Document:

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                                                                     EXHIBIT 4.2

               AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
               -------------------------------------------------

     This Amended and Restated Stockholder Rights Agreement ("Agreement") is
effective as of December 14, 1999 by and between Kyphon Inc., a Delaware
corporation, having its principal place of business at 3110 Coronado Drive,
Santa Clara, California 95054  ("Company") and the investors designated in
Exhibit A to this Agreement ("Investors").  This Agreement supersedes in its
entirety the Stockholder Rights Agreement entered into between the Company and
its investors dated December 11, 1998 (the "Prior Agreement").

     1.  Preemptive Rights
         -----------------

            1.1  Grant of Right. Except as set forth in Section 1.5, Company
                 --------------
hereby grants to each investor beneficially (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934 (the "Exchange Act") holding not less
than 250,000 shares of Series B, Series C, Series D or Series E Preferred Stock,
or a combination thereof, or the Common Stock issuable upon conversion thereof
("Major Holder") the right of first refusal to purchase such Investor's Pro Rata
Share (as hereinafter defined) of the New Securities (as defined in Section 1.2)
which the Company may, from time to time, propose to issue and sell. The Major
Holder may purchase said New Securities on the same terms and at the same price
in which the Company proposes to sell the New Securities. The "Pro Rata Share"
of each Major Holder, for purposes of this right of first refusal, is the ratio
of the number of shares of Registrable Securities (as hereinafter defined) the
Major Holder owns or has the right to acquire from the Company to the total
number of Shares (calculated as if converted into Common Stock) then
outstanding.

            1.2  New Securities. "New Securities" shall mean any capital stock
                 --------------
of the Company, whether now authorized or not, and any rights, options or
warrants to purchase said capital stock, and securities of any type whatsoever
that are, or may become, convertible into said capital stock; provided, however,
                                                              --------  -------
that "New Securities" does not include (i) any securities issued and outstanding
on the date hereof and any shares issued upon exercise or conversion of such
securities, (ii) securities offered pursuant to a registration statement filed
under the Securities Act of 1933 ("Securities Act"), (iii) securities issued as
consideration to the sellers pursuant to the acquisition of another corporation
by the Company by merger, purchase of substantially all of the assets or other
reorganization, and (iv) any securities hereafter issued or issuable to
officers, directors, employees or consultants of the Company (for the primary
purpose of soliciting or retaining their employment or services) pursuant to any
employee or consultant stock offering, plan or arrangement approved by the Board
of Directors.

            1.3  Notice.  In the event the Company proposes to undertake an
                 ------
issuance of New Securities, it shall give to the Major Holders written notice
(the "Notice") of its intention, describing the type of New Securities, number
of shares, the price, the terms upon which the Company proposes to issue the
same, such other information as the Major Holders may reasonably request in
order to evaluate the proposed issuance, and notice to the effect that each
Major Holder seeking to exercise pre-emptive rights must respond to such
Notice within 15 days after the date of receipt of such Notice to the Company.
The Major Holders shall have 30 days from the date of such Notice to
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purchase any or all of the New Securities for the price and upon the terms
specified in the Notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased and forwarding payment
for such New Securities to the Company if immediate payment is required by such
terms, or in any event no later than 45 days after the date of receipt of the
Notice. If all the New Securities offered to such Major Holders are not fully
subscribed by such Major Holders, the remaining New Securities will be reoffered
to the Major Holders purchasing their full allotment upon the terms set forth in
this Section 1.3, until all such New Securities are fully subscribed for or
until all such Major Holders have subscribed for all such New Securities which
they desire to purchase, except that such Major Holders must exercise their
purchase rights within 10 days after receipt of all such reoffers. To the extent
that the Company offers two or more securities in units, Major Holders must
purchase such units as a whole and will not be given the opportunity to purchase
only one of the securities making up such unit. The election by a Major Holder
not to exercise its preemptive rights under this Section 1 in any one instance
shall not affect its right (other than in respect of a reduction in its
percentage holdings) as to any subsequent proposed issuance. Any sale of such
securities by the Company without first giving the Major Holders the rights
described in this Section 1 shall be void and of no force and effect.

            1.4  Sale after Notice.  Upon the expiration of the offering periods
                 -----------------
described above, the Company shall have 90 days thereafter to sell or enter into
an agreement (pursuant to which the sale of New Securities covered thereby shall
be closed, if at all, within 30 days from the date of said agreement) to sell
the New Securities, at a price and upon general terms no more favorable to the
investors thereof than specified in the Notice. In the event the Company has not
sold the New Securities within said 90 day period (or sold and issued New
Securities in accordance with the foregoing within 30 days from the date of said
agreement), the Company shall not thereafter issue or sell any New Securities
without first offering such securities to the Major Holders in the manner
provided above.

            1.5  Expiration.  The right of first refusal granted under this
                 ----------
Section 1 shall expire upon:

                    (a)  The closing of the Company's sale of its Common Stock
in a bona fide, firm commitment underwritten public offering pursuant to a
registration statement declared effective by the Securities and Exchange
Commission under the Securities Act, the aggregate proceeds of which equal or
exceed $15,000,000 and the per share public offering price of which is not less
than $6.18 per share (adjusted to reflect any stock dividend, split, combination
or other recapitalization subsequent to the date hereof and exclusive of
underwriting discounts and the expenses of the offering);

                    (b)  The date on which the Company is acquired by another
entity by merger, purchase of substantially all of its assets or other
reorganization.

                    (c)  For each Major Holder, the date on which such Major
Holder no longer beneficially (within the meaning of Rule 13d-3 of the Exchange
Act) holds a minimum of 250,000 shares of Common Stock (including Common Stock
issuable upon the conversion of shares of Preferred Stock). In determining the
number of shares held by a Major Holder for the purposes of this Section 1.5(c),
the holdings of commonly managed funds of such Major Holder, partners,

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associates, employees and affiliates of such Major Holder or transferees and
assignees of such Major Holder that are commonly managed funds of such Major
Holder or retired partners, partners, associates, employees or affiliates of
such Investor (including spouses and ancestors, lineal descendants and siblings
of such partners, associates, employees or affiliates or spouses who acquire
Shares or Conversion Shares by gift, will or intestate succession) shall be
aggregated together with such Major Holder.

