<PAGE>

                                                                   EXHIBIT 10.11

                          Oratec Interventions, Inc.

                       1999 DIRECTORS' STOCK OPTION PLAN
                       ---------------------------------


     1.  Purposes of the Plan.  The purposes of this Directors' Stock Option
         --------------------
Plan are to attract and retain the best available individuals for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.

         All options granted hereunder shall be nonstatutory stock options.

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

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

         (b)    "Change of Control" means a sale of all or substantially all of
                 -----------------
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.

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

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

         (e)    "Company" means Oratec Interventions, Inc., a Delaware
                 -------
corporation.

         (f)    "Continuous Status as a Director" means the absence of any
                 -------------------------------
interruption or termination of service as a Director.

         (g)    "Corporate Transaction" means a dissolution or liquidation of
                 ---------------------
the Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.

         (h)    "Director" means a member of the Board.
                 --------

         (i)    "Employee" means any person, including any officer or Director,
                 --------
employed by the Company or any Parent or Subsidiary of the Company.  The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.

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

                                       1
<PAGE>

         (k)    "Option" means a stock option granted pursuant to the Plan.  All
                 ------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).

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

         (m)    "Optionee" means an Outside Director who receives an Option.
                 --------

         (n)    "Outside Director" means a Director who is not an Employee.
                 ----------------

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

         (p)    "Plan" means this 1999 Directors' Stock Option Plan.
                 ----

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

         (r)    "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 250,000 Shares of Common Stock (the "Pool").  The Shares may
                                                       ----
be authorized, but unissued, or reacquired Common Stock.

     If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan.  In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan.  If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.

     4.  Administration of and Grants of Options under the Plan.
         ------------------------------------------------------

         (a)    Administrator.  Except as otherwise required herein, the Plan
                -------------
shall be administered by the Board.

         (b)    Procedure for Grants.  All grants of Options hereunder shall be
                --------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:

                                       2
<PAGE>

         (i)    No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.

         (ii)   Each Outside Director shall be automatically granted an Option
to purchase 20,000 Shares (the "First Option") on the date on which such person
first becomes an Outside Director after the effective date of this Plan, whether
through election by the shareholders of the Company or appointment by the Board
of Directors to fill a vacancy.

         (iii)  Each Outside Director, including an Outside Director who did
not receive a First Option grant, shall be automatically granted an Option to
purchase 5,000 Shares (the "Subsequent Option") on the date of each Annual
Meeting of the Company's stockholders immediately following which such Outside
Director is serving on the Board, provided that, on such date, he or she shall
have served on the Board for at least six (6) months prior to the date of such
Annual Meeting.

         (iv)   Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors receiving an Option on
the automatic grant date.  Any further grants shall then be deferred until such
time, if any, as additional Shares become available for grant under the Plan
through action of the stockholders to increase the number of Shares which may be
issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.

         (v)    Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any grant of an Option made before the Company has obtained stockholder
approval of the Plan in accordance with Section 17 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
17 hereof.

         (vi)   The terms of each First Option granted hereunder shall be as
follows:

                (1)   each First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;

                (2)   the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of each First Option, determined in
accordance with Section 8 hereof;

                (3)   each First Option shall vest and become exercisable at the
rate of 1/36 of the Shares subject to the First Option on each monthly
anniversary following the date of grant.

         (vii)  The terms of each Subsequent Option granted hereunder
shall be as follows:

                                       3
<PAGE>

                (1)   each Subsequent Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;

                (2)   the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of each Subsequent Option,
determined in accordance with Section 8 hereof;

                (3)   each Subsequent Option shall vest and become exercisable
at the rate of 1/12 of the Shares subject to the Subsequent Option on each
monthly anniversary following the date of grant.

         (c)    Powers of the Board.  Subject to the provisions and restrictions
                -------------------
of the Plan, the Board shall have the authority, in its discretion:  (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per Share of Options to be granted, which exercise price
shall be determined in accordance with Section 8 of the Plan; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.

         (d)    Effect of Board's Decision.  All decisions, determinations and
                --------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.

         (e)    Suspension or Termination of Option.  If the Chief Executive
                -----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct).  If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever.  In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.

     5.  Eligibility.  Options may be granted only to Outside Directors.  All
         -----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above.  An Outside Director, who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.

                                       4
<PAGE>

         The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.

     6.  Term of Plan; Effective Date.  The Plan shall become effective on the
         ----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities.  It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.

     7.  Term of Options.  The term of each Option shall be ten (10) years from
         ---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.

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

         (a)    Exercise Price.  The per Share exercise price for the Shares to
                --------------
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.

