Document:

<PAGE>

                                                                   EXHIBIT 10.96

                                                                  DRAFT: 8/28/01

                               SUPPLY AGREEMENT

     This SUPPLY AGREEMENT ("Agreement"), dated as of August 31, 2001
("Effective Date"), is entered into by and between Baxter Healthcare
Corporation, a Delaware corporation having its principal place of business at
One Baxter Parkway, Deerfield, Illinois 60015 ("Baxter"), and Nexell of
California, Inc., a Delaware corporation having its principal place of business
at Nine Parker, Irvine, California 92618 ("Nexell").

                                   RECITALS

     WHEREAS, Nexell desires Baxter to provide certain Supplied Products (as
hereafter defined) to Nexell; and

     WHEREAS, Baxter desires to supply such Supplied Products to Nexell on a
non-commercial basis (as more fully described herein), for Nexell's internal use
only and solely for the development of therapeutic products, subject to the
terms hereof.

                                   AGREEMENT

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, Baxter and Nexell hereby agree as follows:

1.   Definitions. As used herein, the following capitalized terms shall have the
     following meanings:

     1.1   "Act" shall mean the Federal Food, Drug and Cosmetic Act, as may be
            ---
           amended or changed from time to time.

     1.2   "Affiliate" of a party shall mean any entity (A) which directly or
            ---------
           indirectly through one or more intermediaries Controls, is Controlled
           by or is under common Control with, the party or (B) fifty percent
           (50%) or more of the voting capital stock (or in the case of an
           entity which is not a corporation, fifty percent (50%) or more of the
           equity interest) of which is beneficially owned or held by a party or
           any of such party's Subsidiaries. The term "Control" means the
           possession, directly or indirectly, of the power to direct or cause
           the direction of the management and policies of an entity (other than
           a natural person), whether through the ownership of voting capital
           stock, by contract or otherwise. For the avoidance of doubt, Nexell
           and its Affiliates shall not be considered Affiliates of Baxter.

     1.3   "Asset Purchase Agreement" shall mean the Asset Purchase Agreement
            ------------------------
           dated as of August 3, 2001 by and among Baxter, Nexell and Nexell
           Therapeutics Inc.

     1.4   "Contract Year" shall mean each September 1 through August 31 during
            -------------
           the term hereof, except that the first Contract Year shall commence
           on the first day of the
<PAGE>

           first month which next follows the date on which Nexell submits its
           first purchase order for Supplied Products to Baxter and shall end on
           August 31 of that year.

     1.5   "Developmental Products" shall have the meaning set forth in Section
            ----------------------
           3.3.

     1.6   "Distribution License Agreement" shall mean the Distribution and
            ------------------------------
           License Agreement entered into between Nexell and Baxter dated as of
           August 31, 2001.

     1.7   "Ex Vivo Cell Processing" shall mean the active selection, and any
            -----------------------
           subsequent modification, genetic alteration, activation and/or
           expansion, of nucleated cells outside the body for therapeutic
           purposes such as cellular therapy or gene therapy. For the purpose of
           this definition, "active selection" shall mean processing involving
           the action of a biological component, such as an antibody or modified
           antibody, a lectin, or a ligand, to selectively and specifically bind
           to a particular molecule on the surface of the cells to be selected
           so as to confer specificity or selectivity for such cells in the cell
           selection process.

     1.8   "FDA" shall mean the United States Food and Drug Administration.
            ---

     1.9   "Form FDA-483" shall have the meaning  ascribed to that term by FDA
            ------------
           policy, as may be amended or changed from time to time.

     1.10  "Fully Loaded Cost" shall mean Baxter's cost of manufacturing,
            -----------------
           performing or acquiring any items or services, in accordance with
           generally accepted accounting principles, consistently applied
           ("GAAP"), in accordance with Baxter's normal accounting policies, all
           consistently applied, including any royalties payable by Baxter in
           connection with manufacturing, performing or acquiring any items or
           services (including the royalties payable under the McLaughlin
           License), but excluding any royalty obligations of Baxter that are
           paid or reimbursed by Nexell pursuant to the Sublicense Agreements.
           Fully Loaded Cost shall not include general corporate allocations or
           other allocations which are not directly related to the manufacture,
           performance or acquisition of the item or service, however
           designated. A charge for the cost of funding Baxter's working capital
           needs for such manufacture, performance or acquisition of items or
           services, including capital expenditures for facilities and/or
           equipment and capitalized manufacturing costs, will be included in
           Fully Loaded Cost, which charge will be made at the interest rate
           paid by Baxter on its then most recent issuance of commercial paper;
           provided, however, that no charge shall be made for any cost of, or
           --------  -------
           the cost of funding, any changes in the site of manufacturing of the
           Supplied Products, or any components thereof. In the event any item
           is acquired or any service is provided for Baxter from or by an
           Affiliate of Baxter, the cost of acquiring such items or services
           shall be deemed to mean such Affiliate's actual cost of
           manufacturing, performing or acquiring such items or services in
           accordance with the principles set forth in this definition of "Fully
           Loaded Cost". Current costs of developing any items or services shall
           be included in Fully Loaded Cost, but in no event shall any historic
           development costs be included in Fully Loaded Cost.

                                       2
<PAGE>

     1.11  "Manufacturing Facility" shall mean any production site selected by
            -----------------------
           Baxter for manufacture of the Supplied Products.

     1.12  "McLaughlin License" shall mean that certain Patent License and
            -------------------
           Assignment Agreement, dated June 6, 1986, by and among Travenol
           Laboratories, Inc., Hemascience Laboratories, Inc., and William F.
           McLaughlin, as amended from time to time.

     1.13  "Non-Compete Agreement" shall mean the Non-Competition and
            ---------------------
           Confidentiality Agreement, by and among Baxter, VIMRx, and Nexell,
           dated as of December 17, 1997, as amended.

     1.14  "Quality System Regulation" ("QSR") shall have the meaning ascribed
            -------------------------    ---
           to it by the regulations and policies of the FDA, as the same may be
           amended or changed from time to time.

     1.15  "Regulatory Files" shall have the meaning set forth in the
            ----------------
           Distribution License Agreement.

     1.16  "Spinning Membrane" shall refer to a component of certain Supplied
            -----------------
           Products, which is currently identified by Baxter as product ID
           number 1200300 (spinning assembly) and product ID number 03-09-06-182
           (device assembly PC membrane) (spinner) print 48072, as modified from
           time to time.

     1.17  "Standard Operating Procedure System" shall mean Baxter's standard
            -----------------------------------
           operating procedures used in connection with the production of the
           Supplied Products, as such procedures may be changed from time to
           time.

     1.18  "Subsidiary" shall mean, as to any party, any corporation of which
            ----------
           more than fifty percent (50%) of the outstanding capital stock having
           ordinary voting power to elect a majority of the board of directors
           of such corporation (irrespective of whether or not at the time stock
           of any other class or classes of such corporation shall have or might
           have voting power by reason of the happening of any contingency) is
           at the time directly or indirectly owned by the party, by one or more
           of its subsidiaries, or by the party and one or more of its
           subsidiaries.

     1.19  "Supplied Products" shall have the same meaning as Products in the
            -----------------
           Distribution License Agreement but shall include only those Products
           that are then being distributed or sold by Baxter to third parties.
           The current Supplied Products are set forth on Schedule 1.19 attached
                                                          -------------
           hereto.

     1.20  "Value Improvement Process" shall mean the Value Improvement
            -------------------------
           Management System currently used in connection with the production of
           the Supplied Products, as such system may be changed from time to
           time.

                                       3
<PAGE>

2.   Term and Termination.

2.1  Term. The term of this Agreement shall commence upon the Effective Date and
     ----
     expire ten (10) years thereafter (the "Term"), unless earlier terminated as
     provided in Section 2.2 below.