            1.6  Assignment.  The right of first refusal granted under this
                 ----------
Section 1 is assignable by each Major Holder to any transferee of a minimum of
250,000 shares of Common Stock (including Common Stock issuable upon the
conversion of shares of Preferred Stock) or to any transferee or assignee that
is a commonly managed fund of a Major Holder, a partner of a Major Holder
(without restriction as to minimum stockholdings) or the estate of such partner,
provided that (a) the Company is given prior written notice of such transfer and
(b) such transfer is otherwise effected in accordance with applicable securities
laws.

            1.7  Injunctive Relief.  The Company and the Major Holders hereby
                 -----------------
declare that it is impossible to measure in money the damages which will accrue
to the parties hereto by reason of the failure of any Major Holder to perform
any of its obligation set forth in this Section 1. Therefore, the Company and
the Major Holders shall have the right to specific performance of such
obligations, and if any party hereto shall institute any action or proceeding to
enforce the provisions hereof, each of the Company and the Major Holders hereby
waives the claims or defense that the party instructing such action or
proceeding has an adequate remedy at law.

     2.  Registration Rights.
         -------------------

            2.1  Certain Definitions.  As used in this Agreement, the following
                 -------------------
terms shall have the following respective meanings:

                    "Commission" shall mean the Securities and Exchange
                     ----------
Commission or any other federal agency at the time administering the Securities
Act.

                    "Holder" shall mean the entities holding Registrable
                     ------
Securities or securities convertible into Registrable Securities and any person
holding such securities to whom the rights under Section 2 have been transferred
in accordance with Section 2.10 hereof.

                    "Initiating Holders" shall mean any Holder or Holders who in
                     ------------------
the aggregate hold at least 50% of the Registrable Securities.

                    "Investor" shall mean each Investor named in the Series B,
                     --------
Series C, Series D or Series E Preferred Stock Purchase Agreement.

                    "Registrable Securities" means (i) any Common Stock issued
                     ----------------------
or issuable upon conversion of shares of Series B, Series C, Series D or Series
E Preferred Stock issued pursuant to the Series B, Series C, Series D or Series
E Preferred Stock Purchase Agreement, (ii) any additional Common Stock acquired
by the Investors, (iii) any Common Stock of the Company issued or issuable with
respect to, or in exchange for, such Common Stock referred to in (i), (ii) and
(iii) above, upon any stock dividend, split, combination or other
recapitalization; provided, however, that

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shares of Common Stock or other securities shall only be treated as Registrable
Securities for the purposes of this Section 2 hereof if and so long as they have
not been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction.

                    The terms "register," "registered" and "registration" refer
                               --------    ----------       ------------
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and any post-effective amendments filed or
required to be filed), and the declaration or ordering of the effectiveness of
such registration statement.

                    "Registration Expenses" shall mean all expenses, except as
                     ---------------------
otherwise stated below, incurred by the Company in complying with Sections 2.2,
2.3 and 2.4 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company).

                    "Restricted Securities" shall mean the securities of the
                     ---------------------
Company required to bear a legend indicating that transfer is restricted in the
absence of registration.

                    "Securities Act" shall mean the Securities Act of 1933, as
                     --------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.

                    "Selling Expenses" shall mean all underwriting discounts,
                     ----------------
selling commissions and stock transfer taxes, and costs of one special counsel
to the Holders in an amount not to exceed $10,000, if any, applicable to the
securities registered by the Holders.

            2.2  Requested Registration.
                 ----------------------

                    (a)  Request for Registration.  In case the Company shall
                         ------------------------
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to shares of Registrable
Securities representing at least fifty percent (50%) of the Registrable
Securities (or any lesser percentage if the anticipated aggregate offering price
to the public is at least $10,000,000), the Company will:

                         (i) within five days of the receipt by the Company of
such notice, give written notice of the proposed registration, qualification
or compliance to all other Holders; and

                         (ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or
regulations) as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request as are
specified in a written request received by the Company within 15 days after
the date of such written notice

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from the Company; provided, however, that the Company shall not be obligated
                  --------  -------
to take any action to effect any such registration, qualification or
compliance pursuant to this Section 2.2:

                         (1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;

                         (2) Prior to the earlier of December 31, 2004, or six
months after the closing date of the initial underwritten public offering of the
Company's securities;

                         (3) During the period starting with the date 30 days
prior to the Company's estimated date of filing of, and ending on the date three
months immediately following the effective date of, any registration statement
pertaining to securities of the Company (other than a registration statement
relating to the sale of the Company's securities in connection with a Rule 145
transaction, an employee benefit plan or the initial public offering of the
Company's securities), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;

                         (4) After the Company has effected two such
registrations pursuant to this Section 2.2(a), and such registrations have been
declared or ordered effective and the sales of such Registrable Securities shall
have closed;

                         (5) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company for a registration statement to be filed in the near future, then
the Company's obligation to use its best efforts to register, qualify or comply
under this Section 2.2 shall be deferred for a period not to exceed 90 days from
the date of receipt of written request from the Initiating Holders; provided,
                                                                    --------
however, that the Company shall not exercise such right more than once in any
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twelve-month period.

     Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, after receipt of the request or requests of
the Initiating Holders.

                    (b)  Underwriting.  In the event that a registration
                         ------------
pursuant to Section 2.2 is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part of the notice
given pursuant to Section 2.2(a)(i). In such event, the right of any Holder to
registration pursuant to Section 2.2 shall be conditioned upon such Holder's
participation in the underwriting arrangements required by this Section 2.2, and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested shall be limited to the extent provided herein.

     The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected pursuant to the final
paragraph of this Section 2.2(b).  Notwithstanding any

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other provision of this Section 2.2, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
holders of Registrable Securities and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders thereof in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities held by such Holders at the
time of filing the registration statement or in such other manner as shall be
agreed to by the Company and Holders of a majority of the Registrable Securities
proposed to be included in such registration; provided, however, that the number
                                              --------  -------
of Registrable Securities to be included in such underwriting shall not be
reduced unless all other securities are first entirely excluded from the
underwriting. No Registrable Securities excluded from the underwriting by reason
of the underwriter's marketing limitation shall be included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriters may round the number of shares
allocated to any Holder to the nearest 100 shares.

