<PAGE>
 
                                                                   EXHIBIT 10.4

                        CARDIOTECH INTERNATIONAL, INC.

           1996 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN


1.   DEFINITIONS.
     ----------- 

     Unless otherwise specified or unless the context otherwise requires, the
     following terms, as used in this CardioTech International, Inc. 1996
     Employee, Director and Consultant Stock Option Plan, have the following
     meanings:

          Administrator means the Board of Directors, unless it has delegated
          -------------
          power to act on its behalf to the Committee, in which case the
          Administrator means the Committee.

          Affiliate means a corporation which, for purposes of Section 424 of 
          ---------                                                       
          the Code, is a parent or subsidiary of the Company, direct or
          indirect.

          Board of Directors means the Board of Directors of the Company.
          ------------------                                             

          Code means the United States Internal Revenue Code of 1986, as 
          ----                                                          
          amended.

          Committee means the Committee of the Board of Directors to which the
          ---------                                                       
          Board of Directors has delegated power to act under or pursuant to the
          provisions of the Plan.

          Common Stock means shares of the Company's common stock, $.01 par 
          ------------                                                     
          value per share.

          Company means CardioTech International, Inc., a Massachusetts 
          -------                                                      
          corporation.

          Disability or Disabled means permanent and total disability as defined
          ----------    --------                                        
          in Section 22(e)(3) of the Code.

          Fair Market Value of a Share of Common Stock means:
          -----------------                                  

          (1)  If the Common Stock is listed on a national securities exchange
          or traded in the over-the-counter market and sales prices are
          regularly reported for the Common Stock, either (a) the average of the
          closing or last prices of the Common Stock on the Composite Tape or
          other comparable reporting system for the five (5) consecutive trading
          days immediately following the applicable date or (b) the closing or
          last price of the Common Stock on the Composite Tape or other
          comparable reporting system for the trading day immediately preceding
          the applicable date, as the Administrator shall determine, except that
          Subparagraph (b) shall not apply to Options granted pursuant to
          Paragraph 6(A)(e) of the Plan;

          (2)  If the Common Stock is not traded on a national securities
          exchange but is traded on the over-the-counter market, if sales prices
          are not regularly reported for the Common Stock for the trading days
          or day referred to in clause (1), and if bid and asked prices for the
          Common Stock are regularly reported, either (a) the
<PAGE>
 
          average of the mean between the bid and the asked price for the Common
          Stock at the close of trading in the over-the-counter market for the
          five (5) trading days on which Common Stock was traded immediately
          preceding the applicable date or (b) the mean between the bid and the
          asked price for the Common Stock at the close of trading in the over-
          the-counter market for the trading day on which Common Stock was
          traded immediately preceding the applicable date, as the Administrator
          shall determine, except that Subparagraph (b) shall not apply to
          Options granted pursuant to Paragraph 6(A)(e) of the Plan; and

          (3)  If the Common Stock is neither listed on a national securities
          exchange nor traded in the over-the-counter market, such value as the
          Administrator, in good faith, shall determine.

          ISO means an option meant to qualify as an incentive stock option
          ---                                                              
          under Section 422 of the Code.

          Key Employee means an employee of the Company or of an Affiliate
          ------------                                                    
          (including, without limitation, an employee who is also serving as an
          officer or director of the Company or of an Affiliate), designated by
          the Administrator to be eligible to be granted one or more Options
          under the Plan.

          Non-Qualified Option means an option which is not intended to qualify
          --------------------                                         
          as an ISO.

          Option means an ISO or Non-Qualified Option granted under the Plan.
          ------                                                       

          Option Agreement means an agreement between the Company and a 
          ----------------                                             
          Participant delivered pursuant to the Plan.

          Participant means a Key Employee, director or consultant to whom one
          -----------                                                     
          or more Options are granted under the Plan. As used herein,
          "Participant" shall include "Participant's Survivors" where the
          context requires.

          Participant's Survivors means a deceased Participant's legal
          -----------------------                                     
          representatives and/or any person or persons who acquired the
          Participant's rights to an Option by will or by the laws of descent
          and distribution.

          Plan means this CardioTech International, Inc. 1996 Employee, Director
          ----                                                         
          and Consultant Stock Option Plan.

          Shares means shares of the Common Stock as to which Options have been
          ------                                                          
          or may be granted under the Plan or any shares of capital stock into
          which the Shares are changed or for which they are exchanged within
          the provisions of Paragraph 3 of the Plan. The Shares issued upon
          exercise of Options granted under the Plan may be authorized and
          unissued Shares or Shares held by the Company in its treasury, or
          both.