     2.2   Early Termination. A non-breaching party may terminate this Agreement
           -----------------
           if any of the following events (each is herein referred to as a
           "Material Breach") occur:

           A.  The other party fails to pay any undisputed amount owing under
               this Agreement, on the date(s) specified for such payment and
               such failure shall continue for sixty (60) days after written
               notice of such failure by the non-breaching party to this
               Agreement;

           B.  The other party shall default in the performance of or compliance
               with any covenant contained in this Agreement or the Non-Compete
               Agreement (other than a failure to make a payment described in
               Section 2.2A above or a default the liability for which is
               excused under Section 22.1) which shall continue uncured beyond
               thirty (30) days after notice of such breach from the non-
               breaching party;

           C.  A receiver, conservator, custodian, liquidator or trustee of the
               other party or of all or any of the property of the other party,
               is appointed by court order and such order remains in effect for
               more than ninety (90) days; or an order for relief is entered
               under the federal bankruptcy laws with respect to the other
               party; or any of the material property of the other party is
               sequestered by court order and such order remains in effect for
               more than ninety (90) days; or a petition is filed against the
               other party under the bankruptcy, reorganization, arrangement,
               insolvency, readjustment of debt, dissolution or liquidation law
               of any jurisdiction, whether now or hereafter in effect, and is
               not dismissed within ninety (90) days after such filing;

           D.  The other party files a petition in voluntary bankruptcy or
               seeking relief under any provision of any bankruptcy,
               reorganization, arrangement, insolvency, readjustment of debt,
               dissolution or liquidation law of any jurisdiction, whether now
               or hereafter in effect, or consents to the filing of any petition
               against it under any such law; or

           E.  The other party makes an assignment for the benefit of its
               creditors, or admits in writing its inability to pay its debts
               generally as they become due, or consents to the appointment of a
               receiver, conservator, custodian, liquidator or trustee of the
               party, or of all or any part of its property.

3.   Supply.

     3.1   Baxter to Supply. During the Term, subject to the terms and
           ----------------
           conditions contained herein, Baxter shall supply to Nexell the
           Supplied Products solely for Nexell's

                                       4
<PAGE>

           internal use in the development of therapeutic cellular products in
           connection with Ex Vivo Cell Processing. In connection therewith,
           Nexell shall have the right to use such Supplied Products for
           clinical trials in a manner customary in the industry; provided,
                                                                  --------
           however, that nothing herein shall grant to Nexell the right to
           -------
           resell any Supplied Product (including any sales under Section 906 of
           the Act). If Nexell desires to commercialize such therapeutic
           products, using the Supplied Products, then Baxter and Nexell agree
           to negotiate, in good faith, a separate supply agreement setting
           forth the terms and conditions for such supply arrangement.
           Notwithstanding anything to the contrary set forth herein, if Baxter
           chooses not to commence the manufacture and sale of any new Product
           (as such term is defined in the Distribution License Agreement) to
           any third party or if Baxter ceases to sell any Product, any such
           Product shall not become a Supplied Product or shall automatically be
           deleted from Schedule 1.19 upon notice to Nexell and shall no longer
                        -------------
           be considered a Supplied Product, as the case may be, and Baxter
           shall have no obligation to supply any such Product to Nexell under
           this Agreement. Nexell shall not be obligated to accept Supplied
           Products that have an expiration date less than one hundred eighty
           (180) days after shipment by Baxter unless the parties agree
           otherwise.

     3.2   Acknowledgment. Nexell acknowledges and understands that Baxter's
           --------------
           manufacturing and sale of the Spinning Membrane and any Supplied
           Products containing the Spinning Membrane, and Nexell's use thereof,
           are subject to the terms and conditions of, and the limitations, if
           any, contained in the McLaughlin License.

     3.3   Developmental Products. Nexell acknowledges and understands that
           ----------------------
           Baxter has no obligation to manufacture any products for Nexell under
           this Agreement other than the Supplied Products. If Nexell requests
           that Baxter manufacture products other than the Supplied Products
           ("Developmental Products"), Baxter may, in its sole discretion, elect
           to manufacture such Developmental Products, subject to the terms and
           conditions set forth in this Agreement and such other terms and
           conditions as may be agreed upon by the parties.

     3.4   Violations. Nothing herein contained shall oblige Baxter to continue
           ----------
           supplying or Nexell to continue purchasing any Supplied Product if
           such supply or purchase is reasonably believed by Baxter or Nexell,
           as the case may be, to violate any applicable law, regulation, rule
           or license or if the Supplied Products supplied infringe a third
           party's patent or other intellectual property rights, provided that
                                                                 --------
           Baxter will cooperate with Nexell, to the extent commercially
           feasible, to develop and implement such changes as may be necessary
           to bring such Supplied Product into compliance or to prevent such
           infringement and Baxter will continue to supply after a finding of
           infringement if Nexell or Baxter reaches an agreement with the third
           party which permits future production without infringement.

                                       5
<PAGE>

4.   Trademarks and Label Copy.

     4.1   Trademarks. Neither party shall use the other party's trademarks,
           ----------
           trade names, service marks, logos or other company identifiers
           without such party's prior written consent. Neither party shall use
           any trademarks, trade names, service marks, logos or other company
           identifiers that are confusingly similar to the other party's
           trademarks, trade names, service marks, logos or other company
           identifiers. Any use of a Baxter trademark, trade name, service mark,
           logo or other company identifier shall inure to the benefit of
           Baxter. Any use of a Nexell trademark, trade name, service mark, logo
           or other company identifier shall inure to the benefit of Nexell.

     4.2   Label Copy. Baxter shall provide all specifications for labeling,
           ----------
           product inserts and packaging for the Supplied Products. If Nexell
           requests changes in the Supplied Product labeling and Baxter agrees
           to make such changes, such changes in the Supplied Product labeling
           and the cost of labeling made obsolete by such changes will be paid
           for by Nexell at Baxter's Fully Loaded Cost.

5.   Production.

     5.1   Production of Supplied Products. In manufacturing the Supplied
           -------------------------------
           Products, Baxter shall comply with all applicable QSR or applicable
           federal, state, or foreign regulatory requirements.

     5.2   Changes to Supplied Products. Baxter shall give Nexell not less than
           ----------------------------
           six (6) months' prior notice of any change in product specifications
           (including in design, materials, or suppliers) that would reasonably
           be expected to require submission of notification to the FDA with
           respect to any Supplied Product. Baxter shall secure all supplemental
           approvals and authorization for such changes as required by federal,
           state, local, or foreign law, or under FDA policy.

     5.3   Materials and Services. Nexell shall not have any right of prior
           ----------------------
           notice with respect to changes of suppliers or materials relating to
           Supplied Products, except to the extent that such changes affect any
           Supplied Product's specifications, whereupon Nexell shall have the
           right to prior notice of such changes pursuant to Section 5.2 above
           (and the rights of the parties in connection therewith shall be
           governed by Section 5.2 above).

6.   Change of Production Sites/Outsourcing Manufacture. After written notice to
     Nexell (but without the requirement of prior consent) Baxter may change the
     current production site of any Supplied Products (or any component thereof)
     and Baxter may outsource the production of any Supplied Products provided
     that (i) there is no material increase in the price of the Supplied
     Products to Nexell and (ii) the manufacturing of the Supplied Products
     otherwise conforms to the terms of this Agreement or Baxter causes a
     relevant third party to comply with the terms of this Agreement in
     connection with outsourced manufacturing of the Supplied Products, as the
     case may be. Nexell and Baxter agree that

                                       6
<PAGE>

     nothing contained in this Agreement shall require Baxter to change, or open
     any new or additional, Manufacturing Facilities, apart from any upgrades in
     its Manufacturing Facilities that Baxter may, in its sole discretion, make
     in order to meet the specifications for production of the Supplied Products
     applicable at any time and any change as may be necessary to enable Baxter
     to satisfy its obligations hereunder to deliver Supplied Products to
     Nexell. Baxter shall secure all supplemental approvals and authorization,
     as required by federal, state, local, or foreign law, or under FDA policy,
     for changes in the production site of any Supplied Products or for any new
     outsourcing of production of Supplied Products.

7.   Facility Access and Audits.

     7.1   Facility Access. During the Term, Baxter shall permit Nexell access
           ---------------
           solely to those areas of the Manufacturing Facilities in which the
           Supplied Products are manufactured, upon reasonable prior notice and
           scheduling by Nexell during normal business hours, for the
           examination of production or quality records or to perform QSR
           audits. Nexell shall maintain the information it acquires with
           respect to such audit in the strictest confidence.

