<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended June 30, 2001

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from _____ to _____

                       Commission file number 000-26745

================================================================================

                          ORATEC INTERVENTIONS, INC.
            (Exact name of registrant as specified in its charter)

            Delaware                                    94-3180773
 (State or other jurisdiction of           (I.R.S. Employer Identification No.)
 incorporation or organization)

                               3700 Haven Court
                         Menlo Park, California 94025
         (Address of principal executive offices, including zip code)

                                (650) 369-9904
             (Registrant's telephone number, including area code)

================================================================================


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes [x] No [_]

     As of July 31, 2001, there were 23,076,993 shares of the registrant's
Common Stock outstanding.
<PAGE>

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
PART I.         FINANCIAL INFORMATION                                                       Page
<S>                                                                                         <C>
       Item 1.  Financial Statements (unaudited)

                Condensed Balance Sheets - June 30, 2001 and December 31, 2000..........     3

                Condensed Statements of Operations - Three and six months ended
                 June 30, 2001 and 2000.................................................     4

                Condensed Statements of Cash Flows - Six months ended
                 June 30, 2001 and 2000.................................................     5

                Notes to Condensed Financial Statements.................................     6

      Item 2.   Management's Discussion and Analysis of Financial Condition
                 and Results of Operations..............................................     8

      Item 3.   Quantitative and Qualitative Disclosures About Market Risk..............    18

PART II.        OTHER INFORMATION

      Item 1.   Legal Proceedings.......................................................    18

      Item 2.   Changes in Securities and Use of Proceeds...............................    18

      Item 3.   Defaults Upon Senior Securities.........................................    18

      Item 4.   Submission of Matters to a Vote of Security Holders.....................    18

      Item 5.   Other Information.......................................................    19

      Item 6.   Exhibits and Reports on Form 8-K........................................    19

SIGNATURES..............................................................................    19
</TABLE>

                                      -2-
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

                          ORATEC INTERVENTIONS, INC.
                           CONDENSED BALANCE SHEETS
                     (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                              June 30,             December 31,
                                                                                2001                   2000
                                                                             ---------             ------------
Assets                                                                      (unaudited)
<S>                                                                         <C>                    <C>
Current assets:
   Cash and cash equivalents.......................................           $ 31,161               $ 33,264
   Available-for-sale investments..................................             21,324                 16,683
   Accounts receivable, net........................................              8,520                  8,352
   Inventories.....................................................              5,569                  6,450
   Prepaid expenses................................................                858                  1,537
   Other current assets............................................              1,088                  1,787
                                                                              --------               --------
       Total current assets........................................             68,520                 68,073
Property and equipment, net........................................              9,449                  8,985
                                                                              --------               --------

                                                                              $ 77,969               $ 77,058
                                                                              ========               ========
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable................................................           $  1,503               $  1,175
   Accrued compensation and benefits...............................              2,172                  3,764
   Other accrued liabilities.......................................              1,760                  1,760
   Current portion of equipment financing obligations..............                 10                     22
                                                                              --------               --------
       Total current liabilities...................................              5,445                  6,721

Common stock, $0.001 par value.....................................                 23                     22
Additional paid-in capital.........................................            101,665                100,244
Deferred stock compensation........................................               (185)                  (230)
Receivable from stockholder........................................                (22)                   (49)
Accumulated other comprehensive income.............................                217                      -
Accumulated deficit................................................            (29,174)               (29,650)
                                                                              --------               --------
Stockholders' equity...............................................             72,524                 70,337
                                                                              --------               --------
                                                                              $ 77,969               $ 77,058
                                                                              ========               ========
</TABLE>

                            See accompanying notes.