2.   PURPOSES OF THE PLAN.
     -------------------- 

                                      -2-
<PAGE>
 
     The Plan is intended to encourage ownership of Shares by Key Employees,
directors and certain consultants to the Company in order to attract such
people, to induce them to work for the benefit of the Company or of an Affiliate
and to provide additional incentive for them to promote the success of the
Company or of an Affiliate. The Plan provides for the granting of ISOs and Non-
Qualified Options.

3.   SHARES SUBJECT TO THE PLAN.
     -------------------------- 

     The number of Shares subject to this Plan as to which Options may be
granted from time to time shall be equal to 1,061,029 Shares or the equivalent
of such number of Shares after the Administrator, in its sole discretion, has
interpreted the effect of any stock split, stock dividend, combination,
recapitalization or similar transaction in accordance with Paragraph 16 of the
Plan. Of the Shares subject to this Plan, 106,103 Shares shall be eligible for
grant under Paragraph 6(A)(e) hereof.

     If an Option ceases to be "outstanding", in whole or in part, the Shares
which were subject to such Option shall be available for the granting of other
Options under the Plan. Any Option shall be treated as "outstanding" until such
Option is exercised in full, or terminates or expires under the provisions of
the Plan, or by agreement of the parties to the pertinent Option Agreement.

4.   ADMINISTRATION OF THE PLAN.
     -------------------------- 

     The Administrator of the Plan will be the Board of Directors, except to the
extent the Board of Directors delegates its authority to the Committee, in which
case the Committee shall be the Administrator. Following the date on which the
Common Stock is registered under the Securities and Exchange Act of 1934, as
amended (the "1934 Act"), the Plan is intended to comply in all respects with
Rule 16b-3 or its successors, promulgated pursuant to Section 16 of the 1934 Act
with respect to Participants who are subject to Section 16 of the 1934 Act, and
any provision in this Plan with respect to such persons contrary to Rule 16b-3
shall be deemed null and void to the extent permissible by law and deemed
appropriate by the Administrator. Subject to the provisions of the Plan, the
Administrator is authorized to:

     a.   Interpret the provisions of the Plan or of any Option or Option
          Agreement and to make all rules and determinations which it deems
          necessary or advisable for the administration of the Plan;

     b.   Determine which employees of the Company or of an Affiliate shall be
          designated as Key Employees and which of the Key Employees, directors
          and consultants shall be granted Options;

     c.   Determine the number of Shares for which an Option or Options shall be
          granted; and

     d.   Specify the terms and conditions upon which an Option or Options may
          be granted;

                                      -3-
<PAGE>
 
provided, however, that all such interpretations, rules, determinations, terms
and conditions shall be made and prescribed in the context of preserving the tax
status under Section 422 of the Code of those Options which are designated as
ISOs. Subject to the foregoing, the interpretation and construction by the
Administrator of any provisions of the Plan or of any Option granted under it
shall be final, unless otherwise determined by the Board of Directors, if the
Administrator is the Committee.

5.   ELIGIBILITY FOR PARTICIPATION.
     ----------------------------- 

     The Administrator will, in its sole discretion, name the Participants in
the Plan, provided, however, that each Participant must be a Key Employee,
director or consultant of the Company or of an Affiliate at the time an Option
is granted. Members of the Board of Directors who are not employees of the
Company or of an Affiliate may receive options pursuant to Paragraph 6(A)(e) of
the Plan, but only pursuant thereto. Notwithstanding any of the foregoing
provisions, the Administrator may authorize the grant of an Option to a person
not then an employee, director or consultant of the Company or of an Affiliate.
The actual grant of such Option, however, shall be conditioned upon such person
becoming eligible to become a Participant at or prior to the time of the
execution of the Option Agreement evidencing such Option. ISOs may be granted
only to Key Employees. Non-Qualified Options may be granted to any Key Employee,
director or consultant of the Company or an Affiliate. In no event shall any
Employee be granted in any fiscal year Options to purchase more than 1,061,029
shares of Stock pursuant to this Plan. The granting of any Option to any
individual shall neither entitle that individual to, nor disqualify him or her
from, participation in any other grant of Options.

6.   TERMS AND CONDITIONS OF OPTIONS.
     ------------------------------- 

     Each Option shall be set forth in writing in an Option Agreement, duly
executed by the Company and, to the extent required by law or requested by the
Company, by the Participant. The Administrator may provide that Options be
granted subject to such conditions as the Administrator may deem appropriate,
including, without limitation, subsequent approval by the shareholders of the
Company of this Plan or any amendments to this Plan. The Option Agreements shall
be subject to at least the following terms and conditions:

     A.   Non-Qualified Options:  Each Option intended to be a Non-Qualified
          ---------------------                                             
          Option shall be subject to the terms and conditions which the
          Administrator determines to be appropriate and in the best interest of
          the Company, subject to the following minimum standards for any such
          Non-Qualified Option:

          a.   Option Price. Each Option Agreement shall state the option price
               ------------                                              
               (per share) of the Shares covered by each Option, which option
               price shall be determined by the Administrator but shall not be
               less than the par value per share of Common Stock;

          b.   Number of Shares. Each Option Agreement shall state the number of
               ----------------                                              
               Shares to which it pertains;

                                      -4-
<PAGE>
 
          c.   Term of Option, Vesting. Each Option Agreement shall state the
               -----------------------                                       
               date or dates on which it first is exercisable and the date after
               which it may no longer be exercised, and may provide that the
               Option rights accrue or become exercisable in installments over a
               period of months or years, or upon the occurrence of certain
               conditions or the attainment of stated goals or events;

          d.   Option Conditions. Exercise of any Option may be conditioned upon
               -----------------                                           
               the Participant's execution of a Share purchase agreement in form
               satisfactory to the Administrator providing for certain
               protections for the Company and its other shareholders including
               requirements that:

               i.   The Participant's or the Participant's Survivors' right to
                    sell or transfer the Shares may be restricted; and

               ii.  The Participant or the Participant's Survivors may be
                    required to execute letters of investment intent and must
                    also acknowledge that the Shares will bear legends noting
                    any applicable restrictions.

          e.   Directors' Options.  Each director of the Company who is not an
               ------------------                                          
               employee of the Company or any Affiliate, who is first elected or
               appointed to the Board of Directors after the date on which the
               Common Stock is registered under the 1934 Act, upon such election
               or appointment and upon every anniversary thereof provided that
               on such dates such director has been in the continued and
               uninterrupted service of the Company as a director since his or
               her election or appointment and is a director of the Company and
               is not an employee of the Company at such times, shall be granted
               a Non-Qualified Option to purchase 14,854 Shares. Any non-
               employee director serving in office on the date on which the
               Common Stock is registered under the 1934 Act, who has been a
               member of the Board of Directors prior to such date shall be
               granted on such date and upon every anniversary thereof, a Non-
               Qualified Option to purchase 14,854 Shares, provided that on such
               date such director has been in the continued and uninterrupted
               service of the Company as a director since his or her election or
               appointment and is a director of the Company and is not an
               employee of the Company at such time. If any non-employee
               director should cease to be a director and thereafter shall be
               elected or appointed to the Board of Directors, upon such
               election or appointment and upon every anniversary thereof
               provided that on such dates such director has been in the
               continued and uninterrupted service of the Company as a director
               since his or her election or appointment and is a director of the
               Company and is not an employee of the Company at such times, such
               director shall be granted a Non-Qualified Option to purchase
               14,854 Shares. Each such Option shall (i) have an exercise price
               equal to the Fair Market Value (per share) of the Shares on the
               date of grant of the Option, (ii) have a term of ten (10) years,
               and (iii) shall become cumulatively exercisable in four (4) equal
               installments of twenty-five percent (25%) each, upon completion
               of three (3) months of service on the Board of Directors after
               the date of grant, and continuing upon completion of each of the
               next three (3) three (3)-month 

                                      -5-
<PAGE>
 
               periods of service thereafter (for example, if the date of grant
               of an Option was May 1, 1996, then the Option would vest in four
               (4) equal installments on August 1, 1996, November 1, 1996,
               February 1, 1997 and May 1, 1997). Any director entitled to
               receive an Option grant under this Subparagraph may elect to
               decline the Option. Notwithstanding the provisions of Paragraph
               23 concerning amendment of the Plan, the provisions of this
               Subparagraph shall not be amended more than once every six (6)
               months, other than to comport with changes in the Code, the
               Employee Retirement Income Security Act, or the rules thereunder.
               The provisions of Paragraphs 10, 11, 12 and 13 below shall not
               apply to Options granted pursuant to this Subparagraph.

     Except as otherwise provided in the pertinent Option Agreement, if a
director who received Options pursuant to this Subparagraph (e):

               i.   ceases to be a member of the Board of Directors for any
                    reason other than death or Disability, any then unexercised
                    Options granted to such director may be exercised by the
                    director within a period of ninety (90) days after the date
                    the director ceases to be a member of the Board of
                    Directors, but only to the extent of the number of Shares
                    with respect to which the Options are exercisable on the
                    date the director ceases to be a member of the Board of
                    Directors, and in no event later than the expiration date of
                    the Option; or

               ii.  ceases to be a member of the Board of Directors by reason of
                    his or her death or Disability, any then unexercised Options
                    granted to such director may be exercised by the director
                    (or by the Participant's personal representative, or
                    Participant's Survivors in the event of death) within a
                    period of one hundred eighty (180) days after the date the
                    director ceases to be a member of the Board of Directors,
                    but only to the extent of the number of Shares with respect
                    to which the Options are exercisable on the date the
                    director ceases to be a member of the Board of Directors,
                    and in no event later than the expiration date of the
                    Option.