     7.2   Audit. Either party may audit the other party's books and records for
           -----
           the purpose of determining compliance with the terms of this
           Agreement. Either party may use independent outside auditors (who may
           participate fully in such audit). In the event that an audit is
           proposed with respect to information which is proprietary to the
           disclosing party ("Restricted Information"), then on the written
           demand of the disclosing party, the individuals conducting the audit
           with respect to the Restricted Information will be limited to the
           independent auditors of the other party. In such event, the
           disclosing party shall pay the costs of the independent auditors
           conducting such audit, but only with respect to that portion of the
           audit relating to the Restricted Information. Such independent
           auditors shall enter into an agreement with the relevant parties on
           terms that are agreeable to such parties, under which such
           independent auditors shall agree to maintain the confidentiality of
           the information obtained during the course of such audit and
           establish what information such auditors will be permitted to
           disclose in reporting the results of any audit of Restricted
           Information to the requesting party. Any such audit shall be
           conducted during regular business hours in a manner that does not
           interfere unreasonably with the operations of the disclosing party.
           The aggregate number of audits of Baxter's books and records
           conducted under this Agreement and the Sublicense Agreements and the
           Distribution License Agreement shall not exceed one (1) per facility
           in any twelve (12) month period unless the next preceding audit
           disclosed a failure to conform to the terms of any such Agreement or
           unless the facility received a Form FDA-483 in the twelve (12) months
           following any audit. Subject to the foregoing limitations, any such
           audit shall be conducted when requested by notice given not less than
           thirty (30) days prior to the commencement of the audit. Any disputes
           arising out of an audit performed hereunder shall be resolved in
           accordance with the provisions of Section 22.12.

                                       7
<PAGE>

8.   Process Validation. During the Term, at Nexell's request, Baxter shall
     permit Nexell to review production validation protocols and results with
     respect to the Supplied Products.

9.   Regulatory Responsibility.

     9.1   Baxter Responsibilities. Baxter will maintain, in compliance in all
           -----------------------
           material respects with applicable law, all Regulatory Files related
           to the Supplied Products and components thereof. Upon request by
           Nexell, Baxter shall assign to Nexell right of reference and/or any
           other rights available under FDA regulations or policies to allow
           Nexell to cross-reference the Regulatory Files. In addition, Baxter
           shall provide Nexell with reasonable access to and a copy of such
           portions of the Regulatory Files relating to the Supplied Products as
           Nexell shall reasonably request.

     9.2   Nexell Responsibilities. Nexell shall promptly forward product
           -----------------------
           complaints received on Supplied Products to Baxter. In addition,
           Nexell shall cooperate, as mutually agreed by the parties, in
           Baxter's administration of mandatory notifications, repairs,
           replacements and refunds, safety alerts, "cease distribution and
           notification" mandatory recall actions, voluntary recalls, market
           withdrawals and stock recoveries, and device removals and
           corrections, as defined or understood under law or FDA policy, or
           related or analogous actions involving the Supplied Products.

     9.3   Ongoing Compliance. Each party agrees to comply in all material
           ------------------
           respects with the requirements of the FDA, any federal, state, local,
           or other regulatory authority, or any analogous authority outside the
           United States, which in each case relates to the Supplied Products.

     9.4   Regulatory Actions. In the event that Nexell takes a regulatory
           ------------------
           action relative to any Supplied Product or any Nexell product
           containing any Supplied Product manufactured for or supplied to it by
           Baxter and such action is due solely to Baxter's failure to
           manufacture the Supplied Product in accordance with its
           responsibilities under Sections 5.1, 9.1 or 9.3 of this Agreement,
           then Baxter shall pay or reimburse Nexell for all out-of-pocket costs
           and expenses incurred by Nexell due to such action, including
           expenses or obligations to third parties, the cost of notifying
           customers, costs associated with the return by customers of Supplied
           Products or Nexell products containing any Supplied Products, and
           costs related to otherwise addressing, handling or correcting the
           Supplied Products. In the event that such action is due in part to
           Baxter's failure to manufacture the Supplied Product in accordance
           with its responsibilities under this Agreement, Baxter shall pay or
           reimburse Nexell for such part of Nexell's out-of-pocket costs and
           expenses as shall be agreed by the parties or as determined in
           binding arbitration pursuant to Section 22.12(C) of this Agreement.
           For purposes of this paragraph, "regulatory actions" mean mandatory
           notifications, repairs, replacements and refunds, safety alerts,
           "cease distribution and notification" and mandatory recall actions,
           voluntary recalls, market withdrawals and stock

                                       8
<PAGE>

           recoveries, and device removals and corrections, as defined or
           understood under law or FDA policy, and related or analogous actions.

10.  Forecasts and Orders.

     10.1  Forecasts. Within thirty (30) days following the Effective Date,
           ---------
           Nexell shall provide Baxter with a written estimate of Nexell's
           quarterly requirements for Supplied Products for the first Contract
           Year (the "First Year Forecast"). The First Year Forecast shall
           constitute a firm order for Supplied Products for the first two
           quarters of the first Contract Year. On the first day of each quarter
           during each Contract Year (the "Review Date"), beginning with the
           first day of the second quarter of the Contract Year, Nexell shall
           update the Forecast for the Contract Year. Each updated Forecast
           shall constitute a firm order for Supplied Products for the quarter
           beginning 90 days after the Review Date. In addition, on the last
           Review Date of each Contract Year thereafter, Nexell shall provide
           Baxter with a written estimate of Nexell's quarterly orders for
           Supplied Products for the following Contract Year (each a
           "Forecast").

     10.2  Forecast Increases. Each quarterly Forecast following the first
           ------------------
           Forecast for the second Contract Year may not increase the number or
           orders shown in the corresponding quarterly Forecast of the prior
           Contract Year by more than fifteen percent (15%), without the prior
           written consent of Baxter.

     10.3  Production Schedule. Based on the Forecasts and orders received by
           -------------------
           Baxter from Nexell, Baxter shall develop and maintain detailed
           production schedules for the Supplied Products, which shall be
           presented for review by both parties at least quarterly.

     10.4  Long Range Forecasts. The parties shall cooperate in good faith in
           --------------------
           providing other, longer range forecasts, which shall be used in
           budget planning for the parties. On June 30 of each Contract Year,
           Nexell shall deliver a good faith estimate of its forecast for the
           next eighteen months.

11.  Title to Inventory; Cost of Unique Manufacturing Inventory.

     11.1  Title to Inventory. Baxter shall retain title to all raw materials
           ------------------
           and work in process relating to the Supplied Products.

     11.2  Cost of Unique Manufacturing Inventory. Nexell shall have the
           --------------------------------------
           responsibility to purchase and fund any manufacturing inventory that
           is required under this Agreement for the manufacture by Baxter of the
           Supplied Products (or Developmental Products, if any) under this
           Agreement that is unique to Nexell's requirements.

12.  Pricing, Billing and Payment.

     12.1  Price. The prices for the Supplied Products during the term
           -----
           commencing upon the

                                       9
<PAGE>

           Effective Date and ending on December 17, 2002, shall be Baxter's
           Fully Loaded Cost for such Supplied Products plus fifteen percent
           (15%) of such Fully Loaded Cost (unless Baxter and Nexell agree in
           writing to a different price). After December 17, 2002, the prices
           for the Supplied Products during the remainder of the Term shall be
           Baxter's Fully Loaded Cost for such Supplied Products plus thirty
           percent (30%) of such Fully Loaded Cost (unless Baxter and Nexell
           agree in writing to a different price).

     12.2  Price Adjustments. The prices for the Supplied Products shall be
           -----------------
           adjusted as of January 1 of each year of the Term, through Baxter's
           annual internal budgeting process, based on forecast changes in
           volume pursuant to the forecasting process set forth in Section 10,
           anticipated changes in materials prices and anticipated cost
           reductions resulting from Baxter's Value Improvement Process. The
           overall intent of the parties is that the Supplied Products shall be
           transferred at the prices described in Section 12.1 as adjusted for
           future changes in Baxter's costs of production (taking into account
           Section 12.3 hereof).

     12.3  Unanticipated Volume, Materials Price or Overhead Changes. Costs
           ---------------------------------------------------------
           variances shall be paid by or credited to the parties during the
           course of a calendar year based on unanticipated volume, materials
           price or overhead changes, as follows:

           A.  Cost variances based on volume changes shall be made only when
               firm orders exceed or are less than forecast activity by ten
               percent (10%) or more (excluding any increases attributable to
               earlier failures to supply firm orders) and shall cover only the
               difference between ten percent (10%) of the budgeted activity and
               the variance from budgeted activity. The adjustment will be based
               on fifty percent (50%) of Baxter's standard overhead attributable
               to the difference from the planned volume.

           B.  Cost variances based on materials price changes shall be made
               only when actual prices for total materials costs differ from
               those anticipated in the budgeting process by more than two
               percent (2%). The adjustment shall cover only the difference
               between two percent (2%) of total budgeted materials cost and the
               variance from budgeted activity.

           C.  Cost variances based on overhead cost changes caused by
               conditions, other than those described in 12.3A or 12.3B above,
               beyond Baxter's control, shall be shared pro rata (based on
               changes in total plant overhead) by the parties or as they shall
               otherwise agree.

