Document:

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                                                                    EXHIBIT 10.2

                                  KYPHON INC.

                            1996 STOCK OPTION PLAN

      1.  Purposes of the Plan.  The purposes of this Stock Option Plan are to
          --------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.

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

         (a)  "Administrator" means the Board or any of its Committees appointed
               -------------
pursuant to Section 4 of the Plan.

         (b)  "Applicable Laws" means the legal requirements relating to the
               ---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code and the applicable laws of any
foreign country or jurisdiction where Options will be or are being granted under
the Plan.

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

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

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

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

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

         (h)  "Consultant" means any person who is engaged by the Company or any
               ----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.

         (i)  "Continuous Status as an Employee or Consultant" means that the
               ----------------------------------------------
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
<PAGE>

leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract, including Company policies. If reemployment upon expiration
of a leave of absence approved by the Company is not so guaranteed, on the 181st
day of such leave any Incentive Stock Option held by the Optionee shall cease to
be treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option.

         (j)  "Employee" means, any person, including Officers and directors,
               --------
employeed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.

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

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

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

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

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

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

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

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

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

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

         (r)  "Optionee" means an Employee or Consultant who receives an Option.
               --------

                                      -2-
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         (s)  "Parent" means a "parent corporation", whether now or hereafter
               ------
existing, as defined in Section 424(e) of the Code.

         (t)  "Plan" means this 1996 Stock Option Plan.
               ----

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

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

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

     3.  Stock Subject to the Plan.  Subject to the provisions of Section 11 of
         -------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.

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

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

         (a)  Initial Plan Procedure.  Prior to the date, if any, upon which the
              ----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a committee appointed by the Board.

         (b)  Plan Procedure after the Date, if any, upon Which the Company
              -------------------------------------------------------------
becomes Subject to the Exchange Act.
-----------------------------------

               (i)  Administration with Respect to Directors and Officers.  With
                    -----------------------------------------------------
respect to grants of Options to Employees who are also Officers or directors of
the Company, the Plan shall be administered by (A) the Board if the Board may
administer the Plan in compliance with the rules under Rule 16b-3 promulgated
under the Exchange Act or any successor thereto ("Rule 16b-3") relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made, or
(B) a Committee designated by the Board to administer the Plan, which Committee
shall be constituted to comply with the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made. Once
appointed, such Committee shall continue to serve in its designated capacity
until

                                      -3-
<PAGE>

otherwise directed by the Board. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
rules under Rule 16b-3 relating to the disinterested administration of employee
benefit plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made.

               (ii)  Multiple Administrative Bodies.  If permitted by Rule
                     ------------------------------
16b-3, the Plan may be administered by different bodies with respect to
directors, non-director Officers and Employees who are neither directors nor
Officers.

               (iii) Administration With Respect to Consultants and Other
                     ----------------------------------------------------
Employees. With respect to grants of Options to Employees or Consultants who are
---------
neither directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a committee designated by the Board, which committee shall
be constituted in such a manner as to satisfy Applicable Laws. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.

         (c)  Powers of the Administrator.  Subject to the provisions of the
              ---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the Common
Stock is listed, the Administrator shall have the authority, in its discretion:

               (i)   to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;

               (ii)  to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;

               (iii) to determine whether and to what extent Options are granted
hereunder;

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

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

               (vi)  to determine the terms and conditions of any award granted
hereunder;

                                      -4-
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               (vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;

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

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

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

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

         (a)  Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.

         (b)  Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.

         (c)  The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his or her right or the Company's right to
terminate his or her employment or consulting relationship at any time, with or
without cause.

     6.  Term of Plan.  The Plan shall become effective upon the earlier to
         ------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company, as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.

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

                                      -5-
<PAGE>

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

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

               (i)  In the case of an Incentive Stock Option

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

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

               (ii) In the case of a Nonstatutory Stock Option

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

                   (2)  granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.

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

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

         (a)  Procedure for Exercise; Rights as a Stockholder. Any Option
              -----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the

                                      -6-
<PAGE>

Administrator, including performance criteria with respect to the Company and/or
the Optionee, and as shall be permissible under the terms of the Plan, but in no
case at a rate of less than 20% per year over five (5) years from the date the
Option is granted.

