Document:

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                                                                   EXHIBIT 10.18

                         AMERICAN STATES WATER COMPANY

                           2000 STOCK INCENTIVE PLAN
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                               TABLE OF CONTENTS

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<S>  <C>  <C>                                                           <C>
1.   THE PLAN.........................................................  1
     1.1  Purpose.....................................................  1
     1.2  Administration and Authorization; Power and Procedure.......  1
     1.3  Participation...............................................  2
     1.4  Shares Available for Awards; Share Limits...................  2
     1.5  Grant of Awards.............................................  2
     1.6  Award Period................................................  2
     1.7  Limitations on Exercise and Vesting of Awards...............  3
     1.8  Acceptance of Notes to Finance Exercise.....................  3
     1.9  No Transferability; Limited Exception to Transfer
          Restrictions................................................  3
2.   OPTIONS..........................................................  4
     2.1  Grants......................................................  4
     2.2  Option Price................................................  4
     2.3  Limitations on Grant and Terms of Incentive Stock Options...  4
     2.4  Limits on 10% Holders.......................................  5
     2.5  Option Repricing/Cancellation and Regrant/Waiver of
          Restrictions................................................  5
     2.6  Effects of Termination of Employment; Termination of
          Subsidiary Status; Discretionary Provisions.................  5
3.   RESTRICTED STOCK AWARDS..........................................  6
     3.1  Grants......................................................  6
     3.2  Restrictions................................................  6
     3.3  Return to the Corporation...................................  6
4.   OTHER PROVISIONS.................................................  6
     4.1  Rights of Eligible Employees, Participants and
          Beneficiaries...............................................  6
     4.2  Adjustments; Acceleration...................................  7
     4.3  Effect of Termination of Service on Awards..................  8
     4.4  Compliance with Laws........................................  9
     4.5  Tax Matters.................................................  9
     4.6  Plan Amendment, Termination and Suspension..................  9
     4.7  Privileges of Stock Ownership...............................  10
     4.8  Effective Date of the Plan..................................  10
     4.9  Term of the Plan............................................  10
     4.10 Governing Law/Construction/Severability.....................  10
     4.11 Captions....................................................  10
     4.12 Stock-Based Awards in Substitution for Stock Options or
          Awards Granted by Other Corporation.........................  11
     4.13 Non-Exclusivity of Plan.....................................  11
     4.14 No Corporate Action Restriction.............................  11
     4.15 Other Company Benefit and Compensation Program..............  11
5.   DEFINITIONS......................................................  11
     5.1  Definitions.................................................  11
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                         AMERICAN STATES WATER COMPANY

                           2000 STOCK INCENTIVE PLAN

1. THE PLAN

     1.1  Purpose

     The purpose of this Plan is to promote the success of the Company by
providing an additional means through the grant of Awards to attract, motivate,
retain and reward key employees, including officers, whether or not directors,
of the Company with awards and incentives for high levels of individual
performance and improved financial performance of the Company. "Corporation"
means American States Water Company and "Company" means the Corporation and its
Subsidiaries, collectively. These terms and other capitalized terms are defined
in Article 5.

     1.2  Administration and Authorization; Power and Procedure

     (a) Committee. This Plan shall be administered by and all Awards to
Eligible Employees shall be authorized by the Committee. Action of the Committee
with respect to the administration of this Plan shall be taken pursuant to a
majority vote or by written consent of its members.

     (b) Plan Awards; Interpretation; Powers of Committee. Subject to the
express provisions of this Plan, the Committee shall have the authority:

          (i) to determine eligibility and, from among those persons determined
     to be eligible, the particular Eligible Employees who will receive an
     Award;

          (ii) to grant Awards to Eligible Employees, determine the price at
     which securities will be offered or awarded and the amount of securities to
     be offered or awarded to any of such persons, and determine the other
     specific terms and conditions of such Awards consistent with the express
     limits of this Plan, and establish the installments (if any) in which such
     Awards shall become exercisable or shall vest, or determine that no delayed
     exercisability or vesting is required, and establish the events of
     termination or reversion of such Awards;

          (iii) to approve the forms of Award Agreements (which need not be
     identical either as to type of award or among Participants);

          (iv) to construe and interpret this Plan and any agreements defining
     the rights and obligations of the Company and Participants under this Plan,
     further define the terms used in this Plan, and prescribe, amend and
     rescind rules and regulations relating to the administration of this Plan;

          (v) to cancel, modify, or waive the Corporation's rights with respect
     to, or modify, discontinue, suspend, or terminate any or all outstanding
     Awards held by Eligible Employees, subject to any required consent under
     Section 4.6;

          (vi) to accelerate or extend the exercisability or extend the term of
     any or all such outstanding Awards within the maximum ten-year term of
     Awards under Section 1.6; and

          (vii) to make all other determinations and take such other action as
     contemplated by this Plan or as may be necessary or advisable for the
     administration of this Plan and the effectuation of its purposes.

     (c) Binding Determinations/Liability Limitation. Any action taken by, or
inaction of, the Corporation, any Subsidiary, the Board or the Committee
relating or pursuant to this Plan and within its authority hereunder or under
applicable law shall be within the absolute discretion of that entity or body
and shall be conclusive and binding upon all persons. Neither the Board nor any
Committee, nor any member thereof or person acting at the direction thereof,
shall be liable for any act, omission, interpretation, construction or
determination made in good faith in connection with this Plan (or any Award made
under this Plan), and all such persons shall be entitled to indemnification and
reimbursement by the Company in respect of any claim, loss, damage or expense
(including, without limitation, attorneys' fees) arising or resulting therefrom
to the

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fullest extent permitted by law and/or under any directors and officers
liability insurance coverage that may be in effect from time to time.

     (d) Reliance on Experts. In making any determination or in taking or not
taking any action under this Plan, the Committee or the Board, as the case may
be, may obtain and may rely upon the advice of experts, including professional
advisors to the Corporation. No director, officer or agent of the Company shall
be liable for any such action or determination taken or made or omitted in good
faith.

     (e) Delegation. The Committee may delegate ministerial, non-discretionary
functions to individuals who are officers or employees of the Company.

     1.3  Participation

     Awards may be granted by the Committee only to those persons that the
Committee determines to be Eligible Employees. An Eligible Employee who has been
granted an Award may, if otherwise eligible, be granted additional Awards if the
Committee shall so determine.

     1.4  Shares Available for Awards; Share Limits

     (a) Shares Available. Subject to the provisions of Section 4.2, the capital
stock that may be delivered under this Plan shall be shares of the Corporation's
authorized but unissued Common Stock. The shares may be delivered for any lawful
consideration.

     (b) Share Limits. The maximum number of shares of Common Stock that may be
delivered pursuant to Awards granted to Eligible Employees under this Plan shall
not exceed 250,000 shares (the "Share Limit"). The maximum number of shares of
Common Stock that may be delivered pursuant to options qualified as Incentive
Stock Options granted under this Plan is 125,000 shares. The maximum number of
shares subject to those options that are granted during any calendar year to any
individual shall be limited to 15,000 and the maximum individual limit on the
number of shares in the aggregate subject to all Awards that during any calendar
year are granted under this Plan shall be 15,000. Each of the four foregoing
numerical limits shall be subject to adjustment as contemplated by this Section
1.4 and Section 4.2.

     (c) Share Reservation; Replenishment and Reissue of Unvested Awards. No
Award may be granted under this Plan unless, on the date of grant, the sum of
(i) the maximum number of shares issuable at any time pursuant to such Award,
plus (ii) the number of shares that have previously been issued pursuant to
Awards granted under this Plan, other than reacquired shares available for
reissue consistent with any applicable legal limitations, plus (iii) the maximum
number of shares that may be issued at any time after such date of grant
pursuant to Awards that are outstanding on such date, does not exceed the Share
Limit. Shares that are subject to or underlie Awards which expire or for any
reason are canceled or terminated, are forfeited, fail to vest, or for any other
reason are not paid or delivered under this Plan, as well as reacquired shares,
shall again, except to the extent prohibited by law, be available for subsequent
Awards under the Plan. Except as limited by law, if an Award is or may be
settled only in cash, such Award need not be counted against any of the limits
under this Section 1.4.

     1.5  Grant of Awards

     Subject to the express provisions of this Plan, the Committee shall
determine the number of shares of Common Stock subject to each Award and the
price (if any) to be paid for the shares or the Award. Each Award shall be
evidenced by an Award Agreement signed by the Corporation and, if required by
the Committee, by the Participant. The Award Agreement shall set forth the
material terms and conditions of the Award established by the Committee
consistent with the specific provisions of this Plan.

     1.6  Award Period

     Each Award and all executory rights or obligations under the related Award
Agreement shall expire on such date (if any) as shall be determined by the
Committee, but in the case of Options or other rights to acquire Common Stock
not later than ten (10) years after the Award Date.

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     1.7  Limitations on Exercise and Vesting of Awards

     (a) Provisions for Exercise. Unless the Committee otherwise expressly
provides, no Award shall be exercisable or shall vest until at least six months
after the initial Award Date, and once exercisable an Award shall remain
exercisable until the expiration or earlier termination of the Award.

     (b) Procedure. Any exercisable Award shall be deemed to be exercised when
the Secretary of the Corporation receives written notice of such exercise from
the Participant, together with any required payment made in accordance with
Section 2.2.

     (c) Fractional Shares/Minimum Issue. Fractional share interests shall be
disregarded, but may be accumulated. The Committee, however, may determine in
the case of Eligible Employees that cash, other securities, or other property
will be paid or transferred in lieu of any fractional share interests. No fewer
than 100 shares may be purchased on exercise of any Award at one time unless the
number purchased is the total number at the time available for purchase under
the Award.

