (the "Company"), and _______________ (the
"Optionee").

                              W I T N E S S E T H:

         WHEREAS, the Company's Board of Directors has established the 1996
Stock Plan of Aerogen, Inc., as amended, in order to provide selected Employees
of the Company and its Subsidiaries with an opportunity to acquire Common Stock
of the Company; and

         WHEREAS, the Committee has determined that it would be in the best
interests of the Company and its stockholders to grant the Incentive Stock
Option described in this Agreement to the Optionee as an inducement to enter
into or remain in the service of the Company and as an incentive for
extraordinary efforts during such service:

         NOW, THEREFORE, it is agreed as follows:

         1.   Grant of Option.

         (a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase __________________ Shares
for the sum of $______ ($0.20) per Share, which is agreed to be 100% of the fair
market value thereof on the Date of Grant. This option is intended to be an
Incentive Stock Option.

         (b) STOCK PLAN. This option is granted pursuant to the Plan, a copy of
which the Optionee acknowledges having received and read. The provisions of the
Plan are incorporated into this Agreement by this reference.

                                       1.
<PAGE>

         (c) STOCKHOLDER APPROVAL. This option is granted subject to approval of
the Plan by the stockholders of the Company. Should the Plan not be approved by
the stockholders of the Company, this grant shall be null and void.

         2. NO TRANSFER OR ASSIGNMENT OF OPTION.

         Except as otherwise provided in this Agreement, this option and the
rights and privileges conferred hereby shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of this option, or of any right or privilege conferred hereby, contrary to the
provisions hereof, or upon any attempted sale under any execution, attachment or
similar process upon the rights and privileges conferred hereby, this option and
the rights and privileges conferred hereby shall immediately become null and
void.

         3. VESTING/RIGHT TO EXERCISE.

         (a) VESTING. This option shall vest as to 25% of the Shares on the
first anniversary of the Vesting Commencement date which shall be ________, 199_
(the "Vesting Commencement Date") and 1/48th of the Shares shall vest monthly
thereafter. The percentage of the total number of Shares subject to this option
with respect to which this option is vested at any time after the first
anniversary of the Vesting Commencement Date shall be equal to the product of
1/48 times the number of whole months that have elapsed since the Vesting
Commencement Date.

         (b) PERIODS OF NONEXERCISABILITY. Any other provision of this Agreement
notwithstanding, the Company shall have the right to designate one or more
periods of time, each of which shall not exceed 18 consecutive months in length,
during which this option shall not be exercisable if the Company determines (in
its sole discretion) that such limitation on exercise could in any way
facilitate a lessening of any restriction on transfer pursuant to the Securities
Act or any state securities laws with respect to any issuance of securities by
the Company, facilitate the registration or qualification of any securities by
the Company under the Securities Act or any state securities laws, or facilitate
the perfection of any exemption from the registration or qualification
requirements of the Securities Act or any applicable state securities laws for
the issuance or transfer of any securities. Such limitation on exercise shall
not alter the vesting schedule set forth in Section 3(a) other than to limit the
periods during which this option shall be

                                       2.
<PAGE>

exercisable. The Optionee shall be notified in writing in advance of any such
designation by the Company.

         (c) STOCKHOLDER APPROVAL. Any other provision of this Agreement
notwithstanding, this option shall not be exercisable at any time prior to the
approval of the Plan by the holders of a majority of the outstanding stock of
the Company.

         4.   EXERCISE PROCEDURES.

         (a) NOTICE OF EXERCISE. The Optionee or the Optionee's representative
may exercise this option by giving written notice to the Chief Financial
Officer, Secretary or an Assistant Secretary of the Company pursuant to Section
12(d). The notice shall specify the election to exercise this option, the number
of Shares for which it is being exercised and the form of payment. The notice
shall be signed by the person or persons exercising this option. In the event
that this option is being exercised by the representative of the Optionee, the
notice shall be accompanied by proof (satisfactory to the Company) of the
representative's right to exercise this option. The Optionee or the Optionee's
representative shall deliver to the Chief Financial Officer, Secretary or
Assistant Secretary of the Company, at the time of giving the notice, payment in
a form permissible under Section 5 for the full amount of the Purchase Price.

         (b) ISSUANCE OF SHARES. After receiving a proper notice of exercise,
the Company shall cause to be issued a certificate or certificates for the
Shares as to which this option has been exercised, registered in the name of the
person exercising this option (or in the names of such person and his or her
spouse as community property or as joint tenants with right of survivorship).
The Company shall cause such certificate or certificates to be delivered to or
upon the order of the person exercising this option.

         (c) EARLY EXERCISE. Subject to the provisions of this Agreement,
Optionee may elect at any time that is both (A) during the period of Optionee's
Service and (B) during the term of Optionee's option, to exercise all or part of
such option, including the nonvested portion of such option; provided, however,
that:
                  (i)      a partial exercise of such option shall be deemed to
         cover first vested Shares of Stock and then the earliest vesting
         installment of unvested Shares of Stock;

                                       3.
<PAGE>

                  (ii)     any Shares of Stock so purchased from installments
         that have not vested as of the date of exercise shall be subject to the
         purchase option in favor of the Company as described in the Company's
         form of Early Exercise Stock Purchase Agreement;

                  (iii)    Optionee shall enter into the Company's form of Early
         Exercise Stock Purchase Agreement with a vesting schedule that will
         result in the same vesting as if no early exercise had occurred.