     If any Holder or Holders of Registrable Securities disapproves of the terms
of the underwriting, such Holder or Holders may elect to withdraw therefrom by
written notice to the Company, the managing underwriter and the Initiating
Holders.  The Registrable Securities and/or other securities so withdrawn shall
also be withdrawn from registration, and such Registrable Securities shall not
be transferred in a public distribution prior to 90 days after the effective
date of such registration, or such other shorter period of time as the
underwriters may require.

     In the event that the Initiating Holders exercise their registration rights
pursuant to Section 2.2 hereof, such Initiating Holders shall have the right to
select the managing underwriter with respect to such registration; provided,
however, that such managing underwriter shall be of recognized national standing
and shall be reasonably acceptable to the Company.

            2.3  Company Registration.
                 --------------------

                    (a)  Notice of Registration.  If at any time or from time to
                         ----------------------
time the Company shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, (ii) a registration
relating solely to a Rule 145 transaction or (iii) a registration pursuant to
Section 2.2 hereof, the Company will:

                         (i)  promptly give to each Holder written notice
thereof; and

                         (ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 20 days after receipt of such written
notice from the Company, by any Holder.

                    (b)  Underwriting.  If the registration of which the Company
                         ------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.3(a)(i). In such event the right of any Holder to
registration pursuant to Section 2.3 shall be conditioned upon such Holder's
participation

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in such underwriting and the inclusion of Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company. Notwithstanding any
other provision of this Section 2.3, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit or exclude some or all of the
Registrable Securities and other securities to be included in such registration.
The Company shall so advise all Holders distributing their securities through
such underwriting of such limitation and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders at the time of
filing the registration statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company may round the number of shares
allocated to any Holder or Holders to the nearest 100 shares.

     If any Holder or Holders disapproves of the terms of any such underwriting,
such Holder or Holders may elect to withdraw therefrom by written notice to the
Company and the managing underwriter.  Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to ninety (90) days after the
effective date of the registration statement relating thereto, or such other
shorter period of time as the underwriters may require.

                    (c)  Right to Terminate Registration.  The Company shall
                         -------------------------------
have the right to terminate or withdraw any registration initiated by it under
this Section 2.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by the
Company in accordance with Section 2.5 hereof.

            2.4  Registration on Form S-3.
                 ------------------------

                    (a)  Request for Registration.  If any Holder or Holders of
                         ------------------------
in excess of twenty percent (20%) of the Registrable Securities request that the
Company file a registration statement on Form S-3 (or any successor form to Form
S-3), or any similar short-term registration statement, for a public offering of
Registrable Securities, the reasonably anticipated aggregate price to the public
of which, net of underwriting discounts and commissions, would exceed $5,000,000
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered on such form for
the offering and to cause such Registrable Securities to be qualified in such
jurisdictions as the Holder or Holders may reasonably request; provided,
                                                               --------
however, that the Company shall not be required to effect more than three
-------
registrations pursuant to this Section 2.4 or more than one such registration in
any twelve (12) month period. After the Company's first public offering of its
securities, the Company will use its best efforts to qualify for Form S-3
registration or a similar short-form registration. The provisions of Section
2.2(b) shall be applicable to each registration initiated under this Section
2.4.

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                    (b)  Limitations.  Notwithstanding the foregoing, the
                         -----------
Company shall not be obligated to take any action pursuant to this Section 2.4:
(i) in any particular jurisdiction in which the Company would be required to
execute a general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act; (ii)
during the period starting with the date 180 days prior to the Company's
estimated date of filing of, and ending on the date 180 days immediately
following, the effective date of any registration statement pertaining to
securities of the Company (other than a registration statement relating solely
to the sale of the Company's securities in connection with a Rule 145
transaction or an employee benefit plan), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (iii) if the Company shall furnish to such
Holder a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to the Company or its stockholders for a registration statement to be filed in
the near future, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed 90 days from
the receipt of the request to file such registration statement by such Holder;
provided, however, that the Company shall not exercise such right more than once
--------  -------
in any twelve-month period.

            2.5  Expenses of Registration.  All Registration Expenses incurred
                 ------------------------
in connection with registrations pursuant to Sections 2.2, 2.3 and 2.4 shall be
borne by the Company. All Selling Expenses relating to securities registered on
behalf of the Holders shall be borne by the Holders of securities included in
such registration pro rata with the Company and among each other on the basis of
the number of shares so registered.

            2.6 Registration Procedures. In the case of each registration,
                -----------------------
qualification or compliance effected by the Company pursuant to this Section 2,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:

                    (a)  Registration Statement.  Prepare and file with the
                         ----------------------
Commission a registration statement with respect to such securities and use its
best efforts to cause such registration statement to become and remain effective
for at least 180 days or until the distribution described in the Registration
Statement has been completed.

                    (b)  Amendments.  Prepare and file with the Commission such
                         ----------
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement.

                    (c)  Copies.  Furnish to the Holders participating in such
                         ------
registration and to the underwriters of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities.

                    (d)  Underwriting Agreement.  In the event of any
                         ----------------------
underwritten public offering, enter into and perform its obligations under an
underwriting agreement, in usual and

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customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such agreement.

                    (e)  Blue Sky.  Use its best efforts to register and qualify
                         --------
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any state or jurisdiction.

                    (f)  Notice.  Notify each Holder of Registrable Securities
                         ------
covered by such registration statement (at any time when a prospectus relating
thereto is required to be delivered under the Act) of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

                    (g)  Opinion.  Furnish, at the request of any Holder
                         -------
requesting registration of Registrable Securities delivered to the underwriters
for sale in connection with a registration pursuant to this Section 2.6, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent accountants of the Company,
in form and substance as is customarily given by independent accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.