           D.  Adjustments pursuant to this Section 12.3 will be determined as
               of the end of each calendar quarter (on a year to date basis) and
               reflected as an amount due and payable (or a credit receivable)
               spread ratably over the following three months.

     12.4  Billing and Payment. Baxter shall bill Nexell as of the end of each
           calendar month

                                       10
<PAGE>

          for Supplied Products shipped during the month and Nexell shall pay
          such invoices within sixty (60) days of Nexell's receipt thereof.

13.  Foreign Currency Conversion. Where calculations of Baxter's Fully Loaded
     Cost relate to a currency other than United States dollars, all such
     calculations shall be calculated pursuant to Baxter's then current
     accounting policies and practices.

14.  Withholding Taxes. Where required to do so by applicable law, Nexell shall
     withhold taxes required to be paid to a taxing authority on account of any
     payments to Baxter hereunder, and Nexell shall furnish Baxter with
     satisfactory evidence of such withholding and payment in order to permit
     Baxter to obtain a tax credit or other relief as may be available under the
     applicable law. Nexell shall cooperate with Baxter in obtaining exemption
     from withholding taxes where available under applicable law.

15.  Interest on Overdue Payments. Interest shall accrue and be payable on all
     overdue payments owing by a party under this Agreement from the date due at
     the rate of one and one-half percent (1.5%) per month (or the highest rate
     allowed by law, if lower), compounded annually, until fully paid (including
     full payment of such interest).

16.  Delivery. All shipments of Supplied Products shall be FOB the manufacturing
     facilities where such Supplied Products are manufactured by or on behalf of
     Baxter. Except as otherwise specified in this Agreement, all freight,
     insurance, and other delivery costs (and any customs duties) shall be paid
     by Nexell.

17.  Title. Title to all Supplied Products shall pass to Nexell when the
     Supplied Products are placed on Nexell's truck or Nexell's designated
     carrier at Baxter's Manufacturing Facility.

18.  Warranties.

     18.1   General. Each party represents and warrants to the other that: (A)
            -------
            all corporate action necessary for the authorization, execution and
            delivery of this Agreement by such party and the performance of its
            obligations hereunder has been taken; (B) the execution, delivery
            and performance of this Agreement do not violate or conflict with
            any law applicable to it, any provision of its charter or bylaws,
            any order or judgment of any court or other agency of government
            applicable to it or any of its assets or any contractual restriction
            binding on or affecting it or any of its assets; and (C) its
            obligations hereunder constitute its legal, valid and binding
            obligations, enforceable in accordance with their respective terms
            (subject to applicable bankruptcy, reorganization, insolvency,
            moratorium or similar laws affecting creditors' rights generally and
            subject, as to enforceability, to equitable principles of general
            application (regardless of whether enforcement is sought in a
            proceeding in equity or at law)).

     18.2   Supplied Product Warranty. Baxter warrants to Nexell that the
            -------------------------
            Supplied Products delivered to or at the direction of Nexell
            hereunder (A) will have been

                                       11
<PAGE>

            manufactured in accordance with the applicable specifications,
            procedures and product drawings/blueprints and all applicable laws
            (including the Act) and (B) will not be adulterated or misbranded
            within the meaning of the Act as a result of acts of or omissions by
            Baxter, and (C) are free from defects in workmanship.
            Notwithstanding the foregoing, Baxter shall not be liable to Nexell
            under subpart (B) above as a result of any specifications for
            labeling supplied by Nexell. This warranty shall be continuing and
            shall be binding on Baxter and its permitted successors and assigns
            and shall inure to the benefit of Nexell and its permitted
            successors and assigns. Notwithstanding anything to the contrary
            contained herein, no warranty is provided hereunder with respect to
            any Supplied Product not manufactured by Baxter or its Affiliates or
            sublicensees, and any such Supplied Product shall be supplied "AS
            IS", provided that Baxter shall, to the extent it is permitted to do
            so, pass on to Nexell the benefits of any warranties received from
            the manufacturer of such Supplied Product. WARRANTIES OF
            MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE NOT GIVEN
            BY BAXTER AND ANY SUCH IMPLIED WARRANTIES ARE  SPECIFICALLY
            DISCLAIMED.

     18.3   Disclaimer of Warranty for Developmental Products. IF BAXTER
            -------------------------------------------------
            PROVIDES ANY DEVELOPMENTAL PRODUCTS TO NEXELL, SUCH DEVELOPMENTAL
            PRODUCTS SHALL BE PROVIDED ON AN "AS IS" BASIS WITHOUT ANY
            REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER.

19.  Indemnification.

     19.1   Baxter's Indemnity. Baxter shall indemnify Nexell and hold it
            ------------------
            harmless from any liability, loss, expense, cost, claim or judgment
            arising out of any claim for property damage, personal injury or
            death that is caused by Baxter's failure to manufacture the Supplied
            Products in accordance with the designs, specifications, procedures
            and product drawings/blueprints, with the law, regulations, rules,
            orders and notices, and with the quality system and Standard
            Operating Procedure System, and which are applicable to Baxter.
            Furthermore, Baxter shall defend, indemnify and hold Nexell harmless
            with respect to any liability, loss or damage incurred by Nexell
            with respect to any infringement, misappropriation or violation by
            any Supplied Product of the intellectual property of any entity. At
            Baxter's expense, Nexell shall cooperate fully with Baxter in
            defending or otherwise resolving any such claim. Baxter shall have
            full control of any litigation brought against Nexell with respect
            to any claim that is indemnifiable by Baxter hereunder, but Nexell
            may, at its expense, also be represented by its own counsel in any
            such litigation. BAXTER'S INDEMNIFICATION OBLIGATIONS SET FORTH IN
            THIS SECTION 19.1 SHALL NOT APPLY TO DEVELOPMENTAL PRODUCTS, IF ANY,
            THAT BAXTER PROVIDES TO NEXELL UNDER THIS AGREEMENT. NOTHING IN THIS
            SECTION 19.1 SHALL BE INTERPRETED TO, NOR IS ANYTHING SET FORTH
            HEREIN INTENDED TO, ALTER OR DIMINISH NEXELL'S INDEMNIFICATION

                                       12
<PAGE>

            OBLIGATIONS SET FORTH IN THE DISTRIBUTION LICENSE AGREEMENT. IN THE
            EVENT OF A CONFLICT BETWEEN SECTION 19 OF THIS AGREEMENT AND
            SECTIONS 18 AND 19 OF THE DISTRIBUTION LICENSE AGREEMENT, THE
            DISTRIBUTION LICENSE AGREEMENT CONTROLS.

     19.2   Nexell's Indemnity. Nexell shall defend, indemnify and hold Baxter
            ------------------
            harmless with respect to any liability incurred by Baxter as a
            result of Nexell's negligence or willful misconduct with respect to
            Nexell's activities under this Agreement. At Nexell's expense,
            Baxter shall cooperate fully with Nexell in defending or otherwise
            resolving any such claims of negligence or willful misconduct.
            Baxter shall have full control of any litigation brought against
            Baxter with respect to any claim that is indemnifiable by Nexell
            hereunder.

     19.3   Exclusions. Notwithstanding anything to the contrary set forth in
            ----------
            Sections 19.1 and 19.2, neither party shall be required to indemnify
            the other party under Section 19.1 or 19.2, as applicable, to the
            extent any claim is caused by the other party's negligent acts or
            omissions.

20.  Limitation of Liability. IN NO EVENT, WHETHER AS A RESULT OF BREACH OF
     CONTRACT, TORT LIABILITY (INCLUDING NEGLIGENCE), OR OTHERWISE, SHALL EITHER
     PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, PUNITIVE, EXEMPLARY OR
     LIQUIDATED DAMAGES.

21.  Insurance.

     21.1   Baxter Insurance. During the Term, Baxter shall procure and
            ----------------
            maintain, through self-insurance or a combination of self-insurance
            and commercially placed insurance, comprehensive general liability
            insurance covering each occurrence of bodily injury and property
            damage in the amount of not less than Ten Million Dollars
            ($10,000,000) combined single limit including coverage for product
            and completed operations, blanket contractual liability and vendor's
            liability. Baxter shall, within sixty (60) days of the date of this
            Agreement, furnish a certificate of insurance to Nexell evidencing
            the foregoing coverages and limits and thereafter shall give at
            least thirty (30) days prior notice to Nexell of any termination,
            expiration without renewal, or material change to such insurance,
            coverage or limits.