         5.   PAYMENT FOR STOCK.

         The entire Purchase Price may be paid in lawful money of the United
States of America.

         6.   TERM AND EXPIRATION.

         (a) BASIC TERM. This option shall in any event expire on the date 10
years after the Date of Grant.
         (b) TERMINATION OF SERVICE (EXCEPT BY DEATH). If the Optionee's service
as an Employee terminates for any reason other than death, then this option
shall expire on the earliest of the following occasions:

                  (i)      The expiration date determined pursuant to subsection
         (a) above;

                  (ii)     The date 90 days after the termination of the
         Optionee's service as an Employee for any reason other than Total and
         Permanent Disability; or

                  (iii)    The date six months after the termination of the
         Optionee's service as an Employee by reason of Total and Permanent
         Disability.

The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this option
had become exercisable before the Optionee's service terminated. The balance of
this option shall lapse when the Optionee's service as an Employee terminates.
In the event that the Optionee dies after the termination of service but before
the expiration of this option, all or part of this option may be exercised
(prior to expiration) by the executors or administrators of the Optionee's
estate or by any person who has acquired this option directly from the Optionee
by bequest or inheritance, but only to the extent that this option had become
exercisable before the Optionee's service terminated.

         (c) DEATH OF OPTIONEE. If the Optionee dies as an Employee, then this
option shall expire on the earlier of the following dates:

                                       4.
<PAGE>

         (i)      The expiration date determined pursuant to subsection (a)
                  above; or

         (ii)     The date six months after the Optionee's death.

All or part of this option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this option directly from
the Optionee by bequest or inheritance, but only to the extent that this option
had become exercisable before the Optionee's death. The balance of this option
shall lapse when the Optionee dies.

         (d) LEAVES OF ABSENCE. For purposes of this Section 6, the Employee
relationship shall be deemed to continue during any period when the Optionee is
on military leave, sick leave or other bona fide leave of absence (to be
determined in the sole discretion of the Committee). However, if the Optionee's
reemployment rights are not guaranteed by statute or by contract, then the
Employee relationship shall not be deemed to continue beyond the 90th day of
such period.

         7.   THE COMPANY'S RIGHT OF FIRST OFFER.

         In the event that the Optionee proposes to sell, pledge or otherwise
transfer to any person any Shares acquired under this Agreement, or any interest
in such Shares, such Shares shall first be offered to the Company as follows:

         (a) The Optionee shall promptly deliver a notice ("Notice") to the
Company stating (i) Optionee's bona fide intention to sell or transfer such
Shares, (ii) the number of such Shares to be sold or transferred, and the basic
terms and conditions of such sale or transfer, (iii) the price for which
Optionee proposes to sell or transfer such Shares, (iv) the name of the proposed
purchaser or transferee, and (v) proof satisfactory to the Company that the
proposed sale or transfer will not violate any applicable federal or state
securities laws. The Notice shall be signed by both Optionee and the proposed
purchaser or transferee and must constitute a binding commitment subject to the
Company's rights of first offer as set forth herein.
         (b) Within 30 days after receipt of the Notice, the Company may elect
to purchase all of the Shares to which the Notice refers, at the price per Share
specified in the Notice. If the Company elects not to purchase all such Shares,
the Company may assign its right to purchase all such Shares. The assignees may
elect within 30 days after receipt by the Company of the Notice to purchase all
Shares to which the Notice refers, at the price per Share specified in the
Notice. An election to purchase shall be made by written notice to Optionee.
Payment for all

                                       5.
<PAGE>

Shares elected to be purchased pursuant to this Section 7 shall be made within
30 days of the receipt by the Company of the Notice.
         (c) If the Shares to which the Notice refers are not elected to be
purchased, as provided in subsection 7(b) above, the Optionee may sell the
Shares to any person named in the Notice at the price specified in the Notice,
provided that such sale or transfer is consummated within three months of the
date of said Notice to the Company, and provided, further, that any such sale is
made in compliance with applicable federal and state securities laws and not in
violation of any other contractual restrictions to which the Optionee is bound.
The third-party Transferee shall acquire the Shares of Stock free and clear of
the Company's right of first offer.
         (d) Any proposed transfer on terms and conditions different from those
set forth in the notice of transfer, as well as any subsequent proposed
transfer, shall again be subject to the Company's right of first offer and shall
require compliance with the procedures described in this Section 7.
         (e) Optionee agrees to cooperate affirmatively with the Company, to the
extent reasonably requested by the Company, to enforce rights and obligations
pursuant to this Agreement.
         (f) Notwithstanding the above, neither the Company nor any assignee of
the Company under this Section 7 shall have any right under this Section 7 at
any time subsequent to the closing of a public offering of the common stock of
the Company pursuant to a registration statement declared effective under the
Securities Act of 1933.
         (g) This Section 7 shall not apply to a transfer by will or intestate
succession, provided that the Transferee agrees in writing to be bound by the
terms of this Agreement.
         (h) If the Company makes available, at the time and place and in the
amount and form provided in this Agreement, the consideration for the Shares to
be purchased in accordance with the provisions of this Section 7, then from and
after such time the person from whom such Shares are to be purchased shall no
longer have any rights as a holder of such Shares (other than the right to
receive payment of such consideration in accordance with this Agreement). Such
Shares shall be deemed to have been purchased in accordance with the applicable
provisions hereof, whether or not the certificate(s) therefor have been
delivered as required by this Agreement.