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

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

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

         (b)  Termination of Employment or Consulting Relationship.  In the
              ----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company (but not in the event of an Optionee's change of
status from Employee to Consultant (in which case an Employee's Incentive Stock
Option shall automatically convert to a Nonstatutory Stock Option on the date
three (3) months and one day from the date of such change of status) or from
Consultant to Employee), such Optionee may, but only within such period of time
as is determined by the Administrator, of at least thirty (30) days, with such
determination in the case of an Incentive Stock Option not exceeding three (3)
months after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of such termination, or if
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.

         (c)  Disability of Optionee.  In the event of termination of an
              ----------------------
Optionee's consulting relationship or Continuous Status as an Employee as a
result of his or her disability, Optionee may, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination; provided, however, that if such disability is
not a "disability" as such term is defined in Section 22(e)(3) of the Code, in
the case of an Incentive Stock Option such Incentive Stock Option shall

                                      -7-
<PAGE>

automatically convert to a Nonstatutory Stock Option on the day three months and
one day following such termination. To the extent that Optionee is not entitled
to exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.

         (d)  Death of Optionee.  In the event of the death of an Optionee, the
              -----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.

         (e)  Rule 16b-3.  Options granted to persons subject to Section 16(b)
              ----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.

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

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

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

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

                                      -8-
<PAGE>

securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.

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

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

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

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

         (a)  Amendment and Termination.  The Board may at any time amend,
              -------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.

         (b)  Effect of Amendment or Termination.  Any such amendment or
              ----------------------------------
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between

                                      -9-
<PAGE>

the Optionee and the Administrator, which agreement must be in writing and
signed by the Optionee and the Company.

     14.  Conditions Upon Issuance of Shares.  Shares shall not be issued
          ----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.

     As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.

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

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

     16.  Agreements.  Options shall be evidenced by written agreements in such
          ----------
form as the Administrator shall approve from time to time.

     17.  Stockholder Approval.  Continuance of the Plan shall be subject to
          --------------------
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under Applicable Laws and the rules of any
stock exchange upon which the Common Stock is listed.

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

                                      -10-<PAGE>

                                                                    EXHIBIT 10.3

                                  KYPHON INC.
                                2000 STOCK PLAN

        1.  Purposes of the Plan.  The purposes of this 2000 Stock Plan are:
            --------------------

            .  to attract and retain the best available personnel for positions
               of substantial responsibility,

            .  to provide additional incentive to Employees, Directors and
               Consultants, and

            .  to promote the success of the Company's business.

            Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant.

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

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

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

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

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

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

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

            (g)  "Company" means Kyphon Inc., a Delaware Corporation.
                  -------

            (h)  "Consultant" means any natural person, including an advisor,
                  ----------
engaged by the Company or a Parent or Subsidiary to render services to such
entity.

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

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

            (k) "Employee" means any person, including Officers and Directors,
                 --------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to
<PAGE>

be an Employee in the case of (i) any leave of absence approved by the Company
or (ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. For purposes of Incentive Stock
Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment
upon expiration of a leave of absence approved by the Company is not so
guaranteed, then three (3) months following the 91st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.

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

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

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

                 (ii)   If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or

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

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

            (o)  "Inside Director" means a Director who is an Employee.
                  ---------------

            (p)  "IPO Effective Date" means the date upon which the Securities
                  ------------------
and Exchange Commission declares the Company's Registration Statement on
Form S-1 effective.

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

            (r)  "Notice of Grant" means a written or electronic notice
                  ---------------
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.

                                      -2-
<PAGE>

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

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

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

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

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

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

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

            (z)  "Plan" means this 2000 Stock Plan.
                  ----

            (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
                  ----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.

            (bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
                  -------------

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

            (dd) "Share" means a share of the Common Stock, as adjusted in
                  -----
accordance with Section 13 of the Plan.