     21.2   Nexell Insurance. During the Term, Nexell shall procure and
            ----------------
            maintain, through commercially placed insurance, comprehensive
            general liability insurance covering each occurrence of bodily
            injury and property damage in the amount of not less than Ten
            Million Dollars ($10,000,000) combined single limit for Nexell's use
            of Supplied Products. Nexell shall, within sixty (60) days of the
            date of this Agreement, furnish a certificate of insurance to Baxter
            evidencing the foregoing coverage and limit and thereafter shall
            give at least thirty (30) days prior notice to Baxter of any
            termination, expiration without renewal, or material

                                       13
<PAGE>

            change to such insurance, coverage or limits.

22.  General Provisions.

     22.1   Force Majeure. Neither party to this Agreement shall be liable for
            -------------
            delay or failure in the performance of any of its obligations
            hereunder if such delay or failure is due to causes beyond its
            reasonable control, including acts of God, fires, earthquakes,
            strikes and labor disputes, acts of war, civil unrest or
            intervention of any governmental authority, but any such delay or
            failure shall be remedied by such party as soon as is reasonably
            possible. A party's lack of financial resources to effect its
            performance hereunder shall not be considered a force majeure event.

     22.2   Foreign Government Approval or Registration. If this Agreement or
            -------------------------------------------
            any associated transaction is required by the law of any nation to
            be either approved or registered with any governmental authority, or
            any agency or political subdivision thereof, Baxter shall assume all
            legal obligations to do so. In connection therewith, Nexell shall
            cooperate and assist Baxter as Baxter reasonably requests, at
            Baxter's expense, with any such approvals or registrations.

     22.3   Export Control. Each party shall observe all applicable United
            --------------
            States and foreign laws with respect to the transfer of all Supplied
            Products between nations, countries or other sovereign states.

     22.4   Notices. All notices required under this Agreement shall be in
            -------
            writing, and all such notices and other written communications
            (including purchase orders) shall be delivered either by hand, by a
            nationally recognized overnight delivery service (with delivery
            charges prepaid), by first class, registered or certified United
            States mail (postage prepaid), or by facsimile transmission
            (provided that in the case of facsimile transmission, a confirmation
            copy of the notice shall be delivered by hand, by a nationally
            recognized overnight delivery service (with charges prepaid), or by
            first class, registered or certified United States mail (postage
            prepaid) within two (2) days of facsimile transmission), addressed
            to each party as follows:

            If to Baxter, such notices shall be delivered to:

            Baxter Healthcare Corporation
            One Baxter Parkway
            Deerfield, Illinois 60015
            Attention: Cindy Collins - General Manager
            Telecopy:  (847) 948-4684

                                       14
<PAGE>

            With a copy to:

            Baxter Healthcare Corporation
            One Baxter Parkway
            Deerfield, Illinois 60015
            Attention: Thomas Sabatino, Esq. - General Counsel
            Telecopy:  (847) 948-2450

            If to Nexell, such notices shall be delivered to:

            Nexell of California, Inc.
            Nine Parker
            Irvine, California 92618
            Attention: President and CEO
            Telecopy:  (949) 470-6645

            With a copy to:

            Bryan Cave LLP
            700 Thirteenth Street, N.W.
            Washington, D.C. 20005
            Attention: Eric F. Stoer, Esq.
            Telecopy: (202) 508-6200

            or such other address as any such party may designate in writing and
            delivered to the other party hereto pursuant to this Section 22.4.
            All such notices or other written communications shall be deemed to
            have been received by the addressee if delivered by: hand or by a
            nationally recognized overnight delivery service (with delivery
            charges prepaid) at the time of delivery; by first class, registered
            or certified United States mail (postage prepaid), three (3)
            business days after delivery thereof to the United States Postal
            Service; or by facsimile transmission, at the time of transmission.

     22.5   Choice of Law and Jurisdiction. This Agreement shall be governed by
            ------------------------------
            and construed in accordance with the internal laws of the State of
            Delaware, without application of conflicts of law principles, and,
            subject to Section 22.12, each party hereby submits to the
            jurisdiction and venue of any state or federal court in the State of
            Delaware. To the extent permissible by law, each of the parties
            hereby waives, releases and agrees not to assert, and agrees to
            cause its Affiliates to waive, release and not assert, any rights
            such party or its Affiliates may have under any foreign law or
            regulation that would be inconsistent with the terms of this
            Agreement as governed by Delaware law.

                                       15
<PAGE>

     22.6   Provisions Contrary to Law/Severability. In performing this
            ---------------------------------------
            Agreement, the parties hereto shall comply with all applicable laws.
            Nothing in this Agreement shall be construed so as to require the
            violation of any law, and wherever there is any conflict between any
            provision of this Agreement and any applicable law, the applicable
            law shall prevail. If any provision of this Agreement conflicts with
            any applicable law or is otherwise determined by an arbitrator or
            court having valid jurisdiction thereof to be enforceable, the
            affected provision of this Agreement shall be deemed to have been
            modified to the extent necessary so as not to conflict with the
            applicable law or to be unenforceable or, if such modification is
            not possible, such provision shall be deemed to have been deleted
            herefrom, without affecting, impairing or invalidating the remaining
            provisions of this Agreement.

     22.7   Entire Agreement. This Agreement, together with any schedules
            ----------------
            attached hereto, the Asset Purchase Agreement and all agreements
            contemplated thereby (including the agreements noted on Schedule
            5.15 thereof as continuing in effect), and the Non-Compete
            Agreements constitute the entire agreement between the parties as to
            subject matter hereof, and all prior negotiations, representations,
            agreements and understandings are merged into, extinguished by and
            completely expressed by this Agreement and the other agreements
            referred to above.

     22.8   Waivers and Modifications. The failure of any party to insist on the
            -------------------------
            performance of any obligation hereunder shall not be deemed to be a
            waiver of such obligation. Waiver of any breach of any provision
            hereof shall not be deemed to be waiver of any other breach of such
            provision or any other provision. No waiver, modification, release
            or amendment of any obligation under or provision of this Agreement
            shall be valid or effective unless in writing signed by the other
            party to be bound by such waiver, modification, release or
            amendment.

     22.9   Assignment. Nexell may assign its rights or obligations under this
            ----------
            Agreement to any Affiliate of Nexell without the prior written
            consent of Baxter; provided that such assignee remains an Affiliate
                               --------
            of Nexell; and, provided, further, that no such assignment shall
                            --------  -------
            relieve Nexell of the obligation to satisfy and discharge the
            obligation(s) so assigned. Baxter may assign its rights and
            obligations hereunder to any Affiliate of Baxter without prior
            notice to or consent of Nexell. No assignment by Baxter or Nexell,
            or by any permitted assignee, (by operation of law or otherwise)
            shall be effective unless and until the assignee shall have agreed
            to become bound by the provisions of the Non-Compete Agreement, to
            the same extent and in the same manner as Baxter (in the case of a
            Baxter assignee) or Nexell (in the case of a Nexell assignee) is
            bound. No party hereto may assign (by operation of law or otherwise)
            any of its rights or obligations under this Agreement, unless and to
            the extent expressly permitted by this Section 22.9. Subject to the
            foregoing, this Agreement shall inure to the benefit of and be
            binding on the parties' permitted successors and assigns.

     22.10  Independent Parties. By virtue of this Agreement, neither party
            --------------------
            constitutes the other as its agent (except as may otherwise be
            expressly provided herein), partner,

                                       16
<PAGE>

            joint venturer, or legal representative and neither party has
            express or implied authority to bind the other in any manner
            whatsoever.

     22.11  Counterparts. This Agreement may be executed in any number of
            ------------
            counterparts with the same effect as if all parties had signed the
            same document. All such counterparts shall be deemed an original,
            shall be construed together, and shall constitute one and the same
            instrument.

     22.12  Dispute Resolution.
            ------------------

            A. Provisional Remedies.  The procedures specified in this Section
               --------------------
               22.12 shall be the sole and exclusive procedures for the
               resolution of disputes between the parties arising out of or
               relating to this Agreement; provided, however, that a party,
                                           --------  -------
               without prejudice to these procedures, may seek a preliminary
               injunction or other provisional relief if, in its sole judgment,
               such action is deemed necessary to avoid irreparable damage or to
               preserve the status quo. During such action, the parties will
               continue to participate in good faith in the procedures specified
               in this Section 22.12

            B. Negotiations Between Executives. The parties will attempt in good
               -------------------------------
               faith to resolve any claim or controversy arising out of or
               relating to the execution, interpretation or performance of this
               Agreement (including the validity, scope and enforceability of
               the provisions contained in this Section 22.12) promptly by
               negotiations between executives who have authority to settle the
               controversy and who are at a higher level of management than the
               persons with direct responsibility for the administration of this
               Agreement.