                                      -3-
<PAGE>

                          ORATEC INTERVENTIONS, INC.
                      CONDENSED STATEMENTS OF OPERATIONS
               (In thousands, except per share data, unaudited)


<TABLE>
<CAPTION>
                                                    Three months ended                       Six months ended
                                                         June 30,                                June 30,
                                                 2001                 2000               2001               2000
                                               --------             --------           --------           --------
<S>                                            <C>                  <C>                <C>                <C>
Sales................................          $ 12,264             $ 13,563           $ 25,075           $ 26,226
Cost of sales........................             3,864                3,782              7,884              7,428
                                               --------             --------           --------           --------
Gross profit.........................             8,400                9,781             17,191             18,798
Operating expenses:
 Research and development............             1,465                1,486              2,893              2,804
 Sales and marketing.................             6,235                6,196             12,937             12,231
 General and administrative..........             1,068                1,239              2,041              2,274
 Stock compensation (1)..............                31                  661                213                920
                                               --------             --------           --------           --------
Total operating expenses.............             8,799                9,582             18,084             18,229
                                               --------             --------           --------           --------
Income (loss) from operations........              (399)                 199               (893)               569
Interest and other income............               665                  771              1,395                939
Interest and other expense...........                (2)                (303)                (3)              (624)
                                               --------             --------           --------           --------
Income before income taxes...........               264                  667                499                884
Provision for income taxes...........                13                   34                 25                 45
                                               --------             --------           --------           --------
Net income...........................          $    251             $    633           $    474           $    839
                                               ========             ========           ========           ========
Basic net income per share...........          $   0.01             $   0.03           $   0.02           $   0.07
                                               ========             ========           ========           ========
Diluted net income per share.........          $   0.01             $   0.03           $   0.02           $   0.04
                                               ========             ========           ========           ========
Shares used in computing basic net               22,976               21,138             22,823             12,847
 income per share....................
Shares used in computing diluted net             23,519               24,561             23,497             21,717
 income per share....................
</TABLE>

(1)  Stock compensation expense relates to research and development and sales
     and marketing expenses as follows:

     Research and development............        $ 31   $ 661   $  95   $ 920
     Sales and marketing.....................      --      --     118      --
                                                 ----   -----   -----   -----
                                                 $ 31   $ 661   $ 213   $ 920
                                                 ====   =====   =====   =====

                            See accompanying notes.

                                      -4-
<PAGE>

                           ORATEC INTERVENTIONS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                Increase (decrease) in cash and cash equivalents
                           (In thousands, unaudited)

<TABLE>
<CAPTION>
                                                                                         Six months ended
                                                                                             June 30,
                                                                                     --------------------------
                                                                                       2001              2000
                                                                                     --------         ---------
<S>                                                                                  <C>              <C>
Operating activities:
Net income.....................................................................      $    474         $     839

Adjustments to reconcile net income to net cash provided by (used) in
 operating activities:
       Depreciation and amortization...........................................         2,382             1,739
       Compensation expense for options granted to non-employees..................        168               920
       Amortization of stock compensation......................................            45               120
Changes in operating assets and liabilities:
       Accounts receivable.....................................................          (168)           (2,592)
       Inventories.............................................................           881            (1,896)
       Prepaid expenses and other current assets...............................         1,378              (677)
       Accounts payable........................................................           328               235
       Accrued compensation and benefits.......................................        (1,592)             (425)
       Other accrued liabilities...............................................            --               183
                                                                                     --------         ---------
               Net cash provided by (used in) operating activities.............         3,896              (704)
                                                                                     --------         ---------
Investing activities:
Purchases of available-for-sale investments....................................       (11,236)               --
Sales of available-for-sale investments........................................         6,812             2,931
Capital expenditures...........................................................        (2,846)           (5,727)
                                                                                     --------         ---------
               Net cash used in investing activities...........................        (7,270)           (2,796)

Financing activities:
Proceeds from issuance of common stock.........................................         1,256            60,025
Repayment of shareholder receivables...........................................            27                 9
Repayment of notes payable.....................................................            --              (498)
Repayment of bank borrowings...................................................            --            (3,427)
Repayment of equipment financing obligations...................................           (12)           (3,028)
                                                                                     --------         ---------
               Net cash provided by financing activities.......................         1,271            53,081
                                                                                     --------         ---------
Net increase (decrease) in cash and cash equivalents...........................        (2,103)           49,581
Cash and cash equivalents at beginning of period...............................        33,264             5,943
                                                                                     --------         ---------
Cash and cash equivalents at end of period.....................................      $ 31,161         $  55,524
                                                                                     ========         =========

Supplemental disclosure of cash flow information:
         Cash payments for interest............................................      $      3         $     609
                                                                                     ========         =========
</TABLE>
                            See accompanying notes.