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

        3.  Stock Subject to the Plan. Subject to the provisions of Section 13
            -------------------------
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 2,500,000 Shares, plus (a) any Shares which were reserved
but unissued under the Company's 1996 Stock Option Plan ("1996 Plan") as of the
date of stockholder approval of the original adoption of this Plan, (b) any
Shares subsequently returned to the 1996 Plan as a result of termination of
options or repurchase of Shares issued under the 1996 Plan, and (c) an annual
increase to be added on the first day of the Company's fiscal year, beginning
fiscal year 2001, equal to the lesser of (i) 3,000,000 Shares, (ii) 5% of the
outstanding Shares of Common Stock on the last day of the immediately preceding
fiscal year or (iii) an amount determined by the Board. The Shares may be
authorized, but unissued, or reacquired Common Stock.

            If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
             --------
the Plan upon exercise of an Option shall not be returned to the Plan and shall
not

                                      -3-
<PAGE>

become available for future distribution under the Plan, except that if
unvested Shares are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.

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

            (a)  Procedure.
                 ---------

                 (i)    Multiple Administrative Bodies. Different Committees
                        ------------------------------
with respect to different groups of Service Providers may administer the Plan.

                 (ii)   Section 162(m). To the extent that the Administrator
                         --------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.

                 (iii)  Rule 16b-3. To the extent desirable to qualify
                        ----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.

                 (iv)   Other Administration. Other than as provided above, the
                        --------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.

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

                 (i)    to determine the Fair Market Value;

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

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

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

                 (v)    to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;

                 (vi)   to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;

                                      -4-
<PAGE>

                 (vii)  to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of satisfying applicable foreign laws;

                 (viii) to modify or amend each Option (subject to Section
15(c) of the Plan), including the discretionary authority to extend the post-
termination exercisability period of Options longer than is otherwise provided
for in the Plan;

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

                 (x)    to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;

                 (xi)   to make all other determinations deemed necessary or
advisable for administering the Plan.

            (c)  Effect of Administrator's Decision. The Administrator's
                 ----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Shares issued under the Plan.

        5.  Eligibility.  Nonstatutory Stock Options may be granted to Service
            -----------
Providers.  Incentive Stock Options may be granted only to Employees.

        6.  Limitations.
            -----------

            (a)  Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.

            (b)  Neither the Plan nor any Option shall confer upon an Optionee
any right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.

            (c)  The following limitations shall apply to grants of Options:

                                      -5-
<PAGE>

                 (i)    No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 750,000 Shares.

                 (ii)   In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 2,000,000
Shares, which shall not count against the limit set forth in subsection (i)
above.

                 (iii)  The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.

        7.  Term of Plan. Subject to Section 19 of the Plan, the Plan shall
            ------------
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.

        8.  Term of Option. The term of each Option shall be stated in the
            --------------
Option Agreement. In the case of an Incentive Stock Option, the term shall be
ten (10) years from the date of grant or such shorter term as may be provided in
the Option Agreement. Moreover, in the case of an Incentive Stock Option granted
to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Option Agreement.

        9.  Option Exercise Price and Consideration.
            ---------------------------------------

            (a)  Exercise Price. The per share exercise price for the Shares to
                 --------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:

                 (i)    In the case of an Incentive Stock Option

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

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

                 (ii)   In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of
a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.

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

                                      -6-
<PAGE>

           (b)  Waiting Period and Exercise Dates. At the time an Option is
                ---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.

           (c)  Form of Consideration. The Administrator shall determine the
                ---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:

                 (i)    cash;

                 (ii)   check;

                 (iii)  promissory note;

                 (iv)   other Shares which, in the case of Shares acquired
directly or indirectly from the Company, (A) have been owned by the Optionee for
more than six (6) months on the date of surrender, and (B) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised;

                 (v)    consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;

                 (vi)   a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;

                 (vii)  any combination of the foregoing methods of payment; or

                 (viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.

Notwithstanding the foregoing, the Administrator may permit an Option to be
exercised by delivery of a full-recourse promissory note secured by the
purchased shares.  All other terms of such promissory note shall be determined
by the Administrator in its sole discretion.

        10.  Exercise of Option.
             ------------------

             (a)  Procedure for Exercise; Rights as a Stockholder. Any Option
                  -----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be suspended during any unpaid leave
of absence. An Option may not be exercised for a fraction of a Share.