     1.8  Acceptance of Notes to Finance Exercise

     The Corporation may, with the Committee's approval, accept one or more
notes from any Eligible Employee in connection with the exercise or receipt of
any outstanding Award; provided that any such note shall be subject to the
following terms and conditions:

          (a) The principal of the note shall not exceed the amount required to
     be paid to the Corporation upon the exercise or receipt of one or more
     Awards under the Plan and the note shall be delivered directly to the
     Corporation in consideration of such exercise or receipt.

          (b) The initial term of the note shall be determined by the Committee;
     provided that the term of the note, including extensions, shall not exceed
     a period of five years.

          (c) The note shall provide for full recourse to the Participant and
     shall bear interest at a rate determined by the Committee but not less than
     the interest rate necessary to avoid the imputation of interest under the
     Code.

          (d) If the employment of the Participant terminates, the unpaid
     principal balance of the note shall become due and payable on the 10th
     business day after such termination; provided, however, that if a sale of
     such shares would cause such Participant to incur liability under Section
     16(b) of the Exchange Act, the unpaid balance shall become due and payable
     on the 10th business day after the first day on which a sale of such shares
     could have been made without incurring such liability assuming for these
     purposes that there are no other transactions (or deemed transactions in
     securities of this Corporation) by the Participant subsequent to such
     termination.

     (e) If required by the Committee or by applicable law, the note shall be
secured by a pledge of any shares or rights financed thereby in compliance with
applicable law.

     (f) The terms, repayment provisions, and collateral release provisions of
the note and the pledge securing the note shall conform with applicable rules
and regulations of the Federal Reserve Board as then in effect.

     1.9  No Transferability; Limited Exception to Transfer Restrictions

     (a) Limit On Exercise and Transfer. Unless otherwise expressly provided in
(or pursuant to) this Section 1.9, by applicable law and by the Award Agreement,
as the same may be amended, (i) all Awards are non-transferable and shall not be
subject in any manner to sale, transfer, anticipation, alienation, assignment,
pledge, encumbrance or charge; Awards shall be exercised only by the
Participant; and (ii) amounts payable or shares issuable pursuant to an Award
shall be delivered only to (or for the account of) the Participant.

     (b) Exceptions. The Committee may permit Awards to be exercised by and paid
only to certain persons or entities related to the Participant, including but
not limited to members of the Participant's immediate family, or trusts or other
entities whose beneficiaries or beneficial owners are members of the
Participant's immediate family, pursuant to such conditions and procedures as
the Committee may establish. Any permitted transfer shall be subject to the
condition that the Committee receive evidence satisfactory to it that

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the transfer is being made for essentially estate and/or tax planning purposes
on a gratuitous or donative basis and without consideration (other than nominal
consideration or in exchange for an interest in a qualified transferee).
Notwithstanding the foregoing or anything to the contrary in Section 1.9(c),
ISOs and Restricted Stock Awards shall be subject to any and all additional
transfer restrictions under the Code.

     (c) Further Exceptions to Limits On Transfer. The exercise and transfer
restrictions in Section 1.9(a) shall not apply to:

          (i) transfers to the Corporation,

          (ii) the designation of a beneficiary to receive benefits in the event
     of the Participant's death or, if the Participant has died, transfers to or
     exercise by the Participant's beneficiary, or, in the absence of a validly
     designated beneficiary, transfers by will or the laws of descent and
     distribution,

          (iii) transfers pursuant to a QDRO order if approved or ratified by
     the Committee,

          (iv) if the Participant has suffered a disability, permitted transfers
     or exercises on behalf of the Participant by his or her legal
     representative, or

          (v) the authorization by the Committee of "cashless exercise"
     procedures with third parties who provide financing for the purpose of (or
     who otherwise facilitate) the exercise of Awards consistent with applicable
     laws and the express authorization of the Committee.

2. OPTIONS

     2.1  Grants

     One or more Options may be granted under this Article to any Eligible
Employee. Each Option granted shall be designated in the applicable Award
Agreement, by the Committee as either an Incentive Stock Option, subject to
Section 2.3, or a Non-Qualified Stock Option.

     2.2  Option Price

     (a) Pricing Limits. The purchase price per share of the Common Stock
covered by each Option shall be determined by the Committee at the time of the
Award, but shall not be less than 100% (110% in the case of an ISO granted to a
Participant described in Section 2.4) of the Fair Market Value of the Common
Stock on the date of grant.

     (b) Payment Provisions. The purchase price of any shares purchased on
exercise of an Option granted under this Article shall be paid in full at the
time of each purchase in one or a combination of the following methods: (i) in
cash or by electronic funds transfer; (ii) by check payable to the order of the
Corporation; (iii) if authorized by the Committee or specified in the applicable
Award Agreement, by a promissory note of the Participant consistent with the
requirements of Section 1.8; (iv) by notice and third party payment in such
manner as may be authorized by the Committee; or (v) by the delivery of shares
of Common Stock of the Corporation already owned by the Participant, provided,
however, that the Committee may in its absolute discretion limit the
Participant's ability to exercise an Award by delivering such shares, and
provided further that any shares delivered which were initially acquired upon
exercise of a stock option must have been owned by the Participant at least six
months as of the date of delivery. Shares of Common Stock used to satisfy the
exercise price of an Option shall be valued at their Fair Market Value on the
date of exercise.

     2.3  Limitations on Grant and Terms of Incentive Stock Options

     (a) $100,000 Limit. To the extent that the aggregate "Fair Market Value" of
stock with respect to which incentive stock options first become exercisable by
a Participant in any calendar year exceeds $100,000, taking into account both
Common Stock subject to Incentive Stock Options under this Plan and stock
subject to incentive stock options under all other plans of the Company, such
options shall be treated as Nonqualified Stock Options. For this purpose, the
"Fair Market Value" of the stock subject to options shall be determined as of
the date the options were awarded. In reducing the number of options treated as
incentive stock options to meet the $100,000 limit, the most recently granted
options shall be reduced first. To the extent a reduction

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of simultaneously granted options is necessary to meet the $100,000 limit, the
Committee may, in the manner and to the extent permitted by law, designate which
shares of Common Stock are to be treated as shares acquired pursuant to the
exercise of an Incentive Stock Option.

     (b) Option Period. Each Option and all rights thereunder shall expire no
later than 10 years after the Award Date.

     (c) Other Code Limits. Incentive Stock Options may only be granted to
Eligible Employees of the Corporation or a Subsidiary that satisfies the other
eligibility requirements of the Code. There shall be imposed in any Award
Agreement relating to Incentive Stock Options such other terms and conditions as
from time to time are required in order that the Option be an "incentive stock
option" as that term is defined in Section 422 of the Code.

     2.4  Limits on 10% Holders

     No Incentive Stock Option may be granted to any person who, at the time the
Option is granted, owns (or is deemed to own under Section 424(d) of the Code)
shares of outstanding Common Stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation, unless the
exercise price of such Option is at least 110% of the Fair Market Value of the
stock subject to the Option and such Option by its terms is not exercisable
after the expiration of five years from the date such Option is granted.

     2.5  Option Repricing/Cancellation and Regrant/Waiver of Restrictions

     Subject to Section 1.4 and Section 4.6 and the specific limitations on
Awards contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Employee
any adjustment in the exercise or purchase price, the vesting schedule, the
number of shares subject to, the restrictions upon or the term of, an Award
granted under this Article by cancellation of an outstanding Award and a
subsequent regranting of an Award, by amendment, by substitution of an
outstanding Award, by waiver or by other legally valid means. Such amendment or
other action may result among other changes in an exercise or purchase price
which is higher or lower than the exercise or purchase price of the original or
prior Award, provide for a greater or lesser number of shares subject to the
Award, or provide for a longer or shorter vesting or exercise period.

     2.6  Effects of Termination of Employment; Termination of Subsidiary
          Status; Discretionary Provisions

     (a) Options -- Resignation or Dismissal. If the Participant's employment by
the Company terminates for any reason (the date of such termination being
referred to as the "Severance Date") other than Retirement, Total Disability or
death, or for Cause (as determined in the discretion of the Committee), the
Participant shall have, unless otherwise provided in the Award Agreement and
subject to earlier termination pursuant to or as contemplated by Section 1.6 or
4.2, three months after the Severance Date to exercise any Option to the extent
it shall have become exercisable on the Severance Date. In the case of a
termination for Cause, the Option shall terminate on the Severance Date. In
other cases, the Option, to the extent not exercisable on the Severance Date,
shall terminate.

     (b) Options -- Death or Disability. If the Participant's employment by the
Company terminates as a result of Total Disability or death, the Participant,
Participant's Personal Representative or his or her Beneficiary, as the case may
be, shall have, unless otherwise provided in the Award Agreement and subject to
earlier termination pursuant to or as contemplated by Section 1.6 or 4.2, until
12 months after the Severance Date to exercise any Option to the extent it shall
have become exercisable by the Severance Date. Any Option to the extent not
exercisable on the Severance Date shall terminate.

     (c) Options -- Retirement. If the Participant's employment by the Company
terminates as a result of Retirement, the Participant, Participant's Personal
Representative or his or her Beneficiary, as the case may be, shall have, unless
otherwise provided in the Award Agreement and subject to earlier termination
pursuant to or as contemplated by Section 1.6 or 4.2, until 12 months after the
Severance Date to exercise any Option to the extent it shall have become
exercisable by the Severance Date. The Option, to the extent not exercisable on
the Severance Date, shall terminate.