                                       6.
<PAGE>

         (i) The Optionee shall have the right to transfer all or any portion of
Optionee's interest in the Shares issued under this Agreement which have been
delivered to Optionee, to a trust established by the Optionee for the benefit of
Optionee, Optionee's spouse or children, without being subject to the provisions
of this Section 7, provided that the trustee on behalf of the trust shall agree
in writing to be bound by the terms and conditions of this Agreement. The
transferee shall execute a copy of the attached Exhibit A and file the same with
the Secretary of the Company.
         (j) All certificates representing the Shares issued upon exercise of
this Option shall, where applicable, have endorsed thereon the following legend:

                  "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
         CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES
         SET FORTH IN AN AGREEMENT BETWEEN AEROGEN, INC. AND THE REGISTERED
         HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST. SUCH AGREEMENT
         IMPOSES CERTAIN TRANSFER RESTRICTIONS AND GRANTS CERTAIN RIGHTS OF
         FIRST OFFER TO THE CORPORATION (OR ITS ASSIGNS) UPON THE SALE OF THE
         SHARES. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF
         THE CORPORATION AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE CHIEF
         FINANCIAL OFFICER, SECRETARY OR ASSISTANT SECRETARY OF THE CORPORATION
         BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE."

         8.   LEGALITY OF INITIAL ISSUANCE.

         No Shares shall be issued upon the exercise of this option unless and
until the Company has determined that:

         (a) It and the Optionee have taken any actions required to register the
Shares under the Securities Act or to perfect an exemption from the registration
requirements thereof;
         (b) Any applicable listing requirement of any stock exchange on which
Stock is listed has been satisfied; and
         (c) Any other applicable provision of state or federal law has been
satisfied.

                                       7.
<PAGE>

         9.   NO REGISTRATION RIGHTS.

         The Company may, but shall not be obligated to, register or qualify the
sale of Shares under the Securities Act or any other applicable law. The Company
shall not be obligated to take any affirmative action in order to cause the sale
of Shares under this Agreement to comply with any law.

         10. RESTRICTIONS ON TRANSFER OF SHARES.

         (a) RESTRICTIONS. Regardless of whether the offering and sale of Shares
under the Plan have been registered under the Securities Act or have been
registered or qualified under the securities laws of any state, the Company may
impose restrictions upon the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and its counsel, such restrictions are necessary or
desirable in order to achieve compliance with the provisions of the Securities
Act, the securities laws of any state or any other law.
         (b) INVESTMENT INTENT AT GRANT. The Optionee represents and agrees that
the Shares to be acquired upon exercising this option will be acquired for
investment, and not with a view to the sale or distribution thereof.
         (c) INVESTMENT INTENT AT EXERCISE. In the event that the sale of Shares
under the Plan is not registered under the Securities Act but an exemption is
available which requires an investment representation or other representation,
the Optionee shall represent and agree at the time of exercise that the Shares
being acquired upon exercising this option are being acquired for investment,
and not with a view to the sale or distribution thereof, and shall make such
other representations as are deemed necessary or appropriate by the Company and
its counsel.
         (d) LEGEND. All certificates evidencing Shares acquired under this
Agreement in an unregistered transaction shall bear the following restrictive
legend (and such other restrictive legends as are required or deemed advisable
under the provisions of any applicable law):

         "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
         OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
         SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS
         COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."

                                       8.
<PAGE>

         (e) REMOVAL OF LEGENDS. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold under
this Agreement is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
         (f) ADMINISTRATION. Any determination by the Company and its counsel in
connection with any of the matters set forth in this Section 10 shall be
conclusive and binding on the Optionee and all other persons.
         (g) MARKET STAND-OFF. Each Optionee hereby agrees that, if so requested
by the Company, such Optionee shall not sell or otherwise transfer any Shares of
the Company during such period following the effective date of a registration
statement of the Company filed under the Securities Act as agreed to between the
Company and the Underwriter's Representative(s); provided that such restriction
shall only apply to the first two registration statements of the Company to
become effective which include securities to be sold on behalf of the Company to
the public in an underwritten offering.

         11.  SHARES AND ADJUSTMENTS.

         (a) GENERAL. In the event of a subdivision of the outstanding Shares, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Shares (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization or a similar occurrence, the Committee shall make appropriate
adjustments in one or both of (i) the number of Shares covered by this option or
(ii) the Exercise Price.
         (b) MERGERS; CONSOLIDATIONS. In the event that the Company is a party
to a merger or consolidation, this option shall be subject to the agreement of
merger or consolidation. Such agreement shall provide for the assumption of this
option by the surviving corporation or its parent or for continuation thereof by
the Company (if the Company is a surviving corporation). In the event the
Company is not the surviving corporation and the surviving corporation will not
assume this option, the agreement of merger or consolidation will provide for
payment of a cash settlement equal to the difference between the amount to be
paid for one Share under this agreement and the Exercise Price or for the
acceleration of the exercisability of this option

                                       9.
<PAGE>

followed by its cancellation if not exercised, in any case without the
Optionee's consent. Any cancellation shall not occur earlier than 30 days after
such acceleration is effective and the Optionee has been notified of such
acceleration. If this option has been outstanding for less than 12 months, a
cancellation need not be preceded by an acceleration.
         (c) RESERVATION OF RIGHTS. Except as provided in this Section 11, the
Optionee shall have no rights by reason of any subdivision or consolidation of
shares of stock of any class, the payment of any dividend or any other increase
or decrease in the number of shares of stock of any class. Any issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or Exercise Price of the Shares
subject to this option. The grant of this option 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, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.