     B.   ISOs:  Each Option intended to be an ISO shall be issued only to a Key
          ----                                                              
          Employee and be subject to at least the following terms and
          conditions, with such additional restrictions or changes as the
          Administrator determines are appropriate but not in conflict with
          Section 422 of the Code and relevant regulations and rulings of the
          Internal Revenue Service:

          a.   Minimum standards.  The ISO shall meet the minimum standards
               -----------------                                           
               required of Non-Qualified Options, as described in Paragraph 6(A)
               above, except clauses (a) and (e) thereunder.

          b.   Option Price.  Immediately before the Option is granted, if the
               ------------                                               
               Participant owns, directly or by reason of the applicable
               attribution rules in Section 424(d) of the Code:

                                      -6-
<PAGE>
 
               i.   Ten percent (10%) or less of the total combined voting power
                                      -------                             
                    of all classes of share capital of the Company or an
                    Affiliate, the Option price per share of the Shares covered
                    by each Option shall not be less than one hundred percent
                    (100%) of the Fair Market Value per share of the Shares on
                    the date of the grant of the Option.

               ii.  More than ten percent (10%) of the total combined voting
                    power of all classes of share capital of the Company or an
                    Affiliate, the Option price per share of the Shares covered
                    by each Option shall not be less than one hundred ten
                    percent (110%) of the said Fair Market Value on the date of
                    grant.

          c.   Term of Option.  For Participants who own:
               --------------                            

               i.   Ten percent (10%) or less of the total combined voting power
                                      -------                             
                    of all classes of share capital of the Company or an
                    Affiliate, each Option shall terminate not more than ten
                    (10) years from the date of the grant or at such earlier
                    time as the Option Agreement may provide.

               ii.  More than ten percent (10%) of the total combined voting
                    power of all classes of share capital of the Company or an
                    Affiliate, each Option shall terminate not more than five
                    (5) years from the date of the grant or at such earlier time
                    as the Option Agreement may provide.

          d.   Limitation on Yearly Exercise. The Option Agreements shall 
               -----------------------------                             
               restrict the amount of Options which may be exercisable in any
               calendar year (under this or any other ISO plan of the Company or
               an Affiliate) so that the aggregate Fair Market Value (determined
               at the time each ISO is granted) of the stock with respect to
               which ISOs are exercisable for the first time by the Participant
               in any calendar year does not exceed one hundred thousand dollars
               ($100,000), provided that this Subparagraph (d) shall have no
               force or effect if its inclusion in the Plan is not necessary for
               Options issued as ISOs to qualify as ISOs pursuant to Section
               422(d) of the Code.

          e.   Limitation on Grant of ISOs:  No ISOs shall be granted after 
               ---------------------------                                 
               March 4, 2006.

                                      -7-
<PAGE>
 
7.   EXERCISE OF OPTION AND ISSUE OF SHARES.
     -------------------------------------- 

     An Option (or any part or installment thereof) shall be exercised by giving
written notice to the Company at its principal office address, together with
provision for payment of the full purchase price in accordance with this
Paragraph for the Shares as to which such Option is being exercised, and upon
compliance with any other condition(s) set forth in the Option Agreement. Such
written notice shall be signed by the person exercising the Option, shall state
the number of Shares with respect to which the Option is being exercised and
shall contain any representation required by the Plan or the Option Agreement.
Payment of the purchase price for the Shares as to which such Option is being
exercised shall be made (a) in United States dollars in cash or by check, or (b)
at the discretion of the Administrator, through delivery of shares of Common
Stock having a fair market value equal as of the date of the exercise to the
cash exercise price of the Option, determined in good faith by the
Administrator, or (c) at the discretion of the Administrator, by delivery of the
grantee's personal recourse note bearing interest payable not less than annually
at no less than 100% of the applicable Federal rate, as defined in Section
1274(d) of the Code, or (d) at the discretion of the Administrator, in
accordance with a cashless exercise program established with a securities
brokerage firm, and approved by the Administrator or (e) at the discretion of
the Administrator, by any combination of (a), (b), (c) and (d) above.
Notwithstanding the foregoing, the Administrator shall accept only such payment
on exercise of an ISO as is permitted by Section 422 of the Code.

     The Company shall then reasonably promptly deliver the Shares as to which
such Option was exercised to the Participant (or to the Participant's Survivors,
as the case may be). In determining what constitutes "reasonably promptly," it
is expressly understood that the delivery of the Shares may be delayed by the
Company in order to comply with any law or regulation which requires the Company
to take any action with respect to the Shares prior to their issuance. The
Shares shall, upon delivery, be evidenced by an appropriate certificate or
certificates for fully paid, non-assessable Shares.