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     (d) Committee Discretion. Notwithstanding the foregoing provisions of this
Section 2.6, in the event of, or in anticipation of, a termination of employment
with the Company for any reason, other than discharge for Cause, the Committee
may, in its discretion, increase the portion of the Participant's Award
available to the Participant, or Participant's Beneficiary or Personal
Representative, as the case may be, or, subject to the provisions of Section
1.6, extend the exercisability period upon such terms as the Committee shall
determine and expressly set forth in or by amendment to the Award Agreement.

3. RESTRICTED STOCK AWARDS

     3.1  Grants

     The Committee may, in its discretion, grant one or more Restricted Stock
Awards to any Eligible Employee. Each Restricted Stock Award Agreement shall
specify the number of shares of Common Stock to be issued to the Participant,
the date of such issuance, the consideration for such shares (but not less than
the minimum lawful consideration under applicable state law) by the Participant,
the extent (if any) to which and the time (if ever) at which the Participant
shall be entitled to dividends, voting and other rights in respect of the shares
prior to vesting, and the restrictions (which may be based on performance
criteria, passage of time or other factors or any combination thereof) imposed
on such shares and the conditions of release or lapse of such restrictions. Such
restrictions shall not lapse earlier than six months after the Award Date,
except to the extent the Committee may otherwise provide. Stock certificates
evidencing shares of Restricted Stock pending the lapse of the restrictions
("Restricted Shares") shall bear a legend making appropriate reference to the
restrictions imposed hereunder and shall be held by the Corporation or by a
third party designated by the Committee until the restrictions on such shares
shall have lapsed and the shares shall have vested in accordance with the
provisions of the Award and Section 1.7. Upon issuance of the Restricted Stock
Award, the Participant may be required to provide such further assurance and
documents as the Committee may require to enforce the restrictions.

     3.2  Restrictions

     (a) Pre-Vesting Restraints. Except as provided in Section 3.1 and 1.9,
restricted shares comprising any Restricted Stock Award may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered, either
voluntarily or involuntarily, until the restrictions on such shares have lapsed
and the shares have become vested.

     (b) Dividend and Voting Rights. Unless otherwise provided in the applicable
Award Agreement, a Participant receiving a Restricted Stock Award shall be
entitled to cash dividend and voting rights for all shares issued even though
they are not vested, provided that such rights shall terminate immediately as to
any Restricted Shares which cease to be eligible for vesting.

     (c) Cash Payments. If the Participant shall have paid or received cash
(including any dividends) in connection with the Restricted Stock Award, the
Award Agreement shall specify whether and to what extent such cash shall be
returned (with or without an earnings factor) as to any restricted shares which
cease to be eligible for vesting.

     3.3  Return to the Corporation

     Unless the Committee otherwise expressly provides, Restricted Shares that
remain subject to restrictions at the time of termination of employment or are
subject to other conditions to vesting that have not been satisfied by the time
specified in the applicable Award Agreement shall not vest and shall be returned
to the Corporation in such manner and on such terms as the Committee shall
therein provide.

4. OTHER PROVISIONS

     4.1  Rights of Eligible Employees, Participants and Beneficiaries

     (a) Employment Status. Status as an Eligible Employee shall not be
construed as a commitment that any Award will be made under this Plan to an
Eligible Employee or to Eligible Employees generally.

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     (b) No Employment Contract. Nothing contained in this Plan (or in any other
documents under this Plan or in any Award) shall confer upon any Eligible
Employee or Participant any right to continue in the employ or other service of
the Company, constitute any contract or agreement of employment or other service
or affect an employee's status as an employee at will, nor shall interfere in
any way with the right of the Company to change a person's compensation or other
benefits, or to terminate his or her employment or other service, with or
without cause. Nothing in this Section, however, is intended to adversely affect
any express independent right of such person under a separate employment or
service contract other than an Award Agreement.

     (c) Plan Not Funded. Awards payable under this Plan shall be payable in
shares or from the general assets of the Corporation, and (except as provided in
Section 1.4(c)) no special or separate reserve, fund or deposit shall be made to
assure payment of such Awards. No Participant, Beneficiary or other person shall
have any right, title or interest in any fund or in any specific asset
(including shares of Common Stock, except as expressly otherwise provided) of
the Company by reason of any Award hereunder. Neither the provisions of this
Plan (or of any related documents), nor the creation or adoption of this Plan,
nor any action taken pursuant to the provisions of this Plan shall create, or be
construed to create, a trust of any kind or a fiduciary relationship between the
Company and any Participant, Beneficiary or other person. To the extent that a
Participant, Beneficiary or other person acquires a right to receive payment
pursuant to any Award hereunder, such right shall be no greater than the right
of any unsecured general creditor of the Company.

     4.2  Adjustments; Acceleration

     (a) Adjustments. Upon or in contemplation of any reclassification,
recapitalization, stock split (including a stock split in the form of a stock
dividend) or reverse stock split; any merger, combination, consolidation, or
other reorganization; any spin-off, split-up, or similar extraordinary dividend
distribution ("spin-off") in respect of the Common Stock (whether in the form of
securities or property); any exchange of Common Stock or other securities of the
Corporation, or any similar, unusual or extraordinary corporate transaction in
respect of the Common Stock; or a sale of all or substantially all the assets of
the Corporation as an entirety ("asset sale"); then the Committee shall, in such
manner, to such extent (if any) and at such time as it deems appropriate and
equitable in the circumstances:

          (1) proportionately adjust any or all of (a) the number and type of
     shares of Common Stock (or other securities) that thereafter may be made
     the subject of Awards (including the specific maxima and numbers of shares
     set forth elsewhere in this Plan), (b) the number, amount and type of
     shares of Common Stock (or other securities or property) subject to any or
     all outstanding Awards, (c) the grant, purchase, or exercise price of any
     or all outstanding Awards, (d) the securities, cash or other property
     deliverable upon exercise of any outstanding Awards, or (e) (subject to
     limitations under Section 4.10(c)) the performance standards appropriate to
     any outstanding Awards, or

          (2) make provision for a cash payment or for the assumption,
     substitution or exchange of any or all outstanding share-based Awards or
     the cash, securities or property deliverable to the holder of any or all
     outstanding share-based Awards, based upon the distribution or
     consideration payable to holders of the Common Stock upon or in respect of
     such event.

     The Committee may adopt such valuation methodologies for outstanding Awards
as it deems reasonable in the event of a cash or property settlement and, in the
case of Options, but without limitation on other methodologies, may base such
settlement solely upon the excess if any of the amount payable upon or in
respect of such event over the exercise or strike price of the Award.

     In each case, with respect to Awards of Incentive Stock Options, no
adjustment shall be made in a manner that would cause the Plan to violate
Section 422 or 424(a) of the Code or any successor provisions without the
written consent of holders materially adversely affected thereby.

     In any of such events, the Committee may take such action prior to such
event to the extent that the Committee deems the action necessary to permit the
Participant to realize the benefits intended to be conveyed with respect to the
underlying shares in the same manner as is or will be available to shareholders
generally.

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     (b) Possible Early Termination of Accelerated Awards. If any Option or
other right to acquire Common Stock under this Plan has been fully accelerated
as required or permitted by Section 4.2(c) but is not exercised prior to (1) a
dissolution of the Company, or (2) an event described in Section 4.2(a) that the
Company does not survive, or (3) the consummation of an event described in
Section 4.2(a) involving a Change of Control Event approved by the Board, such
Option or right shall terminate, subject to any provision that has been
expressly made by the Board or the Committee, through a plan of reorganization
or otherwise, for the survival, substitution, assumption, exchange or other
settlement of such Option or right.

     (c) Acceleration of Awards Upon Change in Control. Unless prior to a Change
in Control Event the Committee determines that, upon its occurrence, benefits
under any or all Awards shall not be accelerated or determines that only certain
or limited benefits under any or all Awards shall be accelerated and the extent
to which they shall be accelerated, and/or establishes a different time in
respect of such Event for such acceleration, then upon the occurrence of a
Change in Control Event:

          (1) each Option shall become immediately exercisable, and

          (2) Restricted Stock shall immediately vest free of restrictions.

     Any discretion with respect to these events shall be limited to the extent
required by applicable accounting requirements in the case of a transaction
intended to be accounted for as a pooling of interests transaction.

     The Committee may override the limitations on acceleration in this Section
4.2(c) by express provision in the Award Agreement and may accord any Eligible
Employee a right to refuse any acceleration, whether pursuant to the Award
Agreement or otherwise, in such circumstances as the Committee may approve. Any
acceleration of Awards shall comply with applicable legal requirements and, if
necessary to accomplish the purposes of the acceleration or if the circumstances
require, may be deemed by the Committee to occur (subject to Section 4.2(d)) a
limited period of time not greater than 30 days before the event. Without
limiting the generality of the foregoing, the Committee may deem an acceleration
to occur immediately prior to the applicable event and/or reinstate the original
terms of an Award if an event giving rise to an acceleration does not occur.

     (d) Possible Rescission of Acceleration. If the vesting of an Award has
been accelerated expressly in anticipation of an event or upon shareholder
approval of an event and the Committee or the Board later determines that the
event will not occur, the Committee may rescind the effect of the acceleration
as to any then outstanding and unexercised or otherwise unvested Awards.

     (e) Acceleration Upon Termination of Service Following a Change in Control.

          (1) Termination After Change in Control. If any Participant's
     employment is terminated by the Company upon or within one year after a
     Change in Control Event, and the termination is not the result of death,
     Total Disability, Retirement or a termination for Cause, then, subject to
     the other provisions of this Section 4.2 (including without limitation
     Section 4.2(b) and Section 4.4), all outstanding Options and other Awards
     held by the Participant shall be deemed fully vested immediately prior to
     the Severance Date, irrespective of the vesting provisions of the
     Participant's Award Agreement, unless the Award Agreement specifies a
     different result in the case of a Change in Control Event.