         (b)    Fair Market Value.  The fair market value shall be determined by
                -----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
                                                                      --------
Street Journal, or if there is a public market for the Common Stock but the
--------------
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
               ------------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).

         (c)    Form of Consideration.  The consideration to be paid for the
                ---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.

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

         (a)    Procedure for Exercise; Rights as a Stockholder.  Any Option
                -----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.

                                       5
<PAGE>

                An Option may not be exercised for a fraction of a Share.

                An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.

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

         (b)    Termination of Continuous Status as a Director.  If an Outside
                ----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within sixty
(60) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination.  Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.

         (c)    Disability of Optionee.  Notwithstanding Section 9(b) above, in
                ----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired.  To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.

         (d)    Death of Optionee.  In the event of the death of an Optionee:
                -----------------
(A) during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or (B) within three (3) months
after the termination of Continuous Status as a Director, the Option may be
exercised, at any time within twelve (12) months following the date of death, by
the

                                       6
<PAGE>

Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of death or the date of termination, as
applicable.  Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
an Optionee was not entitled to exercise the Option at the date of death or
termination or if he or she does not exercise such Option (to the extent he or
she was entitled to exercise) within the time specified above, the Option shall
terminate and the Shares underlying the unexercised portion of the Option shall
revert to the Plan.

     10. Nontransferability of Options.  The Option 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 or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder).  The
designation of a beneficiary by an Optionee does not constitute a transfer.  An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.

     11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
         ------------------------------------------------------------------

         (a)    Adjustment.  Subject to any required action by the shareholders
                ----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii) and
(iii) above, 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 (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.

         (b)    Corporate Transactions; Change of Control.  In the event of a
                -----------------------------------------
Corporate Transaction, including a Change of Control, and except as otherwise
provided in a Stock Option Agreement issued under the Plan, each outstanding
Option shall be assumed or an equivalent option shall be substituted by the
successor corporation or a Parent or Subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the outstanding
Options or to substitute equivalent options, in which case the Options shall
terminate upon the consummation of the transaction.

                                       7
<PAGE>

         For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Corporate Transaction or Change of Control, each
Optionee would be entitled to receive upon exercise of an Option the same number
and kind of shares of stock or the same amount of property, cash or securities
as the Optionee would have been entitled to receive upon the occurrence of such
transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of Shares covered by
the Option as provided for in this Section 11); provided however that if such
consideration received in the transaction 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
exercise of the Option to be solely common stock of the successor corporation or
its Parent equal to the Fair Market Value of the per Share consideration
received by holders of Common Stock in the transaction.

         (c)    Certain Distributions.  In the event of any distribution to the
                ---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.

     12. Time of Granting Options.  The date of grant of an Option shall, for
         ------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director 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 amend or terminate the
                -------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.

         (b)    Effect of Amendment or Termination.  Any such amendment or
                ----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.

     14. Conditions Upon Issuance of Shares.  Notwithstanding any other
         ----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the

                                       8
<PAGE>

administration of stock option plans under applicable U.S. state corporate laws,
U.S. federal and applicable state securities laws, the Code, any stock exchange
or Nasdaq rules or regulations to which the Company may be subject and the
applicable laws of any other country or jurisdiction where Options are granted
under the Plan, as such laws, rules, regulations and requirements shall be in
place from time to time (the "Applicable Laws"). Such compliance shall be
                              ---------------
determined by the Company in consultation with its legal counsel.

         As a condition to the exercise of an Option, the Company 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 by law.

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

     16. Option Agreement.  Options shall be evidenced by written option
         ----------------
agreements in such form as the Board shall approve.

     17. Stockholder Approval.  If required by the Applicable Laws, continuance
         --------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.

                                       9
<PAGE>

                           ORATEC INTERVENTIONS, INC.

                       1999 DIRECTORS' STOCK OPTION PLAN

                          NOTICE OF STOCK OPTION GRANT
                          ----------------------------



<<Optionee>>
<<OptioneeAddress1>>
<<OptioneeAddress2>>

       You have been granted an option to purchase Common Stock of Oratec
Interventions, Inc. (the "Company") as follows:
                          -------

       Date of Grant                       <<GrantDate>>

       Vesting Commencement Date           <<VestingStartDate>>

       Exercise Price per Share            <<ExercisePrice>>

       Total Number of Shares Granted      <<SharesGranted>>

       Total Exercise Price                <<TotalExercisePrice>>

       Expiration Date                     <<ExpirDate>>

       Vesting Schedule:                   This Option may be exercised, in
       ----------------                    whole or in part, in accordance with
                                           the following schedule: [1/36 or
                                           1/12] of the Option Shares shall vest
                                           and become exercisable on each
                                           monthly anniversary following the
                                           Date of Grant .