         12.  MISCELLANEOUS PROVISIONS.

         (a) WITHHOLDING TAXES. In the event that the Company determines that it
is required to withhold foreign, federal, state or local tax as a result of the
exercise of this option, the Optionee, as a condition to the exercise of this
option, shall make arrangements satisfactory to the Company to enable it to
satisfy all withholding requirements. The Optionee shall also make arrangements
satisfactory to the Company to enable it to satisfy any withholding requirements
that may arise in connection with the disposition of Shares purchased by
exercising this option.
         (b) RIGHTS AS A STOCKHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a stockholder with respect to any Shares
subject to this option until such Shares have been issued in the name of the
Optionee or the Optionee's representative.
         (c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be construed
as giving the Optionee the right to be retained as an Employee. The Company
reserves the right to terminate the Optionee's service at any time, for any
reason.
         (d) NOTICE. Any notice required by the terms of this Agreement shall be
given in writing and shall be deemed effective upon personal delivery or upon
deposit with the United States

                                      10.
<PAGE>

Postal Service, by registered or certified mail with postage and fees prepaid
and addressed to the party entitled to such notice at the address shown below
such party's signature on this Agreement, or at such other address as such party
may designate by 10 days' written notice to the other party to this Agreement.
         (e) ENTIRE AGREEMENT. This Agreement and the Plan constitute the entire
contract between the parties hereto with regard to the subject matter hereof.
         (f) CHOICE OF LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, as such laws are
applied to contracts entered into and performed in such State. The parties agree
that any action brought by either party to interpret or enforce any provision of
this Agreement shall be brought in, and each party agrees to, and does hereby,
submit to the jurisdictional and venue of, the appropriate state or federal
court located in California.

         13.  DEFINITIONS.

         (a)  "AGREEMENT" shall mean this Incentive Stock Option Agreement.
         (b) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
         (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
         (d) "COMMITTEE" shall mean the committee of the Board described in
Section 3 of the Plan or, if none has been appointed, the full Board.
         (e) "DATE OF GRANT" shall mean the date on which the Committee resolved
to grant this option, which is also the date as of which this Agreement is
entered into.
         (f) "EMPLOYEE" shall mean any individual who is a common-law employee
of the Company or of a Subsidiary.
         (g) "EXERCISE PRICE" shall mean the amount for which one Share may
be purchased upon exercise of this option, as specified in Section 1(a).
         (h) "INCENTIVE STOCK OPTION" shall mean an employee incentive stock
option described in section 422A(b) of the Code.
         (i) "PLAN" shall mean the 1996 Stock Plan of Aerogen, Inc., as in
effect on the Date of Grant.

                                      11.
<PAGE>

         (j) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Shares with respect to which this option is being exercised.
         (k) "RIGHT OF FIRST OFFER" shall mean the Company's right of first
         offer described in Section 7.
         (l) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended
         (m) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 11 (if applicable).
         (n) "STOCK" shall mean the Common Stock of the Company.
         (o) "SUBSIDIARY" shall mean any corporation, if the Company and/or one
or more other Subsidiaries own not less than 50% of the total combined voting
power of all classes of outstanding stock of such corporation. A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
         (p) "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than one year.
         (q) "TRANSFEREE" shall mean any person to whom the Optionee has
directly or indirectly transferred any Share acquired under this Agreement.
         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its officer duly authorized to act on behalf of the
Committee, and the Optionee has personally executed this Agreement.

                                  AEROGEN, INC.

                                  By
                                     ------------------------------------------

                                          Jane E. Shaw, Ph.D.

                                          Chairman and Chief Executive Officer

                                  Address:

                                          1310 Orleans Drive

                                      12.
<PAGE>

                                          Sunnyvale, CA 94089

                                  OPTIONEE:

                                  By
                                    --------------------------------------------

                                  Address:

                                          --------------------------------------

                                          --------------------------------------

                                      13.
<PAGE>

                                    EXHIBIT A

                   ACKNOWLEDGMENT OF AND AGREEMENT TO BE BOUND

                   BY THE INCENTIVE STOCK OPTION AGREEMENT OF

                                  AEROGEN, INC.

                             A DELAWARE CORPORATION

         The undersigned, as transferee of shares of AEROGEN, INC., hereby
acknowledges that he has read and reviewed the terms of the Incentive Stock
Option Agreement of Aerogen, Inc. and hereby agrees to be bound by the terms and
conditions thereof, as if the undersigned had executed said Agreement as an
original party thereto.

         Dated: ______________________, 19___.

                                      14.
<PAGE>

                                  AEROGEN INC.

                     EARLY EXERCISE STOCK PURCHASE AGREEMENT
                            UNDER THE 1996 STOCK PLAN

         THIS AGREEMENT is made by and between AeroGen Inc., a Delaware
corporation (the "Company"), and _______________ ("Purchaser").