          (2) No Extension Beyond Expiration. Notwithstanding the foregoing, in
     no event shall an Award be reinstated or extended beyond its final
     expiration date.

     4.3  Effect of Termination of Service on Awards

     (a) General. The Committee shall establish the effect of a termination of
employment on the rights and benefits under each Award under this Plan and in so
doing may make distinctions based upon the cause of termination.

     (b) Events Not Deemed Termination's of Service. Unless Company policy or
the Committee otherwise provides, the employment relationship shall not be
considered terminated in the case of (i) sick leave, (ii) military leave, or
(iii) any other leave of absence authorized by the Company or the Committee;
provided

                                        8
<PAGE>   11

that unless reemployment upon the expiration of such leave is guaranteed by
contract or law, such leave is for a period of not more than 90 days. In the
case of any Eligible Employee on an approved leave of absence, continued vesting
of the Award while on leave from the employ of the Company shall be suspended,
unless the Committee otherwise provides or applicable law otherwise requires. In
no event shall an Award be exercised after the expiration of the term set forth
in the Award Agreement.

     (c) Effect of Change of Subsidiary Status. For purposes of this Plan and
any Award, if an entity ceases to be a Subsidiary a termination of employment
shall be deemed to have occurred with respect to each Eligible Employee in
respect of the Subsidiary who does not continue as an Eligible Employee in
respect of another entity within the Company.

     4.4  Compliance with Laws

     This Plan, the granting and vesting of Awards under this Plan, the offer,
issuance and delivery of shares of Common Stock, the acceptance of promissory
notes and/or the payment of money under this Plan or under Awards are subject to
compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. In addition, any securities
delivered under this Plan may be subject to any special restrictions that the
Committee may require to preserve a pooling of interests under generally
accepted accounting principles. The person acquiring any securities under this
Plan will, if requested by the Company, provide such assurances and
representations to the Company as the Committee may deem necessary or desirable
to assure compliance with all applicable legal and accounting requirements.

     4.5  Tax Matters

     (a) Provision for Tax Withholding or Offset. Upon any exercise, vesting, or
payment of any Award or upon the disposition of shares of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option prior to satisfaction of
the holding period requirements of Section 422 of the Code, the Company shall
have the right at its option to (i) require the Participant (or Personal
Representative or Beneficiary, as the case may be) to pay or provide for payment
of the minimum amount of any taxes which the Company may be required to withhold
with respect to such Award event or payment or (ii) deduct from any amount
payable in cash the minimum amount of any taxes which the Company may be
required to withhold with respect to such cash payment. In any case where a tax
is required to be withheld in connection with the delivery of shares of Common
Stock under this Plan, the Committee may in its sole discretion (subject to
Section 4.4) grant (either at the time of the Award or thereafter) to the
Participant the right to elect, pursuant to such rules and subject to such
conditions as the Committee may establish, to have the Corporation reduce the
number of shares to be delivered by (or otherwise reacquire) the appropriate
number of shares valued at their Fair Market Value, to satisfy such minimum
withholding obligation, determined in each case as of the trading day next
preceding the applicable date of exercise, vesting or payment. Shares in no
event shall be withheld in excess of the minimum number required for tax
withholding under these provisions.

     4.6  Plan Amendment, Termination and Suspension

     (a) Board Authorization. The Board may, at any time, terminate or, from
time to time, amend, modify or suspend this Plan, in whole or in part. No Awards
may be granted during any suspension of this Plan or after termination of this
Plan, but the Committee shall retain jurisdiction as to Awards then outstanding
in accordance with the terms of this Plan.

     (b) Shareholder Approval. To the extent then required under Sections 162,
422 or 424 of the Code or any other applicable law, or deemed necessary or
advisable by the Board, any amendment to this Plan shall be subject to
shareholder approval.

     (c) Amendments to Awards. Without limiting any other express authority of
the Committee under (but subject to) the express limits of this Plan, the
Committee by agreement or resolution may waive conditions of or limitations on
Awards to Participants that the Committee in the prior exercise of its
discretion has imposed, without the consent of a Participant, and (subject to
the requirements of Section 1.2(b)) may make other

                                        9
<PAGE>   12

changes to the terms and conditions of Awards that do not affect in any manner
materially adverse to the Participant, the Participant's rights and benefits
under an Award.

     (d) Limitations on Amendments to Plan and Awards. No amendment, suspension
or termination of this Plan or change of or affecting any outstanding Award
shall, without written consent of the Participant, affect in any manner
materially adverse to the Participant any rights or benefits of the Participant
or obligations of the Company under any Award granted under this Plan prior to
the effective date of such change. Changes contemplated by Section 4.2 shall not
be deemed to constitute changes or amendments for purposes of this Section 4.6.

     4.7  Privileges of Stock Ownership

     Except as otherwise expressly authorized by the Committee or this Plan, a
Participant shall not be entitled to any privilege of stock ownership as to any
shares of Common Stock not actually delivered to and held of record by the
Participant. No adjustment will be made for dividends or other rights as a
shareholder for which a record date is prior to such date of delivery.

     4.8  Effective Date of the Plan

     This Plan is effective as of January 27, 2000 the date of approval by the
Board. The Plan shall be submitted for and subject to shareholder approval.

     4.9  Term of the Plan

     No Award will be granted under this Plan after January 26, 2010 (the
"termination date"). Unless otherwise expressly provided in this Plan or in an
applicable Award Agreement, any Award granted prior to the termination date may
extend beyond such date, and all authority of the Committee with respect to
Awards hereunder, including the authority to amend an Award, shall continue
during any suspension of this Plan and in respect of Awards outstanding on the
termination date.

     4.10  Governing Law/Construction/Severability

     (a) Choice of Law. This Plan, the Awards, all documents evidencing Awards
and all other related documents shall be governed by, and construed in
accordance with the laws of the State of California.

     (b) Severability. If a court of competent jurisdiction holds any provision
invalid and unenforceable, the remaining provisions of this Plan shall continue
in effect.

     (c) Plan Construction.

          (1) Rule 16b-3. It is the intent of the Corporation that the Awards
     and transactions permitted by Awards be interpreted in a manner that, in
     the case of Participants who are or may be subject to Section 16 of the
     Exchange Act, satisfies the applicable requirements for exemptions under
     Rule 16b-3. The exemption will not be available if the authorization of
     actions by any Committee of the Board with respect to such Awards does not
     satisfy the applicable conditions of Rule 16b-3. Notwithstanding the
     foregoing, the Corporation shall have no liability to any Participant for
     Section 16 consequences of Awards or events under Awards.

          (2) Section 162(m). It is the further intent of the Company that (to
     the extent the Company or Awards under this Plan may be or become subject
     to limitations on deductibility under Section 162(m) of the Code), Options
     granted with an exercise or base price not less than Fair Market Value on
     the date of grant will qualify as performance-based compensation or
     otherwise be exempt from deductibility limitations under Section 162(m) of
     the Code, to the extent that the authorization of the Award (or the payment
     thereof, as the case may be) satisfies any applicable administrative
     requirements thereof.

     4.11  Captions

     Captions and headings are given to the sections and subsections of this
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
this Plan or any provision thereof.

                                       10
<PAGE>   13

     4.12  Stock-Based Awards in Substitution for Stock Options or Awards
Granted by Other Corporation

     Awards may be granted to Eligible Employees under this Plan in substitution
for employee stock options, stock appreciation rights, restricted stock or other
stock-based awards granted by other entities to persons who are or who will
become Eligible Employees in respect of the Company, in connection with a
distribution, merger or other reorganization by or with the granting entity or
an affiliated entity, or the acquisition by the Company, directly or indirectly,
or all or a substantial part of the stock or assets of the employing entity.

     4.13  Non-Exclusivity of Plan

     Nothing in this Plan shall limit or be deemed to limit the authority of the
Board or the Committee to grant awards or authorize any other compensation, with
or without reference to the Common Stock, under any other plan or authority.

     4.14  No Corporate Action Restriction

     The existence of the Plan, the Award Agreements and the Awards granted
hereunder shall not limit, affect or restrict in any way the right or power of
the Board or the shareholders of the Corporation to make or authorize: (a) any
adjustment, recapitalization, reorganization or other change in the
Corporation's or any Subsidiary's capital structure or its business, (b) any
merger, amalgamation, consolidation or change in the ownership of the
Corporation or any subsidiary, (c) any issue of bonds, debentures, capital,
preferred or prior preference stock ahead of or affecting the Corporation's or
any Subsidiary's capital stock or the rights thereof, (d) any dissolution or
liquidation of the Corporation or any Subsidiary, (e) any sale or transfer of
all or any part of the Corporation or any Subsidiary's assets or business, or
(f) any other corporate act or proceeding by the Corporation or any Subsidiary.
No participant, beneficiary or any other person shall have any claim under any
Award or Award Agreement against any member of the Board or the Committee, or
the Corporation or any employees, officers or agents of the Corporation or any
Subsidiary, as a result of any such action.

     4.15  Other Company Benefit and Compensation Program

     Payments and other benefits received by a Participant under an Award made
pursuant to this Plan shall not be deemed a part of a Participant's compensation
for purposes of the determination of benefits under any other employee welfare
or benefit plans or arrangements, if any, provided by the Corporation or any
Subsidiary, except where the Committee or the Board expressly otherwise provides
or authorizes in writing. Awards under this Plan may be made in addition to, in
combination with, as alternatives to or in payment of grants, awards or
commitments under any other plans or arrangements of the Company or the
Subsidiaries.

5. DEFINITIONS

     5.1  Definitions

     (a) "Award" means an award of any Option or Restricted Stock, or any
combination thereof, whether alternative or cumulative, authorized by and
granted under this Plan.