            C. Arbitration.  In the event that any dispute arising out of or
               -----------
               relating to this Agreement or its breach, termination or validity
               has not been resolved after good faith negotiation pursuant to
               the procedures of Section 22.12B, such dispute shall upon written
               notice by either party to the other, be finally settled by
               arbitration administered by the Center for Public Resources in
               accordance with the provisions of its Commercial Arbitration
               Rules and the United Stated Federal Arbitration Act, as modified
               below:

                    (i)  The arbitration shall be heard by a panel of three (3)
                         independent and impartial arbitrators, all of whom
                         shall be selected from a list of neutral arbitrators
                         supplied by the Center for Public Resources. From such
                         list, each of Baxter and Nexell shall select one (1)
                         arbitrator, and the arbitrators so selected shall
                         select a third. The panel shall designate one (1) among
                         them to serve as chair.

                    (ii) The arbitration proceedings shall be conducted in Los
                         Angeles County or Orange County in the State of
                         California.

                                       17
<PAGE>

                    (iii) Any party may seek interim or provisional remedies
                          under the Federal Rules of Civil Procedure and the
                          United States Federal Arbitration Act as necessary to
                          protect the rights or property of the party pending
                          the decision of the arbitrators.

                    (iv)  The parties shall allow and participate in limited
                          discovery for the production of documents and taking
                          of depositions, which shall be conducted in accordance
                          with the Commercial Arbitration Rules of the Center
                          for Public Resources. All discovery shall be completed
                          within sixty (60) days following the filing of the
                          answer or other responsive pleading. Unresolved
                          discovery disputes shall be brought to the attention
                          of the chair of the arbitration panel and may be
                          disposed of by the chair.

                    (v)   Each party shall have up to fifty (50) hours to
                          present evidence and argument in a hearing before the
                          panel of arbitrators, provided that the chair of the
                          panel of arbitrators may establish such longer times
                          for presentations as the chair deems appropriate.

                    (vi)  The arbitration award shall be rendered by the
                          arbitrators within fifteen (15) business days after
                          conclusion of the hearing of the matter, shall be in
                          writing and shall specify the factual and legal basis
                          for the award. Judgment thereon may be entered in any
                          court having jurisdiction thereof.

                    (vii) The arbitrators are empowered to order money damages
                          in compensation for a party's actual damages, specific
                          performance or other appropriate relief to cure a
                          breach; provided, however, that the arbitrators will
                          have no authority to award special, punitive or
                          exemplary damages, or other money damages that are not
                          measured by the prevailing party's actual damages.

            D. Performance During Dispute. Each party is required to continue to
               --------------------------
               perform its obligations under this Agreement pending final
               resolution of any dispute arising out of or relating to this
               Agreement, unless to do so would be commercially impossible or
               impractical under the circumstances.

     22.13  Rules of Construction. In this Agreement, unless a clear contrary
            intention appears:

            A. The singular number includes the plural number and vice versa;

                                       18
<PAGE>

            B. Reference to any party includes such party's permitted successors
               and assigns;

            C. Reference to any gender includes the other gender;

            D. Reference to any Section, Exhibit or Schedule means such section
               of this Agreement, exhibit to this Agreement or schedule to this
               Agreement, as the case may be, and references in any section or
               definition to any clause means such clause of such section or
               definition;

            E. "Herein," "hereunder," "hereof," "hereto," and words of similar
               import shall be deemed references to this Agreement as a whole
               and not to any particular section or other provision of this
               Agreement;

            F. "Including" (and with the correlative meaning "include") means
               including without limiting the generality of any description
               preceding such term;

            G. Relative to the determination of any period of time, "from" means
               "from and including," "to" means "to but excluding" and "through"
               means "through and including";

            H. Reference to any law (including statutes and ordinances) means
               such law as amended, modified, codified or reenacted, in whole or
               in part, and in effect from time to time, including rules and
               regulations promulgated thereunder;

            I. Accounting terms used herein shall have the meanings historically
               attributed to them by Baxter International Inc., a Delaware
               corporation, and its subsidiaries prior to the date hereof;

            J. In the event of any conflict between any of the provisions of the
               body of this Agreement and any exhibit or schedule hereto, the
               provisions of the body of this Agreement shall control;

            K. The headings contained in this Agreement have been inserted for
               convenience of reference only, and are not to be used in
               construing this Agreement; and

            L. Any rule of construction or interpretation which might otherwise
               require this Agreement to be construed or interpreted against
               either party shall not apply to any construction or
               interpretation hereof.

             [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       19
<PAGE>

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first set forth above.

                              BAXTER HEALTHCARE CORPORATION

                                   By:  /s/
                                       --------------------------------
                                       Timothy B. Anderson
                                       Senior Vice President, Corporate
                                       Strategy and Development

                              NEXELL OF CALIFORNIA, INC.

                                   By:  /s/
                                       --------------------------------
                                       William A. Albright, Jr.
                                       President

                                       20<PAGE>

                                                                    EXHIBIT 10.1

                               THERASENSE, INC.

                                1997 STOCK PLAN

     1.  Purposes of the Plan.  The purposes of this Stock Option Plan are to
         --------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business.  Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant.

     2.  Definitions.  As used herein, the following definitions shall apply:
         -----------

          (a) "Administrator" means the Board or any of its Committees as shall
               -------------
be administering the Plan, in accordance with Section 4 hereof.

          (b) "Applicable Laws" means the requirements relating to the
               ---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are granted under the Plan.

          (c) "Board" means the Board of Directors of the Company.
               -----

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

          (e) "Committee"  means a committee of Directors appointed by the Board
               ---------
in accordance with Section 4 hereof.

          (f) "Common Stock" means the Common Stock of the Company.
               ------------

          (g) "Company" means Therasense, Inc., a Delaware corporation.
               -------

          (h) "Consultant" means any person who is engaged by the Company or any
               ----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.

          (i) "Director" means a member of the Board of Directors of the
               --------
Company.

          (j) "Employee" means any person, including Officers and Directors,
               --------
employed by the Company or any Parent or Subsidiary of the Company.  A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract.  If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st
<PAGE>

day of such leave any Incentive Stock Option held by the Optionee shall cease to
be treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.

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

          (l) "Fair Market Value" means, as of any date, the value of Common
               -----------------
Stock determined as follows:

              (i)    If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;

              (ii)   If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination, or;

              (iii)  In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.

          (m) "Incentive Stock Option" means an Option intended to qualify as an
               ----------------------
incentive stock option within the meaning of Section 422 of the Code.

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

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

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

          (q) "Option Agreement" means an agreement between the Company and an
               ----------------
Optionee evidencing the terms and conditions of an individual Option grant.  The
Option Agreement is subject to the terms and conditions of the Plan.

          (r) "Option Exchange Program" means a program whereby outstanding
               -----------------------
Options are exchanged for Options with a lower exercise price.

          (s) "Optioned Stock" means the Common Stock subject to an Option.
               --------------

                                      A-2
<PAGE>

          (t) "Optionee" means the holder of an outstanding Option granted under
               --------
the Plan.

          (u) "Parent" means a "parent corporation," whether now or hereafter
               ------
existing, as defined in Section 424(e) of the Code.

          (v) "Plan" means this 1997 Stock Option Plan.
               ----

          (w) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
               -------------
of 1934, as amended.

          (x) "Service Provider" means an Employee, Director or Consultant.
               ----------------

          (y) "Share" means a share of the Common Stock, as adjusted in
               -----
accordance with Section 11 below.

          (z) "Subsidiary" means a "subsidiary corporation," whether now or
               ----------
hereafter existing, as defined in Section 424(f) of the Code.

     3.  Stock Subject to the Plan.  Subject to the provisions of Section 11 of
         -------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 8,107,032 Shares.  The Shares may be authorized, but unissued,
or reacquired Common Stock.

          If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
                                                               --------
however, that Shares that have actually been issued under the Plan shall not be
-------
returned to the Plan and shall not become available for future distribution
under the Plan, except that if unvested Shares are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.

     4.  Administration of the Plan.
         --------------------------

          (a) Procedure.  The Plan shall be administered by the Board or a
              ---------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable laws.

          (b) Powers of the Administrator.  Subject to the provisions of the
              ---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:

              (i)     to determine the Fair Market Value;

              (ii)    to select the Service Providers to whom Options may from
time to time be granted hereunder;

                                      A-3
<PAGE>

              (iii)   to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;

              (iv)    to approve forms of agreement for use under the Plan;

              (v)     to determine the terms and conditions of any option
granted hereunder;

              (vi)    to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;

              (vii)   to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;

              (viii)  to institute an Option Exchange Program;

              (ix)    to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;

              (x)     to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable; and

              (ix)    to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.