            2.7  Indemnification.
                 ---------------

                    (a)  Company Indemnification.  The Company will indemnify
                         -----------------------
each Holder, each of its officers, directors, partners and legal counsel, and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Section 2, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or any violation by the Company of
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or any rule or regulation promulgated under the Securities Act
or the Exchange Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will reimburse each
such Holder, each of its officers, directors, partners and legal counsel and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and

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any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder, controlling person or
underwriter and stated to be specifically for use therein.

                    (b)  Holder Indemnification.  Each Holder will, if
                         ----------------------
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors, officers, and legal counsel, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, and each other Holder, each of its
officers, directors, partners and legal counsel and each person controlling such
Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by such Holder of the
Securities Act or the Exchange Act or any rule or regulation promulgated under
the Securities Act or the Exchange Act applicable to such Holder in connection
with any such registration, qualification or compliance, and such Holder will
reimburse the Company, such Holders, such directors, officers, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
liability of each Holder under this subsection (b) shall be limited to an amount
equal to the net proceeds to each such Holder of Registrable Securities sold as
contemplated herein. A Holder will not be required to enter into any agreement
or undertaking in connection with any registration under this Section 2
providing for any indemnification or contribution on the part of such Holder
greater than the Holder's obligations under this Section 2.7(b).

                    (c)  Procedure.  Each party entitled to indemnification
                         ---------
under this Section 2.7 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 2 unless the failure to
give such notice is

                                      -10-
<PAGE>

materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which the Indemnified Party shall have reasonably concluded
that there may be a conflict of interest or separate and different defenses but
shall bear the expense of such defense nevertheless. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.

     Each Indemnified party shall furnish such information regarding itself or
the claim in question as an Indemnifying Party may reasonably request in writing
and as shall be reasonably required in connection with the defense of such claim
and litigation resulting therefrom.

                    (d)  If the indemnification provided for in this Section 2.7
is held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable but such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue (or alleged untrue) statement of a material fact or the
omission (or alleged omission) to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

            2.8  Information by Holder.  The Holder or Holders of Registrable
                 ---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 2.

            2.9  Rule 144 Reporting.  With a view to making available the
                 ------------------
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to use its best efforts to:

                    (a)  Public Information.  Make and keep public information
                         ------------------
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times after the effective date that the Company becomes
subject to the reporting requirements of the Securities Act or the Exchange Act.

                    (b)  Filing of Reports.  Use its best efforts to file with
                         -----------------
the Commission in a timely manner all reports and other documents required of
the Company under the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements);

                                      -11-
<PAGE>

                    (c)  Compliance Certificate.  So long as an Investor owns
                         ----------------------
any Restricted Securities, to furnish to such Investor forthwith upon request a
written statement by the Company as to its compliance with the reporting
requirements of said Rule 144 (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company for an
offering of its securities to the general public), and of the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as such
Investor may reasonably request in availing itself of any rule or regulation of
the Commission allowing such Investor to sell any such securities without
registration.

            2.10  Transfer of Registration Rights.  The rights to cause the
                  -------------------------------
Company to register securities granted Holders under Sections 2.2, 2.3 and 2.4
may be assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Holder, or to any transferee or
assignee that is a commonly managed fund of a Holder, a partner of a Holder
(without restriction as to minimum stockholdings) or the estate of such partner,
provided that (a) the Company is given prior written notice of such transfer,
(b) such transfer is otherwise effected in accordance with applicable securities
law and (c) the transferree or assignee receives at least 250,000 shares of
Registrable Securities in such transfer.

            2.11  Market Stand-off Agreement.  Each Holder agrees in connection
                  --------------------------
with the Company's initial public offering of the Company's securities, upon
request of the Company or the underwriters managing any underwritten offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time (not to exceed 180 days) days from the effective date of such
registration as may be requested by the underwriters. Provided, additionally,
                                                      --------  ------------
that the officers and directors of the Company who own stock of the Company also
agree to such restrictions.

            2.12  Rule 144A Information.  Whenever the Company receives from a
                  ---------------------
Holder a request for information required pursuant to Rule 144A(d)(4), then the
Company shall within 30 days after the date of such request provide such
information to such Holder and any person or persons designated by such Holder
as a prospective buyer in a transaction pursuant to Rule 144A. The Company's
obligations pursuant to this Section 2.12 shall extend to any person who
acquires shares of the Company's Preferred Stock, and/or Conversion Shares as a
result of a transaction pursuant to Rule 144A.

            2.13  Termination of Registration Rights.  The rights granted under
                  ----------------------------------
this Section 2 shall terminate on the seventh anniversary of the closing date of
the initial underwritten public offering of the Company's securities pursuant to
a registration statement declared effective under the Securities Act.

                                      -12-
<PAGE>

     3.  Voting Covenants.
         ----------------

            3.1  Agreement to Vote.  Each of the Investors (and their permitted
                 -----------------
assigns) hereby agrees to vote all their shares of the Company's Preferred Stock
now or hereafter owned by it, whether beneficially or otherwise, at any regular
or special meeting of stockholders of the Company, or, in lieu of any such
meeting, to give their written consent, as provided in this Section 3.

            3.2  Voting Events.  If there shall be submitted to the stockholders
                 -------------
of the Company any proposal concerning the election or removal of directors of
the Company, the Investors (and their permitted assigns) shall vote or act with
respect to all their Preferred Stock so as to elect to the board of directors of
the Company as the three directors to be elected by the holders of Series B,
Series C, Series D and Series E Preferred Stock in accordance with Section
V.4(b) of the Company's Amended and Restated Certificate of Incorporation, the
(i) one designee designated by E.M. Warburg, Pincus & Co., L.L.C., or any of its
affiliated entities, subsidiaries, partners or funds, including, but not limited
to, Warburg, Pincus Ventures, L.P. (collectively, "Warburg, Pincus"), (ii) one
designee designated by Vertical Fund Associates, L.P., or any of its affiliated
entities, subsidiaries, partners or funds, and (iii) one designee designated by
Investor (Guernsey) Ltd., or any of its affiliated entities, subsidiaries,
partners or funds. The holders of the Common Stock and Series A Preferred Stock,
voting together as a single class, shall be entitled to elect two directors, and
the holders of Common Stock and Series A, Series B, Series C, Series D and
Series E Preferred Stock, voting together as a single class, shall be entitled
to elect all remaining directors. The requirement that the Investors vote their
shares in favor of Warburg, Pincus, Vertical Fund or Investor (Guernsey) Ltd.,
shall terminate as to such entity upon such entity's sale or transfer of more
than 25% of its holdings in the aggregate of Series B, Series C, Series D and
Series E Preferred Stock. No amendment to this Section 3.2 that waives,
modifies, amends or terminates the right of an entity to nominate a designee to
the board of directors shall be effective without the express written consent of
such entity.