     (b) "Award Agreement" means any writing setting forth the terms of an Award
that has been authorized by the Committee.

     (c) "Award Date" means the date upon which the Committee took the action
granting an Award or such later date as the Committee designates as the Award
Date at the time of the Award.

     (d) "Award Period" means the period beginning on an Award Date and ending
on the expiration date of such Award.

     (e) "Beneficiary" means the person, persons, trust or trusts designated by
a Participant or, in the absence of a designation, entitled by will or the laws
of descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan in the event of a Participant's death, and shall
mean the Participant's executor or administrator if no other Beneficiary is
designated and able to act under the circumstances.

     (f) "Board" means the Board of Directors of the Corporation.

                                       11
<PAGE>   14

     (g) "Cause" with respect to a Participant means (unless otherwise expressly
provided in the applicable Award Agreement or another applicable contract with
the Participant) a termination of employment based upon a finding by the
Company, acting in good faith and based on its reasonable belief at the time,
that the Participant:

          (1) has failed to render services to the Company where such failure
     amounts to gross negligence or misconduct of the Participant's
     responsibility and duties; or

          (2) has committed an act of fraud or been dishonest against the
     Company or any affiliate of the Company; or

          (3) has been convicted of a felony or other crime involving moral
     turpitude.

     A termination for Cause shall be deemed to occur (subject to reinstatement
upon a contrary final determination by the Committee) on the date on which the
Company first delivers written notice to the Participant of a finding of
termination for Cause.

     (h) "Change in Control Event" means any of the following events

          (1) the dissolution or liquidation of either the Company, unless its
     business is continued by another entity in which holders of the Company's
     voting securities immediately before the event own, either directly or
     indirectly, more than 50% of the continuing entity's voting securities
     immediately after the event;

          (2) any sale, lease, exchange or other transfer (in one or a series of
     transactions) of all or substantially all of the assets of either the
     Company, unless its business is continued by another entity in which
     holders of the Company's voting securities immediately before the event
     own, either directly or indirectly, more than 50% of the continuing
     entity's voting securities immediately after the event;

          (3) any reorganization or merger of the Company, unless the holders of
     the Company's voting securities immediately before the event own, either
     directly or indirectly, more than 50% of the continuing or surviving
     entity's voting securities immediately after the event;

          (4) an acquisition by any person, entity or group acting in concert of
     more than 50% of the voting securities of the Company, unless the holders
     of the Company's voting securities immediately before the event own, either
     directly or indirectly, more than 50% of the acquirer's voting securities
     immediately after the acquisition; or

          (5) a change of one-half or more of the members of the Board of
     Directors of the Company within a twelve-month period, unless the election
     or nomination for election by shareholders of new directors within such
     period constituting a majority of the applicable Board was approved by the
     vote of at least two-thirds of the directors then still in office who were
     in office at the beginning of the twelve-month period.

     (i) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

     (j) "Commission" means the Securities and Exchange Commission.

     (k) "Committee" means the Board or one or more committees appointed by the
Board to administer all or certain aspects of this Plan, each committee to be
comprised solely of one or more directors or such number as may be required
under applicable law.

     (l) "Common Stock" means the Common Shares of the Corporation and such
other securities or property as may become the subject of Awards, or become
subject to Awards, pursuant to an adjustment made under Section 4.2 of this
Plan.

     (m) "Company" means, collectively, the Corporation and its Subsidiaries.

     (n) "Corporation" means American States Water Company, a California
corporation, and its successors.

                                       12
<PAGE>   15

     (o) "Eligible Employee" means an officer (whether or not a director) or key
employee of the Company, including participants in the American States Water
Company Annual Incentive Plan.

     (p) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.

     (q) "Fair Market Value" on any date means (1) if the stock is listed or
admitted to trade on a national securities exchange, the closing price of the
stock on the Composite Tape, as published in the Western Edition of The Wall
Street Journal, of the principal national securities exchange on which the stock
is so listed or admitted to trade, on such date, or, if there is no trading of
the stock on such date, then the closing price of the stock as quoted on such
Composite Tape on the next preceding date on which there was trading in such
shares; (2) if the stock is not listed or admitted to trade on a national
securities exchange, the last price for the stock on such date, as furnished by
the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ
National Market Reporting System or a similar organization if the NASD is no
longer reporting such information; (3) if the stock is not listed or admitted to
trade on a national securities exchange and is not reported on the National
Market Reporting System, the mean between the bid and asked price for the stock
on such date, as furnished by the NASD or a similar organization; or (4) if the
stock is not listed or admitted to trade on a national securities exchange, is
not reported on the National Market Reporting System and if bid and asked prices
for the stock are not furnished by the NASD or a similar organization, the value
as established by the Committee at such time for purposes of this Plan.

     (r) "Incentive Stock Option" means an Option which is intended, as
evidenced by its designation, as an incentive stock option within the meaning of
Section 422 of the Code, the award of which contains such provisions (including
but not limited to the receipt of shareholder approval of this Plan, if the
Award is made prior to such approval) and is made under such circumstances and
to such persons as may be necessary to comply with that section.

     (s) "Nonqualified Stock Option" means an Option that is designated as a
Nonqualified Stock Option and shall include any Option intended as an Incentive
Stock Option that fails to meet the applicable legal requirements thereof. Any
Option granted hereunder that is not designated as an incentive stock option
shall be deemed to be designated a nonqualified stock option under this Plan and
not an incentive stock option under the Code.

     (t) "Option" means an option to purchase Common Stock granted under this
Plan. The Committee shall designate any Option granted to an Eligible Employee
as a Nonqualified Stock Option or an Incentive Stock Option.

     (u) "Participant" means an Eligible Employee who has been granted an Award
under this Plan.

     (v) "Personal Representative" means the person or persons who, upon the
disability or incompetence of a Participant, shall have acquired on behalf of
the Participant, by legal proceeding or otherwise, the power to exercise the
rights or receive benefits under this Plan and who shall have become the legal
representative of the Participant.

     (w) "Plan" means this 2000 Stock Incentive Plan, as it may be amended from
time to time.

     (x) "QDRO" means a qualified domestic relations order.

     (y) "Restricted Shares" or "Restricted Stock" means shares of Common Stock
awarded to a Participant under this Plan, subject to payment of such
consideration, if any, and such conditions on vesting (which may include, among
others, the passage of time, specified performance objectives or other factors)
and such transfer and other restrictions as are established in or pursuant to
this Plan and the related Award Agreement, for so long as such shares remain
unvested under the terms of the applicable Award Agreement.

     (z) "Retirement" means retirement from active service as an employee or
officer of the Company on or after attaining age 65.

     (aa) "Rule 16b-3" means Rule 16b-3 as promulgated by the Commission
pursuant to the Exchange Act, as amended from time to time.

                                       13
<PAGE>   16

     (bb) "Section 16 Person" means a person subject to Section 16(a) of the
Exchange Act.

     (cc) "Securities Act" means the Securities Act of 1933, as amended from
time to time.

     (dd) "Subsidiary" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Corporation.

     (ee) "Total Disability" means a "permanent and total disability" within the
meaning of Section 22(e)(3) of the Code and such other disabilities,
infirmities, afflictions or conditions as the Committee by rule may include.

                                       14<PAGE>   1

                                                                    EXHIBIT 10.4

                          CAPSTONE TURBINE CORPORATION

                       2000 EMPLOYEE STOCK PURCHASE PLAN

<PAGE>   2

                          CAPSTONE TURBINE CORPORATION

                          EMPLOYEE STOCK PURCHASE PLAN

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                   PAGE
                                                                                                                   ----
<S>                                                                                                                <C>
1.    Definitions.............................................................................................     1
2.    Stock Subject to the Plan...............................................................................     3
3.    Grant of Options........................................................................................     4
4.    Exercise of Options; Option Price.......................................................................     5
5.    Withdrawal from the Plan................................................................................     6
6.    Termination of Employment...............................................................................     7
7.    Restriction upon Assignment.............................................................................     8
8.    No Rights of Stockholders until Shares Issued...........................................................     8
9.    Changes in the Stock and Corporate Events; Adjustment of Options........................................     8
10.   Use of Funds; No Interest Paid..........................................................................    10
11.   Dividends...............................................................................................    10
12.   Amendment, Suspension or Termination of the Plan........................................................    10
13.   Administration by Committee; Rules and Regulations......................................................    10
14.   Designation of Subsidiary Corporations..................................................................    11
15.   No Rights as an Employee................................................................................    11
16.   Term; Approval by Stockholders..........................................................................    11
17.   Effect upon Other Plans.................................................................................    12
18.   Conditions to Issuance of Stock Certificates............................................................    12
19.   Notification of Disposition.............................................................................    12
20.   Notices.................................................................................................    13
21.   Headings................................................................................................    13
</TABLE>

                                       i
<PAGE>   3

                          CAPSTONE TURBINE CORPORATION

                       2000 EMPLOYEE STOCK PURCHASE PLAN

              Capstone Turbine Corporation, a Delaware corporation (the
"Company"), hereby adopts the Capstone Turbine Corporation 2000 Employee Stock
Purchase Plan (the "Plan").

              The purposes of the Plan are as follows:

                       (1) To assist eligible employees of the Company and its
        Designated Subsidiary Corporations (as defined below) in acquiring stock
        ownership in the Company pursuant to a plan which is intended to qualify
        as an "employee stock purchase plan", within the meaning of Section
        423(b) of the Code (as defined below).

                       (2) To help such employees provide for their future
        security and to encourage them to remain in the employment of the
        Company and its Subsidiary Corporations.