                                      -5-
<PAGE>

                          ORATEC INTERVENTIONS, INC.
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (unaudited)

1.   Basis of Presentation:

     In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position, results
of operations and cash flows of ORATEC Interventions, Inc. for the periods
indicated.  Interim results of operations are not necessarily indicative of the
results to be expected for the full year or any other interim periods.  These
condensed financial statements should be read in conjunction with financial
statements for the year ended December 31, 2000 contained in our report on Form
10-K.  The balance sheet at December 31, 2000 was derived from audited financial
statements; however, the financial statements in this report are condensed and
do not include all disclosures required by generally accepted accounting
principles.

2.   Net Income Per Share:

     Basic net income per share is computed using the weighted-average number of
shares of stock outstanding during the period.  Diluted net income per common
share is computed using the weighted average number of common shares, redeemable
convertible preferred shares (on an as-converted basis) and common equivalent
shares outstanding during the period.  Common equivalent shares are computed
using the treasury stock method and consist of shares outstanding related to
stock options and warrants.  Common stock equivalents and redeemable convertible
preferred stock are excluded from the computation of diluted earnings per share
if their effect is anti-dilutive.

     The following is a reconciliation of the computation for basic and diluted
net income per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                           Three months ended        Six months ended
                                                                June 30,                 June 30,

                                                            2001         2000         2001        2000
                                                           ------       ------       ------      ------
<S>                                                      <C>          <C>          <C>         <C>
Net income............................................   $   251      $   633      $   474     $   839
                                                         =======      =======      =======     =======
Shares used in the calculation:
Weighted-average common shares outstanding
 used to compute basic net income per share..........     22,976       21,138       22,823      12,847
Weighted-average effect of dilutive securities:
 Options.............................................        523        2,567          653       2,567
 Warrants............................................         20          192           21         192
 Redeemable convertible preferred shares..............        --          664           --       6,111
                                                         -------      -------      -------     -------
Weighted-average shares used to compute diluted
 net income per share.................................    23,519       24,561       23,497      21,717
                                                         =======      =======      =======     =======
Net income per share:
Basic.................................................   $  0.01      $  0.03      $  0.02     $  0.07
                                                         =======      =======      =======     =======
Diluted...............................................   $  0.01      $  0.03      $  0.02     $  0.04
                                                         =======      =======      =======     =======
</TABLE>

     The Company issued 4,600,000 shares of common stock at the close of its
initial public offering on April 10, 2000.  At that time, all outstanding
convertible preferred stock converted to common stock.

3.   Comprehensive Income:

     The components of comprehensive income for the three and six month periods
ended June 30, 2001 and 2000 are as follows (in thousands):

                                      -6-
<PAGE>

<TABLE>
<CAPTION>
                                                     Three months ended         Six months ended
                                                          June 30,                  June 30,
                                                     2001          2000         2001         2000
                                                    ------        ------       ------       ------
<S>                                                 <C>           <C>          <C>          <C>
Net income........................................  $ 251         $ 633        $ 474        $ 839
Unrealized gain (loss) on available-for-sale
investments.......................................    (19)           --          217           --
                                                    -----         -----        -----        -----
                                                    $ 232         $ 633        $ 691        $ 839
                                                    =====         =====        =====        =====
</TABLE>

4.   Balance Sheet Detail (in thousands):

<TABLE>
<CAPTION>
                                                                       June 30,      December 31,
                                                                       --------      ------------
                                                                         2001            2000
                                                                         ----            ----
<S>                                                                    <C>           <C>
     Inventory:
         Raw materials..............................................    $2,261          $2,573
         Work-in-process............................................       114             189
         Finished goods.............................................     2,405           3,094
         Generators held for sale...................................       789             594
                                                                        ------          ------