          (c) Effect of Administrator's Decision.  All decisions, determinations
              ----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.

     5.   Eligibility.
          -----------

          (a) Nonstatutory Stock Options may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees.

          (b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option.  However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year

                                      A-4
<PAGE>

(under all plans of the Company and any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options. For purposes of
this Section 5(b), Incentive Stock Options shall be taken into account in the
order in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.

          (c) The Plan shall not confer upon any Optionee any right with respect
to continuing the Optionee's relationship as a Service Provider with the
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate such relationship at any time, with or without
cause.

     6.  Term of Plan.  The Plan shall become effective upon its adoption by the
         ------------
Board.  It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 13 of the Plan.

     7.  Term of Option.  The term of each Option shall be stated in the Option
         --------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof.  In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.

     8.  Option Exercise Price and Consideration.
         ---------------------------------------

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

              (i)   In the case of an Incentive Stock Option

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

                    (B) granted to any Employee other than an Employee described
in the preceding subparagraph, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.

              (ii)  In the case of a Nonstatutory Stock Option

                    (A) granted to a Service Provider who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of the grant.

                                      A-5
<PAGE>

                    (B) granted to any Service Provider other than a Service
Provider described in the preceding subparagraph, the exercise price shall be no
less than 85% of the Fair Market Value per Share on the date of grant.

              (iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of Fair Market Value on the date of
grant pursuant to a merger or other corporate transaction.

          (b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) consideration received by the Company
under a formal cashless exercise program adopted by the Company in connection
with the Plan, or (6) any combination of the foregoing methods of payment.  In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.

     9.  Exercise of Option.
         ------------------

          (a) Procedure for Exercise; Rights as a Stockholder. Any Option
              -----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement, but in no case at a rate of less than 20% per
year over five (5) years from the date of grant.  An Option may not be exercised
for a fraction of a Share.

              An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised.  Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan.  Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option.  The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised.  No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 11 of the Plan.

                                      A-6
<PAGE>

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

          (b) Termination of Relationship as a Service Provider.  If an Optionee
              -------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time (of at least thirty (30) days) as is specified in the Option Agreement to
the extent that the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement).  In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for three (3) months following the Optionee's
termination.  If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan.  If, after termination, the Optionee does not
exercise his or her Option within the time specified by the Administrator, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.

          (c) Disability of Optionee.  If an Optionee ceases to be a Service
              ----------------------
Provider as a result of the Optionee's disability, the Optionee may exercise an
Option to the extent the Option is vested on the date of termination, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement).  If such disability is not a "disability" as such term is
defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock
Option such Incentive Stock Option shall automatically cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option on the day three months and one day following such termination.
If, on the date of termination, the Optionee is not vested as to the entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan.  If, after termination, the Option is not exercised within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.

          (d) Death of Optionee.  If an Optionee dies while a Service Provider,
              -----------------
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant) to the extent vested on the date of
death.  If, at the time of death, the Optionee is not vested as to the entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan.  The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the Option
under the Optionee's will or the laws of descent or distribution.  If the Option
is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

          (e) Buyout Provisions.  The Administrator may at any time offer to buy
              -----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.

                                      A-7
<PAGE>

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

     11.  Adjustments Upon Changes in Capitalization or Merger.
          ----------------------------------------------------

          (a) Changes in Capitalization.  Subject to any required action by the
              -------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration."  Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive.  Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

          (b) Dissolution or Liquidation.  In the event of the proposed
              --------------------------
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action.  To the
extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed action.

          (c) Merger.  In the event of a merger of the Company with or into
              ------
another corporation, the Option may be assumed or an equivalent option may be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation.  If, in such event, the Option is not assumed or
substituted, the Option shall terminate as of the date of the closing of the
merger.  For the purposes of this paragraph, the Option shall be considered
assumed if, following the merger, the option confers the right to purchase, for
each Share of Optioned Stock subject to the Option immediately prior to the
merger, the consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger was not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option for
each Share of Optioned Stock subject to the Option to be solely common stock of
the successor corporation or its Parent equal in fair market value to the per
share consideration received by holders of Common Stock in the merger.

                                      A-8
<PAGE>

     12.  Date of Grant.  The date of grant of an Option shall, for all
          -------------
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board.  Notice
of the determination shall be given to each Service Provider to whom an Option
is so granted within a reasonable time after the date of such grant.

     13.  Amendment and Termination of the Plan.
          -------------------------------------

          (a) Amendment and Termination.  The Board may at any time amend,
              -------------------------
alter, suspend or terminate the Plan.

          (b) Stockholder Approval.  The Board shall obtain stockholder approval
              --------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.

          (c) Effect of Amendment or Termination.  No amendment, alteration,
              ----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.

     14.  Conditions Upon Issuance of Shares.
          ----------------------------------

          (a) Legal Compliance.  Shares shall not be issued pursuant to the
              ----------------
exercise of an Option  unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.

          (b) Investment Representations.  As a condition to the exercise of an
              --------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.

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

     16.  Reservation of Shares.  The Company, during the term of this Plan,
          ---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

                                      A-9
<PAGE>

     17.  Stockholder Approval.  The Plan shall be subject to approval by the
          --------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted.  Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.

     18.  Information to Optionees and Purchasers.  The Company shall provide to
          ---------------------------------------
each Optionee, not less frequently than annually, copies of annual financial
statements.  The Company shall also provide such statements to each individual
who acquires Shares pursuant to the Plan while such individual owns such Shares.
The Company shall not be required to provide such statements to Service
Providers whose duties in connection with the Company assure their access to
equivalent information.

                                      A-10
<PAGE>

                               THERASENSE, INC.
                                1997 STOCK PLAN
                            STOCK OPTION AGREEMENT

     Unless otherwise defined herein, the terms defined in the 1997 Stock Plan
(the "Plan") shall have the same defined meanings in this Option Agreement.

     1.  NOTICE OF STOCK OPTION GRANT

((Name))
((Address))

     The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:

Grant Number                        ____________

Date of Grant                       ____________

Vesting Commencement Date           ((Vest_Date))

Exercise Price per Share            $

Total Number of Shares Granted      ((Shares_Granted))

Total Exercise Price                $((Total_Price))

Type of Option:                     X    Incentive Stock Option
                                    -
                                    ____  Nonstatutory Stock Option

Term/Expiration Date:               10 years from date of grant

                                      A-11
<PAGE>

Vesting Schedule:
----------------

     This Option shall be exercisable according to the following vesting
schedule: ((Vest_Schedule))

Termination Period:
------------------

     This Option shall be exercisable for 30 days after Optionee ceases to
be a Service Provider.  Upon Optionee's death or disability, this Option may be
exercised for such longer period as provided in the Plan.  In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.

     2.  AGREEMENT

          (a)  Grant of Option.  The Plan Administrator of the Company hereby
               ---------------
grants to the Optionee named in the Notice of Grant (the "Optionee"), an option
(the "Option") to purchase the number of Shares set forth in the Notice of
Grant, at the exercise price per Share set forth in the Notice of Grant (the
"Exercise Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 13(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.

          If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").

          (b)  Exercise of Option.
               ------------------

                    (i)  Right to Exercise.  This Option shall be exercisable
                         -----------------
during its term in accordance with the Vesting Schedule set out in the Notice of
Grant and with the applicable provisions of the Plan and this Option Agreement.

                    (ii) Method of Exercise. This Option shall be exercisable
                         ------------------
by delivery of an exercise notice in the form attached as Exhibit A (the
                                                          ---------
"Exercise Notice") which shall state the election to exercise the Option, the
number of Shares with respect to which the Option is being exercised, and such
other representations and agreements as may be required by the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by the
aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws.  Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.

                                      A-12
<PAGE>

          (c)  Optionee's Representations.  In the event the Shares have not
               --------------------------
been registered under the Securities Act of 1933, as amended, at the time this
Option is exercised, the Optionee shall, if required by the Company,
concurrently with the exercise of all or any portion of this Option, deliver to
the Company his or her Investment Representation Statement in the form attached
hereto as Exhibit B, and shall read the applicable rules of the Commissioner of
          ---------
Corporations attached to such Investment Representation Statement.