        1. DEFINITIONS. Whenever any of the following terms is used in the Plan
with the first letter or letters capitalized, it shall have the following
meaning unless context clearly indicates to the contrary (such definitions to be
equally applicable to both the singular and the plural forms of the terms
defined):

              (a) "Account" means the account established for an Eligible
Employee under the Plan with respect to an Offering Period.

              (b) "Agent" means the brokerage firm, bank or other financial
institution, entity or person(s) engaged, retained, appointed or authorized to
act as the agent of the Company or an Employee with regard to the Plan.

              (c) "Authorization" means an Eligible Employee's payroll deduction
authorization with respect to an Offering Period provided by such Eligible
Employee in accordance with Section 3(b).

              (d) "Base Compensation" of an Eligible Employee means the gross
base compensation received by such Eligible Employee on each Payday as
compensation for services to the Company or any Designated Subsidiary
Corporation, excluding overtime payments, sales commissions, incentive
compensation, bonuses, expense reimbursements, fringe benefits and other
special-payments.

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

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

<PAGE>   4

              (g) "Committee" means the committee of the Board appointed to
administer the Plan pursuant to Section 13.

              (h) "Company" means Capstone Turbine Corporation, a Delaware
corporation.

              (i) "Date of Exercise" of any Option means the date on which such
Option is exercised, which shall be the last day of the Offering Period with
respect to which the Option was granted, in accordance with Section 4(a) (except
as provided in Section 9).

              (j) "Date of Grant" of any Option means the date on which such
Option is granted, which shall be the first day of the Offering Period with
respect to which the Option was granted, in accordance with Section 3(a).

              (k) "Designated Subsidiary Corporation" means any Subsidiary
Corporation designated by the Board in accordance with Section 14.

              (l) "Effective Date" means the first day of the first Offering
Period, which shall be the date immediately preceding the first date on which a
share of Stock is traded on an exchange or quoted on Nasdaq or a successor
quotation system.

              (m) "Eligible Employee" means an Employee of the Company or any
Designated Subsidiary Corporation: (i) who does not, immediately after the
Option is granted, own (directly or through attribution) stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of Stock or other stock of the Company, a Parent Corporation or a Subsidiary
Corporation (as determined under Section 423(b)(3) of the Code); (ii) whose
customary employment is for more than twenty (20) hours per week and (iii) whose
customary employment is for more than five (5) months in any calendar year. For
purposes of clause (i) above, the rules of Section 424(d) of the Code with
regard to the attribution of stock ownership shall apply in determining the
stock ownership of an individual, and stock which an Employee may purchase under
outstanding options shall be treated as stock owned by the Employee. During a
leave of absence meeting the requirements of Treasury Regulation Section
1.421-7(h)(2), an individual shall be treated as an Employee of the Company or
Subsidiary Corporation employing such individual immediately prior to such
leave.

              (n) "Employee" means an individual who renders services to the
Company or a Subsidiary Corporation in the status of an "employee", within the
meaning of Section 3401(c) of the Code. "Employee" shall not include any
director of the Company or a Subsidiary Corporation who does not render services
to the Company or a Subsidiary Corporation in the status of an "employee",
within the meaning of Section 3401(c) of the Code.

              (o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute or statutes thereto. Reference to any
particular Exchange Act section shall include any successor section.

                                       2
<PAGE>   5

              (p) "Offering Period" means each six-month period commencing on
any January 1 and July 1 on or after the Effective Date; provided, however, that
the first Offering Period under the Plan shall be the period commencing on the
Effective Date and ending December 31, 2000. Options shall be granted on the
Date of Grant and exercised on the Date of Exercise, as provided in Sections
3(a) and 4(a), respectively.

              (q) "Option" means an option to purchase shares of Stock granted
under the Plan to an Eligible Employee in accordance with Section 3(a).

              (r) "Option Price" means the option price per share of Stock
determined in accordance with Section 4(b).

              (s) "Parent Corporation" means any corporation, other than the
Company, in an unbroken chain of corporations ending with the Company if, at the
time of the granting of the Option, each of the corporations other than the
Company owns stock possessing more than fifty percent (50%) of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

              (t) "Payday" means the regular and recurring established day for
payment of Base Compensation to an Employee of the Company or any Subsidiary
Corporation.

              (u) "Plan" means the Capstone Turbine Corporation 2000 Employee
Stock Purchase Plan.

              (v) "Rule 16b-3" means that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended from time to time.

              (w) "Stock" means the shares of the Company's Common Stock, par
value $0.001 per share.

              (x) "Subsidiary Corporation" means any corporation, other than the
Company, in an unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Option, each of the corporations other than the
last corporation in an unbroken chain owns stock possessing more than fifty
percent (50%) of the total combined voting power of all classes of stock in one
of the other corporations in such chain.

        2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 9
hereof (relating to adjustments upon changes in the Stock) and Section 12 hereof
(relating to amendments of the Plan), the Stock that may be sold pursuant to
Options granted under the Plan shall not exceed in the aggregate nine hundred
thousand (900,000) shares of Stock. The shares of Stock sold pursuant to
Options granted under the Plan may be unissued shares or treasury shares of
Stock, or shares of Stock bought on the New York Stock Exchange or other
nationally-recognized exchange, or other market, for purposes of the Plan.

                                       3
<PAGE>   6
        3. GRANT OF OPTIONS.

              (a) Option Grants. The Company shall grant Options under the Plan
to all Eligible Employees in successive Offering Periods until the earlier of:
(i) the date on which the number of shares of Stock available under the Plan
have been sold, or (ii) the date on which the Plan is suspended or terminates.
Each Employee who is an Eligible Employee on the first day of an Offering Period
shall be granted an Option with respect to such Offering Period. The Date of
Grant of such an Option shall be the first day of the Offering Period with
respect to which such Option was granted. Each Option shall expire on the Date
of Exercise immediately after the automatic exercise of the Option in accordance
with Section 4(a), unless such Option terminates earlier in accordance with
Section 5, 6 or 9. The number of shares of Stock subject to an Eligible
Employee's Option shall equal the cumulative payroll deductions (if any)
authorized by such Eligible Employee in accordance with subsection (b) for the
Offering Period, divided by the Option Price; provided, however, that the number
of shares of Stock subject to such Option shall not exceed two thousand five
hundred (2,500) shares per Offering Period; and, provided, further, that the
number of shares of Stock subject to such Option shall not exceed the number
determined in accordance with subsection (c). The Company shall not grant an
Option with respect to an Offering Period to any individual who is not an
Eligible Employee on the first day of such Offering Period.

              (b) Election to Participate; Payroll Deduction Authorization.
Except as provided in subsection (d), an Eligible Employee shall participate in
the Plan only by means of payroll deduction. Each Eligible Employee who elects
to participate in the Plan with respect to an Offering Period shall deliver to
the Company, not later than fifteen (15) days before the first day of the
Offering Period (or such shorter period as determined by the Committee in its
discretion), a completed and executed written payroll deduction authorization in
a form prepared by the Committee (the "Authorization"). An Eligible Employee's
Authorization shall give notice of such Eligible Employee's election to
participate in the Plan for the next following Offering Period (and subsequent
Offering Periods) and shall designate a whole percentage of such Eligible
Employee's Base Compensation to be withheld by the Company or the Designated
Subsidiary Corporation employing such Eligible Employee on each Payday during
the Offering Period. An Eligible Employee may designate any whole percentage of
Base Compensation which is not be less than one percent (1%) and not more than
fifteen percent (15%). An Eligible Employee's Base Compensation payable during
an Offering Period shall be reduced each Payday through payroll deduction in an
amount equal to the percentage specified in the Authorization, and such amount
shall be credited to such Eligible Employee's Account under the Plan.
Notwithstanding the preceding sentence, at the Committee's discretion payroll
deductions with respect to the initial Offering Period under the Plan may
commence as of the second Payday following the Effective Date and not the
initial Payday following the Effective Date. An Eligible Employee may change the
percentage of Base Compensation designated in the Authorization, subject to the
limits of this subsection (b), or may suspend the Authorization, at any time
during the Offering Period, provided, that any such change or suspension shall
become effective not later than thirty (30) days after receipt by the Company.
Any Authorization shall remain in effect for each subsequent Offering Period,
unless the Eligible Employee submits a new Authorization pursuant to this
subsection (b), withdraws from the Plan pursuant to Section 5, ceases to be an
Eligible Employee as defined in Section 1(m) or terminates employment as
provided in Section 6.

                                       4
<PAGE>   7

              (c) $25,000 Limitation. No Eligible Employee shall be granted an
Option under the Plan which permits his rights to purchase shares of Stock under
the Plan, together with other options to purchase shares of Stock or other stock
under all other employee stock purchase plans of the Company, any Parent
Corporation or any Subsidiary Corporation subject to Section 423 of the Code, to
accrue at a rate which exceeds $25,000 of fair market value of such shares of
Stock or other stock (determined at the time the Option or other option is
granted) for each calendar year in which the Option is outstanding at any time.
For purpose of the limitation imposed by this subsection, (i) the right to
purchase shares of Stock or other stock under an Option or other option accrues
when the Option or other option (or any portion thereof) first becomes
exercisable during the calendar year, (ii) the right to purchase shares of Stock
or other stock under an Option or other option accrues at the rate provided in
the Option or other option, but in no case may such rate exceed $25,000 of the
fair market value of such Stock or other stock (determined at the time such
Option or other option is granted) for any one calendar year, and (iii) a right
to purchase Stock or other stock which has accrued under an Option or other
option may not be carried over to any Option or other option. This limitation
shall be applied in accordance with Section 423(b)(8) of the Code and the
Treasury Regulations thereunder.