            3.3  Successors in Interest.  The provisions of this Section 3 shall
                 ----------------------
be binding upon the successors in interest of any of the Series B, Series C,
Series D or Series E Shares. The Company shall not permit the transfer of any
Series B, Series C, Series D or Series E Shares on its books or issue a new
certificate representing any Series B, Series C, Series D or Series E Shares
unless and until the person to whom such security is transferred shall have
executed a written agreement pursuant to which such person becomes subject to
the provisions of this Section 3 and agrees to be bound by all the provisions
hereof.

            3.4  Voting Legend.  Each certificate representing any Series B,
                 -------------
Series C, Series D or Series E Shares shall be endorsed by the Company with a
legend reading as follows:

     THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT CONTAINED IN
     A STOCKHOLDER RIGHTS AGREEMENT (A COPY OF WHICH MAY BE OBTAINED FROM THE
     COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES, THE PERSON
     ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND
     BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT.

                                      -13-
<PAGE>

            3.5  Conversion Stock.  The provisions of this Section 3 shall not
                 ----------------
apply to any shares of Common Stock issued or issuable upon conversion of the
Series B, Series C, Series D or Series E Shares.

            3.6  Voting of Shares by Warburg, Pincus.  Notwithstanding any other
                 -----------------------------------
provision to the contrary, in the event that at any time Warburg Pincus
beneficially owns more than 49% of the issued and outstanding voting securities
of the Company, including for this purpose all securities owned by Warburg,
Pincus that are convertible into or exchangeable for voting securities of the
Company ("Voting Stock"), Warburg, Pincus agrees that (i) it shall be entitled
to vote (or take action by written consent in respect of) not more than 49% of
the issued and outstanding shares of Voting Stock, (ii) it will vote (or take
action by written consent in respect of) any shares in excess of 49% of the
Voting Stock ("Neutral Shares") in proportion to the vote of all other holders
of Voting Stock voting (or acting by written consent) on such matter, unless
Warburg, Pincus elects to abstain from voting in respect of the Neutral Shares
and (iii) it shall not vote its shares in favor of the election of Warburg,
Pincus to hold a majority of the seats on the Board of Directors of the Company.

     4.  Information and Inspection Rights
         ---------------------------------

            4.1  Financial Information.  As long as each Investor holds
                 ---------------------
beneficially (within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934 (the "Exchange Act")) not less than 250,000 shares of Common Stock
(including Common Stock issuable upon conversion of shares of Preferred Stock),
the Company will provide such Investor the reports specified in this Section:

                    (a)  As soon as practicable after the end of each fiscal
year, and in any event within ninety (90) days thereafter, balance sheets of the
Company, as of the end of such fiscal year, and statements of operations,
stockholders' equity and cash flows of the Company, for such year, prepared in
accordance with generally accepted accounting principles and setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail and audited (without qualification) by independent auditors of
national standing selected by the Company, which opinion shall state that such
financial statements fairly present the financial position of the Company on a
consolidated basis and have been prepared in accordance with generally accepted
accounting procedures.

                    (b)  As soon as practicable after the end of each month and
in any event within thirty (30) days thereafter, a balance sheet of the Company
as of the end of each such month, and statements of operations and cash flows of
the Company and its subsidiaries for such period and for the current fiscal year
to date, and setting forth in comparative form the budgeted figures for such
period and for the current fiscal year then reported, prepared in accordance
with generally accepted accounting principles (other than for accompanying
notes), subject to changes resulting from year-end audit adjustments, all in
reasonable detail.

                    (c)  A copy of the annual operating plan of the Company for
the next fiscal year and an annual budget of the Company for the next fiscal
year containing profit and loss projections, cash flow projections and capital
expenditures, all on a monthly basis, as soon as each is available but in any
event prior to the end of the then current fiscal year.

                                      -14-
<PAGE>

                    (d)  With reasonable promptness, the Company shall furnish
each such Investor with such other data and information as from time to time may
be reasonably requested.

            4.2  Inspection.  As long as each Investor beneficially (within the
                 ----------
meaning of Rule 13d-3 under the Exchange Act) holds not less than 250,000 shares
of Common Stock (including Common Stock issuable upon conversion of shares of
Preferred Stock), the Company shall permit such Investor, at such Investor's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, and to receive copies of the minutes of meetings of the
Company's Board of Directors, all at such reasonable times as may be requested
by the Investor, provided, however, that the Company shall not be obligated
pursuant to this Section 4.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
Notwithstanding the foregoing, if an Investor has a representative on the
Company's Board of Directors, the Company shall not withhold such confidential
information from such representative.

            4.3  Termination and Amendment of Covenants.  The covenants set
                 --------------------------------------
forth in Sections 4.1 and 4.2 (i) may not be amended so as to remove or restrict
an Investor's rights thereunder without such Investor's written consent and (ii)
shall terminate and be of no further force or effect at such time as the Company
is required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended. The Information and Inspection Rights
covenants contained in the stock purchase agreement executed at the time of the
Prior Agreement are hereby terminated and superceded by this Section 4.

            4.4  Indemnification of Officers and Directors.  For at least as
                 -----------------------------------------
long as any representative or representatives of the Investors serve on the
Board of Directors of the Company, the Company shall indemnify its officers and
directors to the fullest extent permitted by law.

     5.  Waiver.  The parties to the Prior Agreement hereby waive any preemptive
         ------
rights contained in Section 1 of the Prior Agreement that have accrued as a
result of or prior to the sale of the Shares.