     In lieu of permitting a Participant to obtain Common Stock pursuant to the
exercise of an Option, the Company may, in its sole discretion, pay to the
Participant an amount equal to the Appreciated Value multiplied by the number of
shares of Common Stock that the Participant is entitled to upon the exercise of
an Option (the "Appreciated Amount"). The Appreciated Amount shall be payable to
the Participant within fifteen (15) days of receipt by the Company of the notice
from the Participant that the Participant intends to exercise the Option.
"Appreciated Value" shall mean the amount by which (i) the per share Fair Market
Value on the date of exercise of the Option, exceeds (ii) the option price per
share set forth in the related Option Agreement.

     The Administrator shall have the right to accelerate the date of exercise
of any installment of any Option; provided that the Administrator shall not
accelerate the exercise date of any installment of any Option granted to any Key
Employee as an ISO (and not previously converted into a Non-Qualified Option
pursuant to Paragraph 19) if such acceleration would violate the annual vesting
limitation contained in Section 422(d) of the Code, as described in Paragraph
6(B)(d).

     The Administrator may, in its discretion, amend any term or condition of an
outstanding

                                      -8-
<PAGE>
 
Option provided (i) such term or condition as amended is permitted by the Plan,
(ii) any such amendment shall be made only with the consent of the Participant
to whom the Option was granted, or in the event of the death of the Participant,
the Participant's Survivors, if the amendment is adverse to the Participant,
(iii) any such amendment of any ISO shall be made only after the Administrator,
after consulting the counsel for the Company, determines whether such amendment
would constitute a "modification" of any Option which is an ISO (as that term is
defined in Section 424(h) of the Code) or would cause any adverse tax
consequences for the holders of such ISO, and (iv) with respect to any Option
held by any Participant who is subject to the provisions of Section 16(a) of the
1934 Act, any such amendment shall be made only after the Administrator, after
consulting with counsel for the Company, determines whether such amendment would
constitute the grant of a new Option.

8.   RIGHTS AS A SHAREHOLDER.
     ----------------------- 

     No Participant to whom an Option has been granted shall have rights as a
shareholder with respect to any Shares covered by such Option, except after due
exercise of the Option and tender of the full purchase price for the Shares
being purchased pursuant to such exercise and registration of the Shares in the
Company's share register in the name of the Participant.

9.   ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS.
     -------------------------------------------- 

     By its terms, an Option granted to a Participant shall not be transferable
by the Participant other than by will or by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act or the rules thereunder,
provided, however, that the designation of a beneficiary of an Option by a
Participant shall not be deemed a transfer prohibited by this Paragraph. Except
as provided in the preceding sentence, an Option shall be exercisable, during
the Participant's lifetime, only by such Participant (or by his or her legal
representative) and shall not be assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of any Option or of any rights
granted thereunder contrary to the provisions of this Plan, or the levy of any
attachment or similar process upon an Option, shall be null and void.

10.  EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE".
     ------------------------------------------------------- 

     Except as otherwise provided in the pertinent Option Agreement, in the
event of a termination of service (whether as an employee, director or
consultant) with the Company or an Affiliate before the Participant has
exercised all Options, the following rules apply:

     a.   A Participant who ceases to be an employee, director or consultant of
          the Company or of an Affiliate (for any reason other than termination
          "for cause," Disability, or death for which events there are special
          rules in Paragraphs 11, 12, and 13, respectively), may exercise any
          Option granted to him or her to the extent that the Option is
          exercisable on the date of such termination of service, but only
          within such term as the Administrator has designated in the pertinent
          Option

                                      -9-
<PAGE>
 
          Agreement.

     b.   In no event may an Option Agreement provide, if the Option is intended
          to be an ISO, that the time for exercise be later than three (3)
          months after the Participant's termination of employment.

     c.   The provisions of this Paragraph, and not the provisions of Paragraph
          12 or 13, shall apply to a Participant who subsequently becomes
          disabled or dies after the termination of employment, director status
          or consultancy, provided, however, in the case of a Participant's
          death within three (3) months after the termination of employment,
          director status or consulting, the Participant's Survivors may
          exercise the Option within one (1) year after the date of the
          Participant's death, but in no event after the date of expiration of
          the term of the Option.

     d.   Notwithstanding anything herein to the contrary, if subsequent to a
          Participant's termination of employment, director status or
          consultancy, but prior to the exercise of an Option, the Board of
          Directors determines that, either prior or subsequent to the
          Participant's termination, the Participant engaged in conduct which
          would constitute "cause," then such Participant shall forthwith cease
          to have any right to exercise any Option.