                                   WITNESSETH:

         WHEREAS, Purchaser holds a stock option dated _______________ to
purchase shares of common stock ("Common Stock") of the Company (the "Option")
pursuant to the Company's 1996 Stock Plan (the "Plan"); and

         WHEREAS, the Option consists of a Stock Option Agreement; and

         WHEREAS, Purchaser desires to exercise the Option on the terms and
conditions contained herein; and

         WHEREAS, Purchaser wishes to take advantage of the early exercise
provision of the Purchaser's Option and therefore to enter into this Agreement;

         NOW, THEREFORE, IT IS AGREED between the parties as follows:

         1. INCORPORATION OF PLAN AND OPTION BY REFERENCE. This Agreement is
subject to all of the terms and conditions as set forth in the Plan and the
Option. If there is a conflict between the terms of this Agreement and/or the
Option and the terms of the Plan, the terms of the Plan shall control. If there
is a conflict between the terms of this Agreement and the terms of the Option,
the terms of the Option shall control. Defined terms not explicitly defined in
this Agreement but defined in the Plan shall have the same definitions as in the
Plan. Defined terms not explicitly defined in this Agreement or the Plan but
defined in the Option shall have the same definitions as in the Option.

         2. PURCHASE AND SALE OF COMMON STOCK.

         (a) AGREEMENT TO PURCHASE AND SELL COMMON STOCK. Purchaser hereby
agrees to purchase from the Company, and the Company hereby agrees to sell to
Purchaser, shares of the common stock of the Company (the "Common Stock") in
accordance with the Notice of Exercise duly executed by Purchaser and attached
hereto as Exhibit A.

         (b) CLOSING. The closing hereunder, including payment for and delivery
of the Common Stock, shall occur at the offices of the Company immediately
following the execution of this Agreement, or at such other time and place as
the parties may mutually agree; PROVIDED,

                                       1.
<PAGE>

HOWEVER, that if stockholder approval of the Plan is required before the Option
may be exercised, then the Option may not be exercised, and the closing shall be
delayed, until such stockholder approval is obtained. If such stockholder
approval is not obtained within the time limit specified in the Plan, then this
Agreement shall be null and void.

         3.   UNVESTED SHARE REPURCHASE OPTION

         (a) REPURCHASE OPTION. In the event Purchaser's Service terminates,
then the Company shall have an irrevocable option (the "Repurchase Option") for
a period of ninety (90) days after said termination (or in the case of shares
issued upon exercise of the Option after such date of termination, within ninety
(90) days after the date of the exercise), or such longer period as may be
agreed to by the Company and the Purchaser, to repurchase from Purchaser or
Purchaser's personal representative, as the case may be, those shares that
Purchaser received pursuant to the exercise of the Option that have not as yet
vested as of such termination date in accordance with the Vesting Schedule
indicated on Purchaser's Stock Option Agreement (the "Unvested Shares").

         (b) SHARES REPURCHASABLE AT PURCHASER'S ORIGINAL EXERCISE PRICE. The
Company may repurchase all or any of the Unvested Shares at a price ("Option
Price") equal to the Purchaser's Exercise Price for such shares as indicated on
Purchaser's Stock Option Agreement.

         4. EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be
exercised by written notice signed by an Officer of the Company and delivered or
mailed as provided herein. Such notice shall identify the number of shares of
Common Stock to be purchased and shall notify Purchaser of the time, place and
date for settlement of such purchase, which shall be scheduled by the Company
within the term of the Repurchase Option set forth above. The Company shall be
entitled to pay for any shares of Common Stock purchased pursuant to its
Repurchase Option at the Company's option in cash or by offset against any
indebtedness owing to the Company by Purchaser (including without limitation any
Note given in payment for the Common Stock), or by a combination of both. Upon
delivery of such notice and payment of the purchase price in any of the ways
described above, the Company shall become the legal and beneficial owner of the
Common Stock being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
Common Stock being repurchased by the Company, without further action by
Purchaser.

         5. CAPITALIZATION ADJUSTMENTS TO COMMON STOCK. In the event of a
"capitalization adjustment" affecting the Company's outstanding Common Stock as
a class as designated in Section 9(a) of the Plan, then any and all new,
substituted or additional securities or other property to which Purchaser is
entitled by reason of Purchaser's ownership of Common Stock shall be immediately
subject to the Repurchase Option and be included in the word

                                       2.
<PAGE>

"Common Stock" for all purposes of the Repurchase Option with the same force and
effect as the shares of the Common Stock presently subject to the Repurchase
Option, but only to the extent the Common Stock is, at the time, covered by such
Repurchase Option. While the total Option Price shall remain the same after each
such event, the Option Price per share of Common Stock upon exercise of the
Repurchase Option shall be appropriately adjusted.

         6. REORGANIZATION. In the event of a "Reorganization" as designated in
Section 9(b) of the Plan, then the Repurchase Option may be assigned by the
Company to the successor of the Company (or such successor's parent company), if
any, in connection with such Reorganization. To the extent the Repurchase Option
remains in effect following such Reorganization, it shall apply to the new
capital stock or other property received in exchange for the Common Stock in
consummation of the Reorganization, but only to the extent the Common Stock was
at the time covered by such right. Appropriate adjustments shall be made to the
price per share payable upon exercise of the Repurchase Option to reflect the
Reorganization upon the Company's capital structure; provided, however, that the
aggregate Option Price shall remain the same.