     6.  Miscellaneous Provisions.
         ------------------------

            6.1  Notices.  All notices and other communications required or
                 -------
permitted hereunder shall be in writing and, except as otherwise noted herein,
shall be deemed effectively given upon personal delivery, delivery by nationally
recognized courier or upon deposit with the United States Post Office, (by first
class mail, postage prepaid) addressed: (a) if to the Company, at the address
set forth at the beginning of this Agreement, or as furnished by the Company to
the Holders in writing, attention of President and (b) if to a Holder, at the
latest address of such person shown on the Company's records.

            6.2  Descriptive Headings.  The descriptive headings herein have
                 --------------------
been inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provisions hereof.

                                      -15-
<PAGE>

            6.3  Governing Law.  This Agreement shall be governed by and
                 -------------
interpreted under the laws of the State of Delaware as applied to agreements
among Delaware residents, made and to be performed entirely within the State of
Delaware.

            6.4  Restrictive Legend.  In addition to any other legends required
                 ------------------
under this or other agreements with the Investors, each certificate issued to
such Investor shall be stamped or otherwise imprinted with a legend in
substantially the following form:

     THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED
     BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN
     STOCKHOLDER RIGHTS AGREEMENT BY AND BETWEEN THE CORPORATION AND CERTAIN
     STOCKHOLDERS OF THE CORPORATION.  COPIES OF SUCH AGREEMENTS MAY BE OBTAINED
     UPON REQUEST TO THE SECRETARY OF THE CORPORATION.

     Each Investor agrees that the Company may instruct its transfer agent to
impose transfer restrictions on the shares represented by the certificates
bearing the above legend to enforce the provisions of this Agreement.  Such
legend shall be removed upon termination of this Agreement.

            6.5  Counterparts.  This Agreement may be executed in one or more
                 ------------
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument, but only one of which
need be produced.

            6.6  Expenses.  If any action at law or in equity is necessary to
                 --------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.

            6.7  Waivers and Amendments.  Except as otherwise expressly provided
                 ----------------------
in this Agreement, with the written consent of the record holders of more than
50% of the Registrable Securities (determined assuming conversion or exercise of
all instruments convertible into or exercisable for Conversion Shares), and
which shall in any event include the consent of two-thirds of the outstanding
shares of Series B, Series C, Series D and Series E Preferred Stock, voting as a
single class, the obligations of the Company and the rights under this Agreement
may be waived and this Agreement may be amended, provided that the effect of
such waiver or amendment affects all holders of Registrable Securities on a
comparable basis; provided further, that no such waiver or amendment shall
reduce such percentage without the consent of the holders of all Registrable
Securities. This Agreement may be amended and its provisions waived only by a
signed statement in writing.

            6.8  Successors and Assigns.  Except as otherwise expressly provided
                 ----------------------
in this Agreement, this Agreement shall benefit and bind the successors,
assigns, heirs, executors and administrators of the parties to this Agreement.

            6.9  Entire Agreement.  This Agreement constitutes the full and
                 ----------------
entire understanding and agreement between the parties with regard to the
subject matter of this Agreement.

                                      -16-
<PAGE>

            6.10  Separability; Severability.  Unless expressly provided in this
                  --------------------------
Agreement, the rights of each Investor under this Agreement are several rights,
not rights jointly held with any other Investors. Any invalidity, illegality or
limitation on the enforceability of this Agreement with respect to any Investor
shall not affect the validity, legality or enforceability of this Agreement with
respect to the other Investors. If any provision of this Agreement is judicially
determined to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not be affected or impaired.

            6.11  Stock Splits.  All references to numbers of shares in this
                  ------------
Agreement shall be appropriately adjusted to reflect any stock dividend, split,
combination or other recapitalization of shares by the Company occurring after
the date of this Agreement.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]

                                      -17-
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.

COMPANY:

KYPHON INC.
a Delaware corporation

By: /s/ RICHARD D. MURDOCK
    -----------------------------
    Richard D. Murdock, President

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

____________________________________
(the exact name as it should appear on your stock certificate)

By:_________________________________

Name:_______________________________

Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

INVESTOR (GUERNSEY) LTD.

By:    /s/ DAVID JEFFREYS
     -------------------------------

Name:  David Jeffreys
     _______________________________

Title:  Managing Director
      ______________________________

INVESTOR (GUERNSEY) LTD.

By:    /s/ MARC HOLLANDER
     -------------------------------

Name:  Marc Hollander
     _______________________________

Title:  Managing Director
      ______________________________

Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

______________________________________
Drs. Elizabeth Reiley and Terry Hensle

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

/s/ JAMES REILEY
---------------------------
James Reiley

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

THE REILEY FAMILY TRUST

/s/ EARLE W. REILEY JR.
____________________________________
Earle W. Reiley, Jr., Trustee

/s/ TERESA D. REILEY
____________________________________
Teresa D. Reiley, Trustee

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ TIM REILEY
____________________________________
Tim Reiley, Ph.D.

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

Richard B. Talmadge or
Bobbie J. Talmadge,
Trustee of the Talmadge
Family Trust, dated 31 July 1991

    /s/ RICHARD B. TALMADGE
By:_________________________________
   Trustee

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

VERTICAL FUND ASSOCIATES, L.P.
By: The Vertical Group, General Partner

    /s/ JOHN E. RUNNELLS
By:_________________________________

        John E. Runnels
Name:_______________________________

        General Partner
Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co., General Partner

    /s/ ILLEGIBLE
By:_________________________________

Name:_______________________________

Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

WS INVESTMENTS CO. 96B & 97B

    /s/ J. CASEY MCGLYNN
By:_________________________________

Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

TRUSTEES, WSGR RETIREMENT PLAN, FBO
J. CASEY MCGLYNN

By:_________________________________
   Douglas M. Laurice, Trustee

By:_________________________________
   Mario M. Rosati, Trustee

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ HANSEN YUAN
____________________________________
Hansen Yuan, M.D.