              (d) Leaves of Absence. During a leave of absence meeting the
requirements of Treasury Regulation Section 1.421-7(h)(2), an Employee may
continue to participate in the Plan by making cash payments to the Company on
each Payday equal to the amount of the Employee's payroll deduction under the
Plan for the Payday immediately preceding the first day of such Employee's leave
of absence.

        4. EXERCISE OF OPTIONS; OPTION PRICE.

              (a) Option Exercise. Each Employee automatically and without any
act on such Employee's part shall be deemed to have exercised such Employee's
Option on the Date of Exercise to the extent that the balance then in the
Employee's Account is sufficient to purchase, at the Option Price, shares of the
Stock subject to the Option (including fractional shares).

              (b) Option Price Defined. The option price per share of Stock (the
"Option Price") to be paid by an Employee upon the exercise of the Employee's
Option shall be equal to 85% of the lesser of: (i) the Fair Market Value of a
share of Stock on the Date of Exercise and (ii) the Fair Market Value of a share
of Stock on the Date of Grant. The Fair Market Value of a share of Stock as of a
given date shall be: (A) the closing price of a share of Stock on the principal
exchange on which the Stock is then trading, if any, on such date (or, if shares
of Stock were not traded on such date, then on the next preceding trading day
during which a sale occurred); (B) if the Stock is not traded on an exchange,
but is quoted on Nasdaq or a successor quotation system, (I) the last sales
price (if the Stock is then listed as a National Market Issue under the NASD
National Market System), or (II) the mean between the closing representative bid
and asked prices (in all other cases) for a share of Stock on such date (or, if
shares of Stock were not traded on such date, then on the next preceding trading
day during which a sale occurred) as reported by Nasdaq or such successor
quotation system; (C) if the Stock is not publicly traded on an exchange and not
quoted on Nasdaq or a successor quotation system, the mean between the closing
bid and asked prices for a share of Stock on such date (or, if shares of

                                       5
<PAGE>   8

Stock were not traded on such date, then on the next preceding trading day
during which a sale occurred), as determined in good faith by the Committee; or
(D) if the Stock is not publicly traded, the fair market value of a share of
Stock established by the Committee acting in good faith.

              (c) Book Entry/Share Certificates. As soon as practicable after
the purchase of shares of Stock upon the exercise of an Option by an Employee,
the Company shall issue the shares of Stock to such Employee and such shares
shall be held in the custody of the Agent for the benefit of the Employee. The
Company or the Agent shall make an entry on its books and records indicating
that the shares of Stock purchased in connection with such exercise (including
any partial share) have been duly issued as of that date to such Employee. An
Employee shall have the right at any time to request in writing a certificate or
certificates for all or a portion of the whole shares of Stock purchased
hereunder. Upon receipt of an Employee's written request for any such
certificate, the Company shall (or shall cause the Agent to), within thirty (30)
days after the date of such receipt, deliver any such certificate to the
Employee; provided, however, that no certificate shall be issued to an Employee
with respect to Stock purchased hereunder until the expiration of eighteen (18)
months from the date of exercise of the Option to purchase such Stock. Nothing
in this subsection (c) shall prohibit the sale or other disposition by an
Employee of shares of Stock purchased hereunder. In the event the Company is
required to obtain authority from any commission or agency to issue any
certificate or certificates for all or a portion of the whole shares of Stock
purchased hereunder, the Company shall seek to obtain such authority as soon as
reasonably practicable.

              (d) Pro Rata Allocations. If the total number of shares of Stock
for which Options are to be exercised on any date exceeds the number of shares
of Stock remaining unsold under the Plan (after deduction for all shares of
Stock for which Options have theretofore been exercised), the Committee shall
make a pro rata allocation of the available remaining shares of Stock in as
nearly a uniform manner as shall be practicable and the balance of the amount
credited to the Account of each Employee which has not been applied to the
purchase of shares of Stock shall be paid to such Employee in one lump sum in
cash within thirty (30) days after the Date of Exercise, without any interest
thereon.

              (e) Information Statement. The Company shall provide each Employee
whose Option is exercised with an information statement in accordance with
Section 6039(a) of the Code and the Treasury Regulations thereunder. The Company
shall maintain a procedure for identifying certificates of shares of Stock sold
upon the exercise of Options in accordance with Section 6039(b) of the Code.

        5. WITHDRAWAL FROM THE PLAN.

              (a) Withdrawal Election. An Employee may withdraw from
participation under the Plan at any time, except that an Employee may not
withdraw during the last fifteen (15) days of any Option Period. An Employee
electing to withdraw from the Plan must deliver to the Company a notice of
withdrawal in a form prepared by the Committee (the "Withdrawal Election"), not
later than fifteen (15) days prior to the Date of Exercise for such Option
Period.

                                       6
<PAGE>   9

Upon receipt of an Employee's Withdrawal Election, the Company or Subsidiary
Corporation employing the Employee shall pay to the Employee the amount credited
to the Employee's Account in one lump sum payment in cash, without any interest
thereon, and subject to Section 4(c), the Company shall (or shall cause the
Agent to) deliver to the Employee certificates for any whole shares of Stock
previously purchased by the Employee (the value of any fractional share to be
returned to such Employee by check), in either case within thirty (30) days of
receipt of the Employee's Withdrawal Election. Upon receipt of an Employee's
Withdrawal Election by the Company, the Employee shall cease to participate in
the Plan and the Employee's Option for such Option Period shall terminate.

              (b) Eligibility following Withdrawal. An Employee who withdraws
from the Plan with respect to an Option Period, and who is still an Eligible
Employee, may elect to participate again in the Plan for any subsequent Offering
Period by delivering to the Company an Authorization pursuant to Section 3(b).

        6. TERMINATION OF EMPLOYMENT.

              (a) Termination of Employment Other than by Death. If the
employment of an Employee with the Company and the Subsidiary Corporation
terminates other than by death, the Employee's participation in the Plan
automatically and without any act on the Employee's part shall terminate as of
the date of the termination of the Employee's employment. As soon as practicable
after such a termination of employment, the Company or Subsidiary Corporation
employing the Employee shall pay to the Employee the amount credited to the
Employee's Account in one lump sum payment in cash, without any interest
thereon, and subject to Section 4(c), the Company shall (or shall cause the
Agent to) deliver to the Employee certificates for any whole shares of Stock
previously purchased by the Employee (the value of any fractional share to be
returned to such Employee by check). Upon an Employee's termination of
employment covered by this subsection, the Employee's Authorization and Option
under the Plan shall terminate.

              (b) Termination by Death. If the employment of an Employee is
terminated by the Employee's death, the executor of the Employee's will or the
administrator of the Employee's estate, by written notice to the Company, may
request payment of the balance in the Employee's Account, in which event the
Company or Subsidiary Corporation employing the Employee shall pay the amount
credited to the Employee's Account in one lump sum payment in cash, without any
interest thereon, and subject to Section 4(c), the Company shall (or shall cause
the Agent to) deliver to the Employee certificates for any whole shares of Stock
previously purchased by the Employee (the value of any fractional share to be
returned to such Employee by check) as soon as practicable after receiving such
notice. Upon receipt of such notice, the Employee's Authorization and Option
under the Plan shall terminate. If the Company does not receive such notice
prior to the next Date of Exercise, the Employee's Option shall be deemed to
have been exercised on such Date of Exercise.

                                       7
<PAGE>   10

        7. RESTRICTION UPON ASSIGNMENT. An Option granted under the Plan shall
not be transferable other than by will or the laws of descent and distribution,
and is exercisable during the Employee's lifetime only by the Employee. Except
as provided in Section 6(b) hereof, an Option may not be exercised to any extent
except by the Employee. The Company shall not recognize and shall be under no
duty to recognize any assignment or alienation of the Employee's interest in the
Plan, the Employee's Option or any rights under the Employee's Option.

        8. NO RIGHTS OF STOCKHOLDERS UNTIL SHARES ISSUED. With respect to shares
of Stock subject to an Option, an Employee shall not be deemed to be a
stockholder of the Company, and the Employee shall not have any of the rights or
privileges of a stockholder, until such shares have been issued to the Employee
or his or her nominee following exercise of the Employee's Option. No
adjustments shall be made for dividends (ordinary or extraordinary, whether in
cash securities, or other property) or distribution or other rights for which
the record date occurs prior to the date of such issuance, except as otherwise
expressly provided herein.

        9. CHANGES IN THE STOCK AND CORPORATE EVENTS; ADJUSTMENT OF OPTIONS.

              (a) Subject to Section 9(c), in the event that the Committee, in
its sole discretion, determines that any dividend or other distribution (whether
in the form of cash, Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company, or
exchange of Stock or other securities of the Company, issuance of warrants or
other rights to purchase Stock or other securities of the Company, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended by the Company to be made available
under the Plan or with respect to an Option, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of:

                       (i) the number and kind of shares of Stock (or other
        securities or property) with respect to which Options may be granted
        (including, but not limited to, adjustments of the limitation in Section
        3(a) on the maximum number of shares of Stock which may be purchased),

                       (ii) the number and kind of shares of Stock (or other
        securities or property) subject to outstanding Options, and

                       (iii) the exercise price with respect to any Option.

              (b) Subject to Section 9(c), in the event of any transaction or
event described in Section 9(a) or any unusual or nonrecurring transactions or
events affecting the Company, any affiliate of the Company, or the financial
statements of the Company or any affiliate, or of changes in applicable laws,
regulations, or accounting principles, the Committee, in its sole discretion,
and on such terms and conditions as it deems appropriate, either by the terms of
the Option or by action taken prior to the occurrence of such transaction or
event and either automatically or upon the Employee's request, is hereby
authorized to take any one or more of

                                       8
<PAGE>   11

the following actions whenever the Committee determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended by the Company to be made available under the Plan
or with respect to any Option under the Plan, to facilitate such transactions or
events or to give effect to such changes in laws, regulations or principles:

                       (i) To provide that all Options outstanding shall
        terminate without being exercised on such date as the Committee
        determines in its sole discretion;

                       (ii) To provide that all Options outstanding shall be
        exercised prior to the Date of Exercise of such Options on such date as
        the Committee determines in its sole discretion and such Options shall
        terminate immediately after such exercises.