         7. ESCROW OF UNVESTED COMMON STOCK. As security for Purchaser's
faithful performance of the terms of this Agreement and to insure the
availability for delivery of Purchaser's Common Stock upon exercise of the
Repurchase Option herein provided for, Purchaser agrees, at the closing
hereunder, to deliver to and deposit with the Secretary of the Company or the
Secretary's designee ("Escrow Agent"), as Escrow Agent in this transaction,
three (3) stock assignments duly endorsed (with date and number of shares blank)
in the form attached hereto as Exhibit B, together with a certificate or
certificates evidencing all of the Common Stock subject to the Repurchase
Option; said documents are to be held by the Escrow Agent and delivered by said
Escrow Agent pursuant to the Joint Escrow Instructions of the Company and
Purchaser set forth in Exhibit C, attached hereto and incorporated by this
reference, which instructions also shall be delivered to the Escrow Agent at the
closing hereunder.

         8. RIGHTS OF PURCHASER. Subject to the provisions of the Option,
Purchaser shall exercise all rights and privileges of a stockholder of the
Company with respect to the shares deposited in escrow. Purchaser shall be
deemed to be the holder of the shares for purposes of receiving any dividends
that may be paid with respect to such shares and for purposes of exercising any
voting rights relating to such shares, even if some or all of such shares have
not yet vested and been released from the Company's Repurchase Option.

         9. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not sell,
assign, hypothecate, donate, encumber or otherwise dispose of any interest in
the Common Stock while the Common Stock is subject to the Repurchase Option.
After any Common Stock has been released from the Repurchase Option, Purchaser
shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of
any interest in the Common Stock except in compliance with the provisions herein
and applicable securities laws. Furthermore, the Common Stock shall be subject
to any right of first refusal in favor of the Company or its assignees that may
be contained in the Company's Bylaws.

                                       3.
<PAGE>

         10. RESTRICTIVE LEGENDS. All certificates representing the Common Stock
shall have endorsed thereon legends in substantially the following forms (in
addition to any other legend which may be required by other agreements between
the parties hereto):

         (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
OPTION SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER,
OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY
SHARES SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT
OF THE COMPANY."

         (b) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."

         (c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT
OF FIRST REFUSAL OPTION IN FAVOR OF THE COMPANY AND/OR ITS ASSIGNEE(S) AS
PROVIDED IN THE BYLAWS OF THE COMPANY."

         (d) Any legend required by appropriate blue sky officials.

         11. INVESTMENT REPRESENTATIONS. In connection with the purchase of the
Common Stock, Purchaser represents to the Company the following:

         (a) Purchaser is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Common Stock. Purchaser is
acquiring the Common Stock for investment for Purchaser's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933.

         (b) Purchaser understands that the Common Stock has not been registered
under the Securities Act of 1933 by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.

                                       4.
<PAGE>

         (c) Purchaser further acknowledges and understands that the Common
Stock must be held indefinitely unless the Common Stock is subsequently
registered under the Securities Act of 1933 or an exemption from such
registration is available. Purchaser further acknowledges and understands that
the Company is under no obligation to register the Common Stock. Purchaser
understands that the certificate evidencing the Common Stock will be imprinted
with a legend that prohibits the transfer of the Common Stock unless the Common
Stock is registered or such registration is not required in the opinion of
counsel for the Company.

         (d) Purchaser is familiar with the provisions of Rules 144 and 701,
under the Securities Act of 1933, as in effect from time to time, which, in
substance, permit limited public resale of "restricted securities" acquired,
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the
time of issuance of the securities, such issuance will be exempt from
registration under the Securities Act of 1933. In the event the Company becomes
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the securities exempt under Rule 701 may be sold by
Purchaser ninety (90) days thereafter, subject to the satisfaction of certain of
the conditions specified by Rule 144 and the market stand-off provision
described in Section 12 below.

         (e) In the event that the sale of the Common Stock does not qualify
under Rule 701 at the time of purchase, then the Common Stock may be resold by
Purchaser in certain limited circumstances subject to the provisions of Rule
144, which requires, among other things: (i) the availability of certain public
information about the Company and (ii) the resale occurring following the
required holding period under Rule 144 after the Purchaser has purchased, and
made full payment of (within the meaning of Rule 144), the securities to be
sold.

         (f) Purchaser further understands that at the time Purchaser wishes to
sell the Common Stock there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 or 701, and
that, in such event, Purchaser would be precluded from selling the Common Stock
under Rule 144 or 701 even if the minimum holding period requirement had been
satisfied.

                                       5.
<PAGE>

         12. MARKET STAND-OFF AGREEMENT. By exercising the Option Purchaser
agrees that the Company (or a representative of the underwriters) may, in
connection with any underwritten registration of the offering of any securities
of the Company under the Securities Act of 1933, require that the Purchaser not
sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same
economic effect as a sale, any shares of Common Stock or other securities of the
Company held by Purchaser, for a period of time specified by the underwriter(s)
(not to exceed one hundred eighty (180) days) following the effective date of
the registration statement of the Company filed under the Securities Act of
1933. Purchaser further agrees to execute and deliver such other agreements as
may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect
thereto. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to Purchaser's Common Stock until the
end of such period.