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ TERRY E. SPRAKER
____________________________________
Terry E. Spraker

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

Jonathan and Tracy Ellman, Joint
Trustees with Right of Survivorship

       /s/  JONATHAN ELLMAN
By:_________________________________
   Trustee

       /s/  TRACY ELLMAN
By:_________________________________
   Trustee

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

SIX C'S INVESTMENT CORP.

    /s/ ILLEGIBLE
By:_________________________________

Title:______________________________

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ KURT C. WHEELER
____________________________________
Kurt C. Wheeler

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ ROBERT L. SCRIBNER
____________________________________
Robert L. Scribner, M.D.

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>
/s/ ROBERT M. SCRIBNER
____________________________________
Robert M. Scribner

KYPHON INC.
STOCKHOLDER RIGHTS AGREEMENT
<PAGE>

                                   EXHIBIT A

                             SCHEDULE OF INVESTORS

                               Name and Address
--------------------------------------------------------------------------------
Investor (Guernsey) Ltd.
National Westminster House
Le Truchot St. Peter Port
Guernsey Channel Islands
GY1 4PW U.K.
Attn:  Mr. David Jeffreys

With a copy to:

Expibel BV
World Trade Center
Strawinskylaan 507 A Tower
Floor 5
1077 XX Amsterdam
The Netherlands
Attn:  Mr. Marc Hollander

Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, NY 10017
Attn.: Elizabeth H. Weatherman

Vertical Fund Associates, L.P.
18 Bank Street
Summit, NJ  07901
Attn.: Jack W. Lasersohn

WS Investment Company 96B
650 Page Mill Road
Palo Alto, CA  94304-1050

WS Investment Company 97B
650 Page Mill Road
Palo Alto, CA  94304-1050

Trustee, WSGR Retirement Plan, fbo
J. Casey McGlynn
650 Page Mill Road
Palo Alto, CA  94304-1050

Richard Talmadge or
Bobbie J. Talmadge,
<PAGE>

                               Name and Address
--------------------------------------------------------------------------------
Trustee of the Talmadge
Family Trust, dated 31 July 1991
100 Pasatiempo Dr.
Santa Cruz, CA  95060

Drs. Elizabeth Reiley and Terry Hensle
45 Sunset Ct.
Haworth, NJ 07641

Tim Reiley, Ph.D.
16865 Kennedy Rd.
Los Gatos, CA 95032

James Reiley
7643 SW Chase Lane
Portland, OR 97223

The Reiley Family Trust,
Earle W. Reiley, Jr. and
Teresa D. Reiley, Trustees
3606 Barrington
San Antonio, TX  78217

Six C's Investment Corp.
Joseph Ciffolillo
31 Brimmer Street
Boston, MA  02108

Hansen Yuan, M.D.
5066 Pine Valley Drive
Fayetteville, NY  13066

Karen K. Frederickson
7772 Broadfield Road
Manlius, NY  13104

Jonathan and Tracy Ellman,
Joint Trustees with Right of
Survivorship
64 Scenic Drive
Orinda, CA  94563

Kurt C. Wheeler
3248 48th Place NE
Medina, WA 98039

Robert L. Scribner, M.D.
43 Grey Lane
<PAGE>

                               Name and Address
--------------------------------------------------------------------------------
Lynnfield, MA  01940

Robert M. Scribner
1960 Colleen Drive
Los Altos, CA  94024<PAGE>

                                                                    EXHIBIT 10.1

                                  KYPHON INC.

                           INDEMNIFICATION AGREEMENT

     This Indemnification Agreement ("Agreement") is effective as of
_______________, 2000 by and between Kyphon Inc., a Delaware corporation (the
"Company"), and __________________ ("Indemnitee").

     WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;

     WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;

     WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance,
and the general reductions in the coverage of such insurance;

     WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and

     WHEREAS, the Company and Indemnitee desire to have in place the additional
protection provided by an indemnification agreement to provide indemnification
and advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;

     WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;

     NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.

     1.  Certain Definitions.
         -------------------

         (a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) or group acting in concert, other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the
<PAGE>

"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the
total voting power represented by the Company's then outstanding Voting
Securities, (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote
of at least two thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof, (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of (in one transaction or
a series of related transactions) all or substantially all of the Company's
assets.

         (b) "Claim" shall mean with respect to a Covered Event:  any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.

         (c) References to the "Company" shall include, in addition to Kyphon
Inc. any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger to which Kyphon Inc. (or any of its
wholly-owned subsidiaries) is a party which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, employees, agents or fiduciaries, so that if Indemnitee is or was a
director, officer, employee, agent or fiduciary of such constituent corporation,
or is or was serving at the request of such constituent corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.

         (d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.

                                      -2-
<PAGE>

         (e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.

         (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.

         (g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).

         (h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company"  as referred to in this Agreement.

         (i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Company's Board of Directors in
accordance with applicable law to review the Company's obligations hereunder and
under applicable law, which may include a member or members of the Company's
Board of Directors, Independent Legal Counsel or any other person or body not a
party to the particular Claim for which Indemnitee is seeking indemnification.

         (j) "Section" refers to a section of this Agreement unless otherwise
indicated.

         (k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.

                                      -3-
<PAGE>

     2.  Indemnification.
         ---------------

         (a) Indemnification of Expenses.  Subject to the provisions of Section
             ---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.

         (b) Review of Indemnification Obligations.  Notwithstanding the
             -------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made before such determination by such Reviewing
Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee
(who hereby agrees to reimburse the Company) for all Expenses theretofore paid
to Indemnitee to which Indemnitee is not entitled hereunder under applicable
law; provided, however, that if Indemnitee has commenced or thereafter commences
     --------  -------
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee is entitled to be indemnified hereunder under applicable law,
any determination made by any Reviewing Party that Indemnitee is not entitled to
be indemnified hereunder under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expenses
theretofore paid in indemnifying Indemnitee until a final judicial determination
is made with respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed).  Indemnitee's obligation to reimburse the Company for
any Expenses shall be unsecured and no interest shall be charged thereon.

         (c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
             --------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding.  Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.