     Total..........................................................    $5,569          $6,450
                                                                        ======          ======

     Other accrued liabilities:
         Accrued professional fees..................................    $  483          $  584
         Dealer commissions.........................................       423             349
         Clinical and development costs.............................       387             281
         Other..........                                                   467             546
                                                                        ------          ------

     Total..........................................................    $1,760          $1,760
                                                                        ======          ======
</TABLE>

5.   Recent Accounting Pronouncement:

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which requires all derivatives to be recognized as either assets
or liabilities on the balance sheet and to be measured at fair value.  Changes
in the fair value of derivatives will be recognized in net income unless
specific hedge accounting criteria are met.  SFAS 133 is effective for all
fiscal years beginning after June 15, 2000.  The adoption of SFAS 133 had no
material impact on the Company's financial statements.

     In June 2001, the FASB issued Statement No. 141 "Business Combinations"
("SFAS 141"), which eliminates the pooling-of-interests method of accounting for
business combinations.  SFAS 141 is effective for all business combinations
initiated after June 30, 2001.  The Company believes the adoption of SFAS 141
will not have a material impact on the Company's financial statements.

     In June 2001, the FASB issued Statement No. 142 "Goodwill and Intangible
Assets" ("SFAS 142"), which establishes new standards for goodwill and other
intangible assets, including the elimination of goodwill amortization, to be
replaced with  methods of periodic evaluation of goodwill for impairment.  SFAS
142 is effective for fiscal years beginning after December 15, 2001. The Company
believes that the adoption of SFAS 142 will not have a material impact on the
Company's financial statements.

                                      -7-
<PAGE>

6.   Segment Information:

     ORATEC's spine and arthroscopy product sales are as follows (in thousands):

<TABLE>
<CAPTION>
                                                      Three months ended         Six months ended
                                                           June 30,                  June 30,
                                                      ------------------         ----------------
                                                      2001          2000         2001        2000
                                                     ------        ------       ------      ------
      <S>                                          <C>           <C>          <C>         <C>
      Spine................................        $ 5,506       $ 7,286      $11,694     $14,045
      Arthroscopy..........................          6,758         6,277       13,381      12,181
                                                   -------       -------      -------     -------
                                                   $12,264       $13,563      $25,075     $26,226
                                                   =======       =======      =======     =======
</TABLE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties.  Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify such forward-looking statements.  These statements are not
guarantees of future performance and are subject to risks and uncertainties,
which could cause actual results to differ materially from those expressed or
forecasted.  Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Factors That May Affect
Future Results" and those appearing elsewhere in this Form 10-Q.  Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof.  The Company assumes
no obligation to update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting such forward-looking
statements.

Overview

     ORATEC Interventions develops and markets innovative medical devices that
use controlled thermal energy to treat spine and joint disorders. In December
1995 we gained FDA 510(k) clearance for our first product, our TAC probe for the
treatment of joint disorders.  In March 1997, after 18 months of funding
scientific and clinical studies, we formally launched this product at the
American Academy of Orthopedic Surgeons convention.  We received FDA 510(k)
clearance for our SpineCATH product in March 1998 and formally launched this
product at the North American Spine Society, or NASS, conference in October
1998.  In November 1999, we introduced our Vulcan ElectroThermal Arthroscopy
System.

     All of our revenues are generated from sales of our spine and arthroscopy
products.  For the six months ended June 30, 2001, 95% of our total sales were
derived from our disposable spine catheters and arthroscopy probes and 5% was
derived from sales of generators and accessories.  During the six months ended
June 30, 2001, we produced a profit of $474,000 compared to a profit of $839,000
for the six months ended June 30, 2000.  Our profitability is attributable to
both sales and interest earned on proceeds from our initial public offering in
April 2000.  At June 30, 2001 we had an accumulated deficit of $29.2 million.