         13. SECTION 83(b) ELECTION. Purchaser understands that Section 83(a) of
the Code, taxes as ordinary income the difference between the amount paid for
the Common Stock and the fair market value of the Common Stock as of the date
any restrictions on the Common Stock lapse. In this context, "restriction"
includes the right of the Company to buy back the Common Stock pursuant to the
Repurchase Option set forth above. Purchaser understands that Purchaser may
elect to be taxed at the time the Common Stock is purchased, rather than when
and as the Repurchase Option expires, by filing an election under Section 83(b)
(an "83(b) Election") of the Code with the Internal Revenue Service within
thirty (30) days from the date of purchase. Even if the fair market value of the
Common Stock at the time of the execution of this Agreement equals the amount
paid for the Common Stock, the 83(b) Election must be made to avoid income under
Section 83(a) in the future. Purchaser understands that failure to file such an
83(b) Election in a timely manner may result in adverse tax consequences for
Purchaser. Purchaser further understands that Purchaser must file an additional
copy of such 83(b) Election with his or her federal income tax return for the
calendar year in which the date of this Agreement falls. Purchaser acknowledges
that the foregoing is only a summary of the effect of United States federal
income taxation with respect to purchase of the Common Stock hereunder, and does
not purport to be complete. Purchaser further acknowledges that the Company has
directed Purchaser to seek independent advice regarding the applicable
provisions of the Code, the income tax laws of any municipality, state or
foreign country in which Purchaser may reside, and the tax consequences of
Purchaser's death. Purchaser assumes all responsibility for filing an 83(b)
Election and paying all taxes resulting from such election or the lapse of the
restrictions on the Common Stock.

         14. REFUSAL TO TRANSFER. The Company shall not be required (a) to
transfer on its books any shares of Common Stock of the Company which shall have
been transferred in violation of any of the provisions set forth in this
Agreement or (b) to treat as owner of such shares or to accord the right to vote
as such owner or to pay dividends to any transferee to whom such shares shall
have been so transferred.

         15. NO EMPLOYMENT RIGHTS. This Agreement is not an employment contract
and nothing in this Agreement shall affect in any manner whatsoever the right or
power of the

                                       6.
<PAGE>

Company (or a parent or subsidiary of the Company) to terminate Purchaser's
employment for any reason at any time, with or without cause and with or without
notice.

         16.  MISCELLANEOUS.

         (a) NOTICES. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or sent
by telegram or fax or upon deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at such party's address hereinafter shown below its signature
or at such other address as such party may designate by ten (10) days' advance
written notice to the other party hereto.

         (b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon Purchaser, Purchaser's successors,
and assigns. The Company may assign the Repurchase Option hereunder at any time
or from time to time, in whole or in part.

         (c) ATTORNEYS' FEES; SPECIFIC PERFORMANCE. Purchaser shall reimburse
the Company for all costs incurred by the Company in enforcing the performance
of, or protecting its rights under, any part of this Agreement, including
reasonable costs of investigation and attorneys' fees. It is the intention of
the parties that the Company, upon exercise of the Repurchase Option and payment
of the Option Price, pursuant to the terms of this Agreement, shall be entitled
to receive the Common Stock, in specie, in order to have such Common Stock
available for future issuance without dilution of the holdings of other
stockholders. Furthermore, it is expressly agreed between the parties that money
damages are inadequate to compensate the Company for the Common Stock and that
the Company shall, upon proper exercise of the Repurchase Option, be entitled to
specific enforcement of its rights to purchase and receive said Common Stock.

         (d) GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of California. The parties
agree that any action brought by either party to interpret or enforce any
provision of this Agreement shall be brought in, and each party agrees to, and
does hereby, submit to the jurisdiction and venue of, the appropriate state or
federal court for the district encompassing the Company's principal place of
business.

         (e) FURTHER EXECUTION. The parties agree to take all such further
action(s) as may reasonably be necessary to carry out and consummate this
Agreement as soon as practicable, and

                                       7.
<PAGE>

to take whatever steps may be necessary to obtain any governmental approval in
connection with or otherwise qualify the issuance of the securities that are the
subject of this Agreement.

         (f) INDEPENDENT COUNSEL. Purchaser acknowledges that this Agreement has
been prepared on behalf of the Company by Cooley Godward LLP, counsel to the
Company and that Cooley Godward LLP does not represent, and is not acting on
behalf of, Purchaser. Purchaser has been provided with an opportunity to consult
with Purchaser's own counsel with respect to this Agreement.

         (g) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes and merges all prior agreements or understandings, whether written or
oral. This Agreement may not be amended, modified or revoked, in whole or in
part, except by an agreement in writing signed by each of the parties hereto.

         (h) SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith. In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.

         (i) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of _______________.

                                  AEROGEN INC.

                                  By
                                     -------------------------------------------

                                  Title
                                       -----------------------------------------

                                  Address: 1310 Orleans Drive
                                           Sunnyvale, California 94089

                                       8.
<PAGE>

                                                 -------------------------------
                                                 Purchaser

                                  Address:
                                                 -------------------------------

                                                 -------------------------------

ATTACHMENTS:

Exhibit A                  Notice of Exercise
Exhibit B                  Assignment Separate from Certificate
Exhibit C                  Joint Escrow Instructions

                                       9.
<PAGE>

                                    EXHIBIT A

                               NOTICE OF EXERCISE

<PAGE>

                                    EXHIBIT B

                   STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

<PAGE>

                   STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

         FOR VALUE RECEIVED, _______________________ hereby sells, assigns and
transfers unto AeroGen Inc., a Delaware corporation (the "Company"), pursuant to
the Repurchase Option under that certain Early Exercise Stock Purchase
Agreement, dated _______________ by and between the undersigned and the Company
(the "Agreement"), _______________ (_______________) shares of Common Stock of
the Company standing in the undersigned's name on the books of the Company
represented by Certificate No(s). _______________ and does hereby irrevocably
constitute and appoint the Company's Secretary attorney to transfer said Common
Stock on the books of the Company with full power of substitution in the
premises. This Assignment may be used only in accordance with and subject to the
terms and conditions of the Agreement, in connection with the repurchase of
shares of Common Stock issued to the undersigned pursuant to the Agreement, and
only to the extent that such shares remain subject to the Company's Repurchase
Option under the Agreement.