       Termination Period:                 This Option may be exercised for 60
       ------------------                  days after termination of Optionee's
                                           Continuous Status as a Director, or
                                           such longer period as may be
                                           applicable upon death or Disability
                                           of Optionee as provided in the Plan,
                                           but in no event later than the
                                           Expiration Date as provided above.

                                       10
<PAGE>

     By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 1999 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.

OPTIONEE:                       ORATEC INTERVENTIONS, INC.


_______________________
Signature                       By:___________________________


________________________        Title:________________________
Print Name

                                       11
<PAGE>

                           ORATEC INTERVENTIONS, INC.

                      NONSTATUTORY STOCK OPTION AGREEMENT
                      -----------------------------------



     1.  Grant of Option.  The Board of Directors of the Company hereby grants
         ---------------
to the Optionee named in the Notice of Stock Option Grant attached as Part I of
this Agreement (the "Optionee"), an option (the "Option") to purchase a number
                     --------                    ------
of Shares, as set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "Exercise
                                                                    --------
Price"), subject to the terms and conditions of the 1999 Directors' Stock
-----
Option Plan (the "Plan"), which is incorporated herein by reference.
                  ----
(Capitalized terms not defined herein shall have the meanings ascribed to such
terms in the Plan.) In the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Nonstatutory Stock Option
Agreement, the terms and conditions of the Plan shall prevail.

     2.  Exercise of Option.
         ------------------

         (a)    Right to Exercise.  This Option is exercisable during its term
                -----------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and the applicable provisions of the Plan and this Nonstatutory Stock
Option Agreement. In the event of Optionee's death, disability or other
termination of Optionee's employment or consulting relationship, the
exercisability of the Option is governed by the applicable provisions of the
Plan and this Nonstatutory Stock Option Agreement.

         (b)    Method of Exercise.  This Option is 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 in
respect of which the Option is being exercised (the "Exercised Shares"), and
                                                     ----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of 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 such aggregate Exercise Price.

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

     3.  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:

         (a)    cash;

                                       12
<PAGE>

         (b)    check;

         (c)    delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or

         (d)    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.

     4.  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 or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan.  The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.

     5.  Term of Option.  This Option may be exercised only within the term set
         --------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.

     6.  Tax Consequences.  Set forth below is a brief summary of certain
         ----------------
federal tax consequences relating to this Option under the law in effect as of
the date of grant.  THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE.  OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

         (a)    Exercising the Option.  Since this Option does not qualify as an
                ---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal income tax liability upon exercise.  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 Exercised
Shares on the date of exercise over their aggregate Exercise Price.

         (b)    Disposition of Shares.  If the Optionee holds the Option Shares
                ---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.  The long-
term capital gain will be taxed for federal income tax purposes at a maximum
rate of 20 percent.  By your signature and the signature of the Company's
representative below, you and the Company agree that this Option is granted
under and governed by the terms and conditions of the Plan and this Nonstatutory
Stock Option Agreement.  Optionee has reviewed the Plan and this Nonstatutory
Stock Option Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Nonstatutory Stock Option Agreement
and fully understands all provisions of the Plan and Nonstatutory Stock Option
Agreement.  Optionee hereby agrees to accept as binding, conclusive

                                       13
<PAGE>

and final all decisions or interpretations of the Administrator upon any
questions relating to the Plan and Nonstatutory Stock Option Agreement.

                                    ORATEC INTERVENTIONS, INC.


_______________________________     By:_____________________________
<<Optionee>>
                                    Title:__________________________

                                       14
<PAGE>

                                   EXHIBIT A

                               NOTICE OF EXERCISE
                               ------------------



To:         Oratec Interventions, Inc.

Attn:       Stock Option Administrator

Subject:    Notice of Intention to Exercise Stock Option
            --------------------------------------------


      This is official notice that the undersigned ("Optionee") intends to
                                                     --------
exercise Optionee's option to purchase __________ shares of Oratec
Interventions, Inc. Common Stock, under and pursuant to the Company's 1999
Directors' Stock Option Plan and the Nonstatutory Stock Option Agreement dated
_______________, as follows:

     Grant Number:                   ____________________________

     Date of Purchase:               ____________________________

     Number of Shares:               ____________________________

     Purchase Price:                 ____________________________

     Method of Payment of            ____________________________

     Purchase Price:                 ____________________________

     Social Security No.:            ____________________________

     The shares should be issued as follows:

          Name:     _________________________

          Address:  _________________________

                    _________________________

                    _________________________

          Signed:   _________________________

          Date:     _________________________

                                       15