          (d)  Lock-Up Period.  Optionee hereby agrees that, if so requested by
               --------------
the Company or any representative of the underwriters (the "Managing
Underwriter") in connection with any registration of the offering of any
securities of the Company under the Securities Act, Optionee shall not sell or
otherwise transfer any Shares or other securities of the Company during the 180-
day period (or such other period as may be requested in writing by the Managing
Underwriter and agreed to in writing by the Company) (the "Market Standoff
Period") following the effective date of a registration statement of the Company
filed under the Securities Act. Such restriction shall apply only to the first
registration statement of the Company to become effective under the Securities
Act that includes securities to be sold on behalf of the Company to the public
in an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such Market Standoff Period.

          (e)  Method of Payment.  Payment of the aggregate Exercise Price
               -----------------
shall be by any of the following, or a combination thereof, at the election of
the Optionee:

                    (i)    cash or check;

                    (ii)   consideration received by the Company under a formal
cashless exercise program adopted by the Company in connection with the Plan; or

                    (iii)  surrender of other Shares which, (i) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.

          (f)  Restrictions on Exercise.  This Option may not be exercised
               ------------------------
until such time as the Plan has been approved by the stockholders of the
Company, or if the issuance of such Shares upon such exercise or the method of
payment of consideration for such shares would constitute a violation of any
Applicable Law.

          (g)  Non-Transferability of Option.  This Option may not be
               -----------------------------
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by
Optionee. The terms of the Plan and this Option Agreement shall be binding upon
the executors, administrators, heirs, successors and assigns of the Optionee.

          (h)  Term of Option.  This Option may be exercised only within the
               --------------
term set out in the Notice of Grant, and may be exercised during such term only
in accordance with the Plan and the terms of this Option.

                                      A-13
<PAGE>

          (i)  Tax Consequences.  Set forth below is a brief summary as of the
               ----------------
date of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

                    (i)   Exercise of ISO.  If this Option qualifies as an ISO,
                          ---------------
there will be no regular federal income tax liability upon the exercise of the
Option, although the excess, if any, of the Fair Market Value of the Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
the alternative minimum tax for federal tax purposes and may subject the
Optionee to the alternative minimum tax in the year of exercise.

                    (ii)  Exercise of ISO Following Disability.  If the
                          ------------------------------------
Optionee ceases to be an Employee as a result of a disability that is not a
total and permanent disability as defined in Section 22(e)(3) of the Code, to
the extent permitted on the date of termination, the Optionee must exercise an
ISO within three months of such termination for the ISO to be qualified as an
ISO.

                    (iii) Exercise of Nonstatutory Stock Option.  There may be
                          -------------------------------------
a regular federal income tax liability upon the exercise of a Nonstatutory Stock
Option. The Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Shares on the date of exercise over the Exercise Price. If
Optionee is an Employee or a former Employee, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.

                    (iv)  Disposition of Shares.  In the case of an NSO, if
                          ---------------------
Shares are held for at least one year, any gain realized on disposition of the
Shares will be treated as long-term capital gain for federal income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and of at least two years after
the Date of Grant, any gain realized on disposition of the Shares will also be
treated as long-term capital gain for federal income tax purposes. If Shares
purchased under an ISO are disposed of within one year after exercise or two
years after the Date of Grant, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent
of the difference between the Exercise Price and the lesser of (1) the Fair
Market Value of the Shares on the date of exercise, or (2) the sale price of the
Shares. Any additional gain will be taxed as capital gain, short-term or long-
term depending on the period that the ISO Shares were held.

                    (v)   Notice of Disqualifying Disposition of ISO Shares.
                          -------------------------------------------------
If the Option granted to Optionee herein is an ISO, and if Optionee sells or
otherwise disposes of any of the Shares acquired pursuant to the ISO on or
before the later of (1) the date two years after the Date of Grant, or (2) the
date one year after the date of exercise, the Optionee shall immediately notify
the Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

                                      A-14
<PAGE>

          (j)  Entire Agreement; Governing Law.  The Plan is incorporated
               -------------------------------
herein by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by the
Company and Optionee. This agreement is governed by the internal substantive
laws but not the choice of law rules of California.

          (k)  No Guarantee of Continued Service.  OPTIONEE ACKNOWLEDGES AND
               ---------------------------------
AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS
EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

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

                                      A-15
<PAGE>

OPTIONEE:  Name                         THERASENSE, INC.

______________________________          __________________________________
Signature                               By

______________________________          __________________________________
Print Name                              Title

______________________________

______________________________
Residence Address

                                      A-16
<PAGE>

                                   EXHIBIT A
                                   ---------
                                1997 STOCK PLAN
                                EXERCISE NOTICE

TheraSense, Inc.
1360 South Loop Road
Alameda, CA  94502
Attention:  Secretary

     1.  Exercise of Option.  Effective as of today, ___________, 20____, the
         ------------------
undersigned ("Optionee") hereby elects to exercise Optionee's Option to purchase
_________ shares of the Common Stock (the "Shares") of TheraSense, Inc. (the
"Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock
Option Agreement dated___________________, 20 ______ (the "Option Agreement").

     1.  Delivery of Payment.  Purchaser herewith delivers to the Company the
         -------------------
full purchase price of the Shares, as set forth in the Option Agreement.

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

     3.  Rights as Stockholder.  Until the issuance of the Shares (as evidenced
         ---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option.  The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised.  No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 11 of the Plan.

     4.  Company's Right of First Refusal.  Before any Shares held by Optionee
         --------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").

          (a)  Notice of Proposed Transfer.  The Holder of the Shares shall
               ---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
<PAGE>

          (b)  Exercise of Right of First Refusal.  At any time within thirty
               ----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.

          (c)  Purchase Price.  The purchase price ("Purchase Price") for the
               --------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.

          (d)  Payment.  Payment of the Purchase Price shall be made, at the
               -------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.

          (e)  Holder's Right to Transfer.  If all of the Shares proposed in
               --------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.

          (f)  Exception for Certain Family Transfers.  Anything to the
               --------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.

          (g)  Termination of Right of First Refusal.  The Right of First
               -------------------------------------
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.

     5.  Tax Consultation.  Optionee understands that Optionee may suffer
         ----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents

                                      A-2
<PAGE>

that Optionee has consulted with any tax consultants Optionee deems advisable in
connection with the purchase or disposition of the Shares and that Optionee is
not relying on the Company for any tax advice.

     6.  Restrictive Legends and Stop-Transfer Orders.
         ---------------------------------------------

          (a)  Legends.  Optionee understands and agrees that the Company shall
               -------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

          THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
          THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
          BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
          HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE
          OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE
          SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION
          IS IN COMPLIANCE THEREWITH.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
          RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
          ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
          BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
          COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
          ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE
          BINDING ON TRANSFEREES OF THESE SHARES.

          (b)  Stop-Transfer Notices.  Optionee agrees that, in order to
               ---------------------
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.

          (c)  Refusal to Transfer.  The Company shall not be required (i) to
               -------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.

     7.  Successors and Assigns.  The Company may assign any of its rights
         ----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.

                                      A-3
<PAGE>

     8.  Interpretation.  Any dispute regarding the interpretation of this
         --------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.

     9.  Governing Law; Severability.  This Agreement is governed by the
         ---------------------------
internal substantive laws but not the choice of law rules, of California.

     10. Entire Agreement.  The Plan and Option Agreement are incorporated
         ----------------
herein by reference. This Exercise Notice, the Plan, the Option Agreement and
the Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.

Submitted by:                      Accepted by:

OPTIONEE: Name                     THERASENSE, INC.

_____________________________      ____________________________________
Signature                          By

_____________________________      ____________________________________
Print Name                         Its

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

_____________________________      ____________________________________

_____________________________      ____________________________________

                                   ____________________________________
                                   Date Received

                                      A-4
<PAGE>

                                   EXHIBIT B
                                   ---------
                      INVESTMENT REPRESENTATION STATEMENT

OPTIONEE:      ((Name))
COMPANY:       THERASENSE, INC.
SECURITY:      COMMON STOCK
AMOUNT:
DATE:

     In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:

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

               (ii)   Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this regard,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and any other legend
required under applicable state securities laws.

               (iii)  Optionee is familiar with the provisions of Rule 701 and
Rule 144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions

                                      -5-
<PAGE>

specified by Rule 144, including: (1) the resale being made through a broker in
an unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (2) the availability of certain public information
about the Company, (3) the amount of Securities being sold during any three
month period not exceeding the limitations specified in Rule 144(e), and (4) the
timely filing of a Form 144, if applicable.

               In the event that the Company does not qualify under Rule 701 at
the time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.

               (iv)   Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.

                                    Signature of Optionee:

                                    ____________________________________

                                    Date:____________________, 20_______

                                      -6-

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00029-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00029-of-00352.parquet"}]]