Dated: _______________

                                   ---------------------------------------------
                                   (Signature)

                                   ---------------------------------------------
                                  (Print Name)

(INSTRUCTION: Please do not fill in any blanks other than the "Signature" line
and the "Print Name" line.)

<PAGE>

                                    EXHIBIT C

                            JOINT ESCROW INSTRUCTIONS

<PAGE>

                            JOINT ESCROW INSTRUCTIONS

Secretary
AeroGen Inc.
1310 Orleans Drive
Sunnyvale, CA 94089

Dear Sir or Madam:

         As Escrow Agent for both AeroGen Inc., a Delaware corporation
("Company"), and the undersigned purchaser of Common Stock of the Company
("Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Early Exercise Stock
Purchase Agreement ("Agreement"), dated _______________ to which a copy of these
Joint Escrow Instructions is attached as Exhibit C, in accordance with the
following instructions:

         1. In the event the Company or an assignee shall elect to exercise the
Repurchase Option set forth in the Agreement, the Company or its assignee will
give to Purchaser and you a written notice specifying the number of shares of
Common Stock to be purchased, the purchase price, and the time for a closing
hereunder at the principal office of the Company. Purchaser and the Company
hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.

         2. At the closing you are directed (a) to date any stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of Common Stock to be transferred, to the Company against
the simultaneous delivery to you of the purchase price (which may include
suitable acknowledgment of cancellation of indebtedness) of the number of shares
of Common Stock being purchased pursuant to the exercise of the Repurchase
Option.

         3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of Common Stock to be held by you hereunder and
any additions and substitutions to said shares as specified in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as the Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities and other property all documents of assignment and/or
transfer and all stock certificates necessary or appropriate to make all
securities negotiable and complete any transaction herein contemplated.

         4. This escrow shall terminate upon expiration or exercise in full of
the Repurchase Option, whichever occurs first.

         5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of same to Purchaser and shall be discharged of all
further obligations hereunder; PROVIDED, HOWEVER, that if at the time of
termination of this escrow you are advised by the Company that the property

                                       1.
<PAGE>

subject to this escrow is the subject of a pledge or other security agreement,
you shall deliver all such property to the pledgeholder or other person
designated by the Company.

         6. Except as otherwise provided in these Joint Escrow Instructions,
your duties hereunder may be altered, amended, modified or revoked only by a
writing signed by all of the parties hereto.

         7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties or
their assignees. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while
acting in good faith and any act done or omitted by you pursuant to the advice
of your own attorneys shall be conclusive evidence of such good faith.

         8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree of any
court, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.

         9. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

         10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

         11. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company may
appoint any officer or assistant officer of the Company as successor Escrow
Agent and Purchaser hereby confirms the appointment of such successor or
successors as the Purchaser's attorney-in-fact and agent to the full extent of
your appointment.

         12. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.

         13. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities, you are authorized and directed to retain in your possession without
liability to anyone all or any part of said securities until such dispute shall
have been settled either by mutual written agreement of the parties concerned or
by

                                       2.
<PAGE>

a final order, decree or judgment of a court of competent jurisdiction after the
time for appeal has expired and no appeal has been perfected, but you shall be
under no duty whatsoever to institute or defend any such proceedings.

         14. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery, including
delivery by express courier or five days after deposit in the United States Post
Office, by registered or certified mail with postage and fees prepaid, addressed
to each of the other parties hereunto entitled at the following addresses, or at
such other addresses as a party may designate by ten days' advance written
notice to each of the other parties hereto:

         COMPANY:          AeroGen Inc.
                           1310 Orleans Drive
                           Sunnyvale, CA 94089

         PURCHASER:
                           ------------------------------------
                           ------------------------------------
                           ------------------------------------

         ESCROW AGENT:     Secretary
                           AeroGen Inc.
                           1310 Orleans Drive
                           Sunnyvale, CA 94089

         15. By signing these Joint Escrow Instructions you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.

         16. You shall be entitled to employ such legal counsel and other
experts (including without limitation the firm of Cooley Godward LLP) as you may
deem necessary properly to advise you in connection with your obligations
hereunder. You may rely upon the advice of such counsel, and may pay such
counsel reasonable compensation therefor. The Company shall be responsible for
all fees generated by such legal counsel in connection with your obligations
hereunder.

         17. This instrument shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns. It is
understood and agreed that references to "you" or "your" herein refer to the
original Escrow Agent and to any and all successor Escrow Agents. It is
understood and agreed that the Company may at any time or from time to time
assign its rights under the Agreement and these Joint Escrow Instructions in
whole or in part.

                                       3.
<PAGE>

         18. This Agreement shall be governed by and interpreted and
determined in accordance with the laws of the State of California, as such
laws are applied by California courts to contracts made and to be performed
entirely in California by residents of that state.

                                  Very truly yours,

                                  AEROGEN INC.

                                  By
                                    --------------------------------------------

                                  Title
                                       -----------------------------------------

                                  PURCHASER:

                                  ----------------------------------------------

ESCROW AGENT:

-----------------------------

                                      4.

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