         (d) Selection of Reviewing Party; Change in Control.  If there has not
             -----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately before such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by

                                      -4-
<PAGE>

Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be entitled to be indemnified hereunder under applicable law
and the Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
indemnify fully such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating
to this Agreement or its engagement pursuant hereto. Notwithstanding any other
provision of this Agreement, the Company shall not be required to pay Expenses
of more than one Independent Legal Counsel in connection with all matters
concerning a single Indemnitee, and such Independent Legal Counsel shall be
the Independent Legal Counsel for any or all other Indemnitees unless (i) the
employment of separate counsel by one or more Indemnitees has been previously
authorized by the Company in writing, or (ii) an Indemnitee shall have
provided to the Company a written statement that such Indemnitee has
reasonably concluded that there may be a conflict of interest between such
Indemnitee and the other Indemnitees with respect to the matters arising under
this Agreement.

         (e) Mandatory Payment of Expenses.  Notwithstanding any other
              -----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.

     3.  Expense Advances.
         ----------------

         (a) Obligation to Make Expense Advances.  Upon receipt of a written
             -----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.

         (b) Form of Undertaking.  Any obligation to repay any Expense Advances
             -------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.

         (c) Determination of Reasonable Expense Advances.  The parties agree
             --------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.

     4.  Procedures for Indemnification and Expense Advances.
         ---------------------------------------------------

         (a) Timing of Payments.  All payments of Expenses (including without
             ------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made

                                      -5-
<PAGE>

to the fullest extent permitted by law as soon as practicable after written
demand by Indemnitee therefor is presented to the Company, but in no event
later than thirty (30) business days after such written demand by Indemnitee
is presented to the Company, except in the case of Expense Advances, which
shall be made no later than ten (10) business days after such written demand
by Indemnitee is presented to the Company.

         (b) Notice/Cooperation by Indemnitee.  Indemnitee shall, as a
             --------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement.  Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee).  In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.

         (c) No Presumptions; Burden of Proof.  For purposes of this Agreement,
             --------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
                                                         ---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law.  In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, before the commencement of legal proceedings by Indemnitee to
secure a judicial determination that Indemnitee should be indemnified under this
Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief.  In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.

         (d) Notice to Insurers.  If, at the time of the receipt by the Company
             ------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies.  The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.

         (e) Selection of Counsel.  In the event the Company shall be obligated
             --------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the

                                      -6-
<PAGE>

delivery to Indemnitee of written notice of the Company's election to do so.
After delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees or expenses of separate counsel
subsequently retained by or on behalf of Indemnitee with respect to the same
Claim; provided that, (i) Indemnitee shall have the right to employ
Indemnitee's separate counsel in any such Claim at Indemnitee's expense and
(ii) if (A) the employment of separate counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and
expenses of Indemnitee's separate counsel shall be Expenses for which
Indemnitee may receive indemnification or Expense Advances hereunder.

     5.  Additional Indemnification Rights; Nonexclusivity.
         -------------------------------------------------

         (a) Scope.  The Company hereby agrees to indemnify the Indemnitee to
             -----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute.  In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change.  In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.

         (b) Nonexclusivity.  The indemnification and the payment of Expense
             --------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.

     6.  No Duplication of Payments.  The Company shall not be liable under this
         --------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.

                                      -7-
<PAGE>

     7.  Partial Indemnification.  If Indemnitee is entitled under any provision
         -----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.

     8.  Mutual Acknowledgment.  Both the Company and Indemnitee acknowledge
         ---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise.  Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.

     9.  Liability Insurance.  To the extent the Company maintains liability
         -------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.

     10.  Exceptions.  Notwithstanding any other provision of this Agreement,
          ----------
the Company shall not be obligated pursuant to the terms of this Agreement:

          (a) Excluded Action or Omissions.  To indemnify or make Expense
              ----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.

          (b) Claims Initiated by Indemnitee.  To indemnify or make Expense
              ------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Company's Board of Directors has approved the initiation or
bringing of such Claim, or (iii) as otherwise required under Section 145 of the
Delaware General Corporation Law, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, Expense Advances, or
insurance recovery, as the case may be.

          (c) Lack of Good Faith.  To indemnify Indemnitee for any Expenses
              ------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in

                                      -8-
<PAGE>

good faith or was frivolous, or (ii) by or in the name of the Company to
enforce or interpret this Agreement, if a court having jurisdiction over such
action determines as provided in Section 13 that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous.

          (d) Claims Under Section 16(b).  To indemnify Indemnitee for Expenses
              --------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.

     11.  Counterparts.  This Agreement may be executed in one or more
          ------------
counterparts, each of which shall constitute an original.

     12.  Binding Effect; Successors and Assigns.  This Agreement shall be
          --------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives.  The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place.  This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.

     13.  Expenses Incurred in Action Relating to Enforcement or Interpretation.
          ---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.  In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until

                                      -9-
<PAGE>

such final judicial determination is made, Indemnitee shall be entitled under
Section 3 to receive payment of Expense Advances hereunder with respect to
such action.

     14.  Period of Limitations.  No legal action shall be brought and no cause
          ---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
                                    --------  -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.

     15.  Notice.  All notices, requests, demands and other communications under
          ------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked.  Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.

     16.  Consent to Jurisdiction.  The Company and Indemnitee each hereby
          -----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.

     17.  Severability.  The provisions of this Agreement shall be severable in
          ------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.

     18.  Choice of Law.  This Agreement, and all rights, remedies, liabilities,
          -------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.

     19.  Subrogation.  In the event of payment under this Agreement, the
          -----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.

                                      -10-
<PAGE>

     20.  Amendment and Termination.  No amendment, modification, termination or
          -------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto.  No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.

     21.  Integration and Entire Agreement.  This Agreement sets forth the
          --------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.

     22.  No Construction as Employment Agreement.  Nothing contained in this
          ---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.

                                      -11-
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.

KYPHON INC.

By:         _______________________        AGREED TO AND ACCEPTED

Print Name: _______________________        INDEMNITEE:

Title:      _______________________
                                           _____________________________
Address:    1350 Bordeaux Drive            (signature)
            Sunnyvale, CA  94089
                                           Print Name:__________________

                                           Address:_____________________

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