                  An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the

                                      -7-
<PAGE>

Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.

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

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

            (c)  Disability of Optionee. If an Optionee ceases to be a Service
                 ----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

            (d)  Death of Optionee. If an Optionee dies while a Service
                 -----------------
Provider, the Option may be exercised following Optionee's death within such
period of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of death (but in no event may the option be
exercised later than the expiration of the term of such Option as set forth in
the Option Agreement) by the Optionee's designated beneficiary, provided such
beneficiary has been designated prior to Optionee's death in a form acceptable
by the Administrator. If no such beneficiary has been designated by the
Optionee, then such Option may be exercised by the personal representative of
the Optionee's estate or by the person(s) to whom the Option is transferred
pursuant to the Optionee's will or in accordance with the laws of descent and
distribution. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months

                                      -8-
<PAGE>

following Optionee's death. If, at the time of death, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. If the Option is
not so exercised within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.

        11.  Formula Option Grants to Outside Directors. Outside Directors shall
             ------------------------------------------
automatically be granted Options in accordance with the following provisions:

            (a)  All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.

            (b)  Each person who first becomes an Outside Director on or after
the IPO Effective Date, whether through election by the stockholders of the
Company or appointment by the Board to fill a vacancy, shall be automatically
granted an Option to purchase 30,000 Shares (the "First Option") on the date he
or she first becomes an Outside Director; provided, however, that an Inside
Director who ceases to be an Inside Director but who remains a Director shall
not receive a First Option.

            (c)  Each Outside Director shall be automatically granted an Option
to purchase 10,000 Shares (a "Subsequent Option") following each annual meeting
of the stockholders of the Company, except in the case of the first such annual
meeting after the IPO Effective Date if such annual meeting is held within six
(6) months of the IPO Effective Date, if as of such date, he or she shall
continue to serve on the Board and shall have served on the Board for at least
the preceding six (6) months.

            (d)  Notwithstanding the provisions of subsections (b) and (c)
hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 19 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 19 hereof.

            (e)  The terms of a First Option granted pursuant to this Section
shall be as follows:

                 (i)    the term of the First Option shall be ten (10) years.

                 (ii)   the First Option shall be exercisable only while the
Outside Director remains a Director of the Company.

                 (iii)  the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.

                 (iv)   subject to Section 13, the First Option shall become
exercisable as to 1/3 of the Shares subject to the First Option on each
anniversary of its date of grant, provided that the Optionee continues to serve
as a Director on such dates.

            (f)  The terms of a Subsequent Option granted hereunder shall be as
follows:

                                      -9-
<PAGE>

                 (i)    the term of the Subsequent Option shall be ten (10)
years.

                 (ii)   the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company.

                 (iii)  the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.

                 (iv)   subject to Section 13 hereof, the Subsequent Option
shall become exercisable as to 100% of the Shares subject to the Subsequent
Option on the third (3rd) anniversary of its date of grant, provided that the
Optionee continues to serve as a Director on such date.

        12.  Limited Transferability of Options. Unless determined otherwise by
             ----------------------------------
the Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.

        13.  Adjustments Upon Changes in Capitalization, Dissolution, Merger or
             ------------------------------------------------------------------
Asset Sale.
----------

             (a)  Changes in Capitalization. Subject to any required action by
                  -------------------------
the stockholders of the Company, the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, the number of Shares that may be added annually to the
Plan pursuant to Section 3(i), the number of shares granted under First Options
and Subsequent Options under Section 11, and the number of shares of Common
Stock covered by each outstanding Option as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.

            (b)  Dissolution or Liquidation. In the event of the proposed
                 --------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time

                                      -10-
<PAGE>

and in the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation of
such proposed action.

            (c)  Merger or Asset Sale. In the event of a merger of the Company
                 --------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.

        14.  Date of Grant. The date of grant of an Option shall be, for all
             -------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.

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

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

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

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

                                      -11-
<PAGE>

        16.  Conditions Upon Issuance of Shares.
             ----------------------------------

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

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

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

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

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

                                      -12-

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