     e.   A Participant to whom an Option has been granted under the Plan who is
          absent from work with the Company or with an Affiliate because of
          temporary disability (any disability other than a permanent and total
          Disability as defined in Paragraph 1 hereof), or who is on leave of
          absence for any purpose, shall not, during the period of any such
          absence, be deemed, by virtue of such absence alone, to have
          terminated such Participant's employment, director status or
          consultancy with the Company or with an Affiliate, except as the
          Administrator may otherwise expressly provide.

     f.   Options granted under the Plan shall not be affected by any change of
          employment or other service within or among the Company and any
          Affiliates, so long as the Participant continues to be an employee,
          director or consultant of the Company or any Affiliate, provided,
          however, if a Participant's employment by either the Company or an
          Affiliate should cease (other than to become an employee of an
          Affiliate or the Company), such termination shall affect the
          Participant's rights under any Option granted to such Participant in
          accordance with the terms of the Plan and the pertinent Option
          Agreement.

11.  EFFECT OF TERMINATION OF SERVICE "FOR CAUSE".
     -------------------------------------------- 

     Except as otherwise provided in the pertinent Option Agreement, the
following rules apply if the Participant's service (whether as an employee,
director or consultant) with the Company or an Affiliate is terminated "for
cause" prior to the time that all of his or her outstanding Options have been
exercised:

     a.   All outstanding and unexercised Options as of the date the Participant
          is notified that his or her service is terminated "for cause" will
          immediately be forfeited, unless the Option Agreement provides
          otherwise.

                                     -10-
<PAGE>
 
     b.   For purposes of this Paragraph, "cause" shall include (and is not
          limited to) dishonesty with respect to the Company or any Affiliate,
          insubordination, substantial malfeasance or non-feasance of duty,
          unauthorized disclosure of confidential information, and conduct
          substantially prejudicial to the business of the Company or any
          Affiliate. The determination of the Administrator as to the existence
          of cause will be conclusive on the Participant and the Company.

     c.   "Cause" is not limited to events which have occurred prior to a
          Participant's termination of service, nor is it necessary that the
          Administrator's finding of "cause" occur prior to termination. If the
          Administrator determines, subsequent to a Participant's termination of
          service but prior to the exercise of an Option, that either prior or
          subsequent to the Participant's termination the Participant engaged in
          conduct which would constitute "cause," then the right to exercise any
          Option is forfeited.

     d.   Any definition in an agreement between the Participant and the Company
          or an Affiliate, which contains a conflicting definition of "cause"
          for termination and which is in effect at the time of such
          termination, shall supersede the definition in this Plan with respect
          to such Participant.

12.  EFFECT OF TERMINATION OF SERVICE FOR DISABILITY.
     ----------------------------------------------- 

     Except as otherwise provided in the pertinent Option Agreement, a
Participant who ceases to be an employee, director or consultant of the Company
or of an Affiliate by reason of Disability may exercise any Option granted to
such Participant:

     a.   To the extent exercisable but not exercised on the date of Disability;
          and

     b.   In the event rights to exercise the Option accrue periodically, to the
          extent of a pro rata portion of any additional rights as would have
          accrued had the Participant not become Disabled prior to the end of
          the accrual period which next ends following the date of Disability.
          The proration shall be based upon the number of days of such accrual
          period prior to the date of Disability.

     A Disabled Participant may exercise such rights only within a period of not
more than one (1) year after the date that the Participant became Disabled,
notwithstanding that the Participant might have been able to exercise the Option
as to some or all of the Shares on a later date if he or she had not become
disabled and had continued to be an employee, director or consultant or, if
earlier, within the originally prescribed term of the Option.

     The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.

                                     -11-
<PAGE>
 
13.  EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
     --------------------------------------------------------- 

     Except as otherwise provided in the pertinent Option Agreement, in the
event of the death of a Participant to whom an Option has been granted while the
Participant is an employee, director or consultant of the Company or of an
Affiliate, such Option may be exercised by the Participant's Survivors:

     a.   To the extent exercisable but not exercised on the date of death; and

     b.   In the event rights to exercise the Option accrue periodically, to the
          extent of a pro rata portion of any additional rights which would have
          accrued had the Participant not died prior to the end of the accrual
          period which next ends following the date of death. The proration
          shall be based upon the number of days of such accrual period prior to
          the Participant's death.

     If the Participant's Survivors wish to exercise the Option, they must take
all necessary steps to exercise the Option within one (1) year after the date of
death of such Participant, notwithstanding that the decedent might have been
able to exercise the Option as to some or all of the Shares on a later date if
he or she had not died and had continued to be an employee, director or
consultant or, if earlier, within the originally prescribed term of the Option.