                       (iii) To provide for either the purchase of any Option
        outstanding for an amount of cash equal to the amount that could have
        been obtained upon the exercise of such Option had such Option been
        currently exercisable, or the replacement of such Option with other
        rights or property selected by the Committee in its sole discretion;

                       (iv) To provide that such Option be assumed by the
        successor or survivor corporation, or a parent or subsidiary thereof, or
        shall be substituted for by similar options, covering the stock of the
        successor or survivor corporation, or a parent or subsidiary thereof,
        with appropriate adjustments as to the number and kind of shares and
        prices; and

                       (v) To make adjustments in the number and type of shares
        of Stock (or other securities or property) subject to outstanding
        Options, or in the terms and conditions of outstanding Options, or
        Options which may be granted in the future.

              (c) No adjustment or action described in this Section 9 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to fail to satisfy the requirements of
Section 423 of the Code. Furthermore, no such adjustment or action shall be
authorized to the extent such adjustment or action would result in short-swing
profits liability under Section 16 of the Exchange Act, or violate the exemptive
conditions of Rule 16b-3 unless the Committee determines that the Option is not
to comply with such exemptive conditions. The number of shares of Common Stock
subject to any Option shall always be rounded to the next whole number.

              (d) The existence of the Plan and the Options granted hereunder
shall not affect or restrict in any way the right or power of the Company or the
stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Stock or the rights thereof of which are convertible into or
exchangeable for Stock, or the dissolution or liquidation of the company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.

                                       9
<PAGE>   12

        10. USE OF FUNDS; NO INTEREST PAID. All funds received or held by the
Company under the Plan shall be included in the general funds of the Company
free of any trust or other restriction and may be used for any corporate
purpose. No interest will be paid to any Employee or credited to any Employee's
Account with respect to such funds.

        11. DIVIDENDS.

              (a) Cash dividends and other cash distributions received by the
Agent with respect to Stock held in its custody hereunder will be credited to
each Employee's Account in accordance with such Employee's interests in such
Stock, and shall be applied, as soon as practicable after the receipt thereof by
the Agent, to the purchase in the open market at prevailing market prices of the
number of whole shares of Stock that may be purchased with such funds (after
deductions of any bank service fees, brokerage charges, transfer taxes, and any
other transaction fee, expense or cost payable in connection with the purchase
of such shares of Stock and not otherwise paid by the Employer.)

              (b) All purchases of shares of Stock made pursuant to this Section
11 will be made in the name of the Agent or its nominee, and shall be
transferred and credited to the Account(s) of the Employees to which such
dividends or other distributions were credited. Dividends paid in the form of
shares of Stock will be allocated by the Agent, as and when received, with
respect to Stock held in its custody hereunder to the Account of each Employee
in accordance with such Employee's interests in such Stock. Property, other than
Stock or cash, received by the Agent as a distribution on Stock held in its
custody hereunder, shall be sold by the Agent for the accounts of Employees, and
the Agent shall treat the proceeds of such sale in the same manner as cash
dividends received by the Agent on Stock held in its custody hereunder.

        12. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Board may
amend, suspend, or terminate the Plan at any time and from time to time,
provided that approval by a vote of the holders of the outstanding shares of the
Company's capital stock entitled to vote shall be required to amend the Plan to:
(a) change the number of shares of Stock that may be sold pursuant to Options
under the Plan, (b) alter the requirements for eligibility to participate in the
Plan, or (c) in any manner that would cause the Plan to no longer be an
"employee stock purchase plan" within the meaning of Section 423(b) of the Code.

        13. ADMINISTRATION BY COMMITTEE; RULES AND REGULATIONS.

              (a) Appointment of Committee. The Plan shall be administered by
the Committee, which shall be composed of not less than two members of the
Board, each of whom shall be a "non-employee director" within the meaning of
Rule 16b-3. Each member of the Committee shall serve for a term commencing on a
date specified by the Board and continuing until the member dies, resigns or is
removed from office by the Board. The Committee at its option may utilize the
services of an agent to assist in the administration of the Plan, including
establishing and maintaining an individual securities account under the Plan for
each Employee.

                                       10
<PAGE>   13

              (b) Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
the provisions of the Plan. The Committee shall have the power to interpret the
Plan and the terms of the Options and to adopt such rules for the
administration, interpretation, and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan.

              (c) Majority Rule. The Committee shall act by a majority of its
members in office. The Committee may act either by vote at a meeting or by a
memorandum or other written instrument signed by a majority of the Committee.

              (d) Compensation; Professional Assistance; Good Faith Actions. All
expenses and liabilities incurred by members of the Committee in connection with
the administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its
officers and directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon all Employees, the Company and all other interested persons. No member of
the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Options, and
all members of the Committee shall be fully protected by the Company in respect
to any such action, determination, or interpretation.

        14. DESIGNATION OF SUBSIDIARY CORPORATIONS. The Board shall designate
from among the Subsidiary Corporations, as determined from time to time, the
Subsidiary Corporation or Subsidiary Corporations whose Employees shall be
eligible to be granted Options under the Plan. The Board may designate a
Subsidiary Corporation, or terminate the designation of a Subsidiary
Corporation, without the approval of the stockholders of the Company.

        15. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan shall be construed to
give any person (including any Eligible Employee) the right to remain in the
employ of the Company, a Parent Corporation or a Subsidiary Corporation or to
affect the right of the Company, any Parent Corporation or any Subsidiary
Corporation to terminate the employment of any person (including any Eligible
Employee) at any time, with or without cause.

        16. TERM; APPROVAL BY STOCKHOLDERS. Subject to approval by the
stockholders of the Company in accordance with this Section, the Plan shall be
in effect until December 31, 2010, unless sooner terminated in accordance with
Section 12. No Option may be granted during any period of suspension of the Plan
or after termination of the Plan. The Plan shall be submitted for the approval
of the Company's stockholders within twelve (12) months after the date of the
adoption of the Plan by the Board. Options may be granted prior to such
stockholder approval; provided, however, that such Options shall not be
exercisable prior to the time when the Plan is approved by the Company's
stockholders; and, provided, further, that if such approval has not

                                       11
<PAGE>   14

been obtained by the end of said 12-month period, all Options previously granted
under the Plan shall thereupon terminate without being exercised.

        17. EFFECT UPON OTHER PLANS. The adoption of the Plan shall not affect
any other compensation or incentive plans in effect for the Company, any Parent
Corporation or any Subsidiary Corporation. Nothing in this Plan shall be
construed to limit the right of the Company, any Parent Corporation or any
Subsidiary Corporation to: (a) establish any other forms of incentives or
compensation for employees of the Company, any Parent Corporation or any
Subsidiary Corporation or (b) grant or assume options otherwise than under the
Plan in connection with any proper corporate purpose, including, but not by way
of limitation, the grant or assumption of options in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, firm or association.

        18. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
Stock purchased upon the exercise of Options prior to fulfillment of all the
following conditions:

              (a) The admission of such shares to listing on all stock
exchanges, if any, on which is then listed; and

              (b) The completion of any registration or other qualification of
such shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable; and

              (c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and

              (d) The payment to the Company of all amounts which it is required
to withhold under federal, state or local law upon exercise of the Option; and

              (e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.

        19. NOTIFICATION OF DISPOSITION. Each Employee shall give prompt notice
to the Company of any disposition or other transfer of any shares of Stock
purchased upon exercise of an Option if such disposition or transfer is made:
(a) within two (2) years from the Date of Grant of the Option, or (b) within one
(1) year after the transfer of such shares of Stock to such Employee upon
exercise of such Option. Such notice shall specify the date of such disposition
or other transfer and the amount realized, in cash, other property, assumption
of indebtedness or other consideration, by the Employee in such disposition or
other transfer.

                                       12
<PAGE>   15

        20. NOTICES. Any notice to be given under the terms of the Plan to the
Company shall be addressed to the Company in care of its Secretary and any
notice to be given to any Employee shall be addressed to such Employee at such
Employee's last address as reflected in the Company's records. By a notice given
pursuant to this Section, either party may designate a different address for
notices to be given to it, him or her. Any notice which is required to be given
to an Employee shall, if the Employee is then deceased, be given to the
Employee's personal representative if such representative has previously
informed the Company of his status and address by written notice under this
Section. Any notice shall have been deemed duly given if enclosed in a properly
sealed envelope or wrapper addressed as aforesaid at the time it is deposited
(with postage prepaid) in a post office or branch post office regularly
maintained by the United States Postal Service.

        21. HEADINGS. Headings are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Plan.

                                  * * * * * * *

              I hereby certify that the Capstone Turbine Corporation 2000
Employee Stock Purchase Plan was adopted by the Board of Directors of Capstone
Turbine Corporation on ________, 2000.

      Executed at __________, California on this ___th day of_______, 2000.

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

                                       ------------------------------------
                                       Secretary

                                  * * * * * * *

              I hereby certify that the Capstone Turbine Corporation 2000
Employee Stock Purchase Plan was approved by the stockholders of Capstone
Turbine Corporation on _________________, 2000.

     Executed at __________, California on this ___th day of _______, 2000.

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

                                       ------------------------------------
                                       Secretary

                                       13

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