                                     -12-
<PAGE>
 
14.  PURCHASE FOR INVESTMENT.
     ----------------------- 

     Unless the offering and sale of the Shares to be issued upon the particular
exercise of an Option shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended (the "1933 Act"),
the Company shall be under no obligation to issue the Shares covered by such
exercise unless and until the following conditions have been fulfilled:

     a.   The person(s) who exercise such Option shall warrant to the Company,
          prior to the receipt of such Shares, that such person(s) are acquiring
          such Shares for their own respective accounts, for investment, and not
          with a view to, or for sale in connection with, the distribution of
          any such Shares, in which event the person(s) acquiring such Shares
          shall be bound by the provisions of the following legend which shall
          be endorsed upon the certificate(s) evidencing their Shares issued
          pursuant to such exercise or such grant:

               The shares represented by this certificate have been taken for
               investment and they may not be sold or otherwise transferred by
               any person, including a pledgee, unless (1) either (a) a
               Registration Statement with respect to such shares shall be
               effective under the Securities Act of 1933, as amended, or (b)
               the Company shall have received an opinion of counsel
               satisfactory to it that an exemption from registration under such
               Act is then available, and (2) there shall have been compliance
               with all applicable state securities laws.

     b.   The Company shall have received an opinion of its counsel that the
          Shares may be issued upon such particular exercise in compliance with
          the 1933 Act without registration thereunder.

     The Company may delay issuance of the Shares until the completion of any
action or the attainment of any consent which the Company deems necessary under
any applicable law (including, without limitation, state securities or "blue
sky" laws).

15.  DISSOLUTION OR LIQUIDATION OF THE COMPANY.
     ----------------------------------------- 

     Upon the dissolution or liquidation of the Company, all Options granted
under this Plan which as of such date shall not have been exercised will
terminate and become null and void; provided, however, that if the rights of a
Participant or a Participant's Survivors have not otherwise terminated and
expired, the Participant or the Participant's Survivors will have the right
immediately prior to such dissolution or liquidation to exercise any Option to
the extent that the Option is exercisable as of the date immediately prior to
such dissolution or liquidation.

                                     -13-
<PAGE>
 
16.  ADJUSTMENTS.
     ----------- 

     Upon the occurrence of any of the following events, a Participant's rights
with respect to any Option granted to him or her hereunder which have not
previously been exercised in full shall be adjusted as hereinafter provided,
unless otherwise specifically provided in the pertinent Option Agreement:

     A.   Stock Dividends and Stock Splits.  If the shares of Common Stock shall
          --------------------------------                                
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of such Option shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend. The number
of Shares subject to Non-Qualified Options to be granted to directors pursuant
to Paragraph 6(A)(e) shall also be proportionately adjusted upon the occurrence
of such events.

     B.   Consolidations or Mergers.  If the Company is to be consolidated with
          -------------------------                                       
or acquired by another entity in a merger, sale of all or substantially all of
the Company's assets or otherwise (an "Acquisition"), the Administrator or the
board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Options, either (i)
make appropriate provision for the continuation of such Options by substituting
on an equitable basis for the Shares then subject to such Options either the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition or securities of any successor or acquiring
entity; or (ii) upon written notice to the Participants, provide that all
Options must be exercised (either to the extent then exercisable or, at the
discretion of the Administrator, all Options being made fully exercisable for
purposes of this Subparagraph), within a specified number of days of the date of
such notice, at the end of which period the Options shall terminate; or (iii)
terminate all Options in exchange for a cash payment equal to the excess of the
Fair Market Value of the Shares subject to such Options (either to the extent
then exercisable or, at the discretion of the Administrator, all Options being
made fully exercisable for purposes of this Subparagraph) over the exercise
price thereof.

     C.   Recapitalization or Reorganization.  In the event of a 
          ----------------------------------                    
recapitalization or reorganization of the Company (other than a transaction
described in Subparagraph B above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares of
Common Stock, a Participant upon exercising an Option shall be entitled to
receive for the purchase price paid upon such exercise the securities he or she
would have received if he or she had exercised such Option prior to such
recapitalization or reorganization.

                                     -14-
<PAGE>
 
     D.   Modification of ISOs.  Notwithstanding the foregoing, any adjustments
          --------------------                                     
made pursuant to Subparagraph A, B or C with respect to ISOs shall be made only
after the Administrator, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Administrator
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs, it may refrain from making such adjustments, unless
the holder of an ISO specifically requests in writing that such adjustment be
made and such writing indicates that the holder has full knowledge of the
consequences of such "modification" on his or her income tax treatment with
respect to the ISO.

17.  ISSUANCES OF SECURITIES.
     ----------------------- 

     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 subject to Options. Except as
expressly provided herein, no adjustments shall be made for dividends paid in
cash or in property (including without limitation, securities) of the Company.

18.  FRACTIONAL SHARES.
     ----------------- 

     No fractional share shall be issued under the Plan and the person
exercising such right shall receive from the Company cash in lieu of such
fractional share equal to the Fair Market Value thereof.

19.  CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs.
     ------------------------------------------------------------------

     The Administrator, at the written request of any Participant, may in its
discretion take such actions as may be necessary to convert such Participant's
ISOs (or any portions thereof) that have not been exercised on the date of
conversion into Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the Participant is an employee of the Company
or an Affiliate at the time of such conversion. Such actions may include, but
not be limited to, extending the exercise period or reducing the exercise price
of the appropriate installments of such Options. At the time of such conversion,
the Administrator (with the consent of the Participant) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the
Administrator in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any Participant the right to have such Participant's ISOs converted into
Non-Qualified Options, and no such conversion shall occur until and unless the
Administrator takes appropriate action. The Administrator, with the consent of
the Participant, may also terminate any portion of any ISO that has not been
exercised at the time of such termination.

                                     -15-
<PAGE>
 
20.  WITHHOLDING.
     ----------- 

     In the event that any federal, state, or local income taxes, employment
taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other
amounts are required by applicable law or governmental regulation to be withheld
from the Option holder's salary, wages or other remuneration in connection with
the exercise of an Option or a Disqualifying Disposition (as defined in
Paragraph 21), the Option holder shall advance in cash to the Company, or to any
Affiliate of the Company which employs or employed the Option holder, the amount
of such withholdings unless a different withholding arrangement, including the
use of shares of the Company's Common Stock, is authorized by the Administrator
(and permitted by law), provided, however, that with respect to persons subject
to Section 16 of the 1934 Act, any such withholding arrangement shall be in
compliance with any applicable provisions of Rule 16b-3 promulgated under
Section 16 of the 1934 Act. For purposes hereof, the fair market value of the
shares withheld for purposes of payroll withholding shall be determined in the
manner provided in Paragraph 1 above, as of the most recent practicable date
prior to the date of exercise. If the fair market value of the shares withheld
is less than the amount of payroll withholdings required, the Option holder may
be required to advance the difference in cash to the Company or the Affiliate
employer. The Administrator in its discretion may condition the exercise of an
Option for less than the then Fair Market Value on the Participant's payment of
such additional withholding.

21.  NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
     ---------------------------------------------- 

     Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a Disqualifying Disposition of
any Shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such Shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired Shares by exercising the
ISO. If the Key Employee has died before such stock is sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.

22.  TERMINATION OF THE PLAN.
     ----------------------- 

     The Plan will terminate on March 4, 2006. The Plan may be terminated at an
earlier date by vote of the shareholders of the Company; provided, however, that
any such earlier termination will not affect any Options granted or Option
Agreements executed prior to the effective date of such termination.

                                     -16-
<PAGE>
 
23.  AMENDMENT OF THE PLAN AND AGREEMENTS.
     ------------------------------------ 

     The Plan may be amended by the shareholders of the Company. The Plan may
also be amended by the Administrator, including, without limitation, to the
extent necessary to qualify any or all outstanding Options granted under the
Plan or Options to be granted under the Plan for favorable federal income tax
treatment (including deferral of taxation upon exercise) as may be afforded
ISOs, to the extent necessary to ensure the qualification of the Plan under Rule
16b-3, at such time, if any, as the Company has a class of stock registered
pursuant to Section 12 of the 1934 Act, and to the extent necessary to qualify
the shares issuable upon exercise of any outstanding Options granted, or Options
to be granted, under the Plan for listing on any national securities exchange or
quotation in any national automated quotation system of securities dealers. Any
amendment approved by the Administrator which is of a scope that requires
shareholder approval in order to ensure favorable federal income tax treatment
for any ISOs or requires shareholder approval in order to ensure the compliance
of the Plan with Rule 16b-3 at such time, if any, as the Company has a class of
stock registered pursuant to Section 12 of the 1934 Act, shall be subject to
obtaining such shareholder approval. Any modification or amendment of the Plan
shall not, without the consent of a Participant, adversely affect his or her
rights under an Option previously granted to him or her. With the consent of the
Participant affected, the Administrator may amend outstanding Option Agreements
in a manner which may be adverse to the Participant but which is not
inconsistent with the Plan. In the discretion of the Administrator, outstanding
Option Agreements may be amended by the Administrator in a manner which is not
adverse to the Participant.

24.  EMPLOYMENT OR OTHER RELATIONSHIP.
     -------------------------------- 

     Nothing in this Plan or any Option Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or
her own employment, consultancy or director status or to give any Participant a
right to be retained in employment or other service by the Company or any
Affiliate for any period of time.

25.  GOVERNING LAW.
     ------------- 

     This Plan shall be construed and enforced in accordance with the law of The
Commonwealth of Massachusetts.

                                     -17-