     For the six months ended June 30, 2001, only 2% of our sales was derived
from markets outside the U.S., and we do not expect international sales to
increase significantly in the near future.  In international markets, we rely
exclusively on third party distributors.  Our gross margins on sales through
international third party distributors are less than our gross margins on U.S.
sales as a result of price discounts.  We have limited or no control over the
sales efforts of these third party distributors.

     We recognize revenue upon shipment of products to customers or, in some
instances, when inventory provided to customers by our employees and sales
agencies has been used at their facilities, as evidenced by receipt of a
purchase order.  As is common in the arthroscopy market, we have retained title
to the majority of arthroscopy generators, which we have placed with customers
for their use with our disposable arthroscopy probes.  In connection with the
market launch of our spine products, we have been

                                      -8-
<PAGE>

placing spine generators with customers for a demonstration period, after which
we convert these placements to sales.

     Our early product sales have mainly been to a group of early adopting
physicians who are receptive to minimally invasive techniques.  As we gain
market share, our opportunity for further market penetration may slow and
require additional sales efforts, longer term supporting clinical data, greater
reimbursement acceptance by payors, and further training, in order to convince
physicians who currently favor open surgery or other treatment alternatives to
switch to our minimally invasive procedures.

     Several large insurance companies have refused to reimburse for procedures
using our spine products.  If our customers continue to experience difficulty in
receiving reimbursement, they may refuse to use our products and we may be
unable to meet our revenue goals.

     The medical device market is litigious and in the ordinary course of
business we will become a party to product liability proceedings. We may also
become a party to patent proceedings.  The costs of such lawsuits may be
material and could affect our earnings and financial position. An adverse
outcome in a patent lawsuit could require us to cease sales of affected products
or to pay royalties, which could harm our results of operations.

     Our future growth depends on expanding our current markets and finding new
high growth markets in which we can leverage our core technologies of applying
thermal energy to treat soft tissue disorders.  To the extent any current or
additional markets do not materialize in accordance with our expectations, our
sales could be lower than expected.

Results of Operations

 Sales

     Arthroscopy sales increased 8% to $6.8 million in the three months ended
June 30, 2001 from $6.3 million for the three months ended June 30, 2000.  For
the six months ended June 30, 2001, arthroscopy sales increased 10% to $13.4
million compared to $12.2 million for the same period ended June 30, 2000.
Arthroscopy sales have increased due to the continuing market acceptance of our
Vulcan arthroscopy system and new product introductions, leading to greater
account penetration, increased probe utilization rates, and a higher number of
active customers.  Sales decreased in our spine business to $5.5 million for the
three months ended June 30, 2001 from $7.3 million for the three months ended
June 30, 2000, or 24%.  For the six months ended June 30, 2001, spine sales
decreased to $11.7 million compared to $14.0 million for the same period ended
June 30, 2000.  The decrease is due to lower unit shipments to customers who
continue to experience difficulty obtaining reimbursement from payors for the
IDET procedure.  The unit decline was partially offset by an increase in the
list price of the SpineCATH catheter and increases in the number of generators
placed in hospitals and clinics.  Sales overall decreased 10% to $12.3 million
for the three months ended June 30, 2001 from $13.6 million for the three months
ended June 30, 2000 and 4% to $25.1 million for the six months ended June 30,
2001, compared to $26.2 million for the same period ended June 30, 2000.

 Cost of sales

     Cost of sales increased to $3.9 million for the three months ended June 30,
2001, a 2% increase from $3.8 million for the three months ended June 30, 2000.
Cost of sales increased 6% for the six months ended June 30, 2001, or $7.9
million, compared to $7.4 million for the same period ended June 30, 2000.  The
increase in overall cost of goods sold between 2000 and 2001 is due primarily to
lower production volumes through our manufacturing operations resulting in
higher unit costs and increased inventory reserves.  Cost of sales consists of
material, labor and overhead costs, inventory reserves, as well as depreciation
on generators placed with customers for their use with our disposable products.

                                      -9-
<PAGE>

 Gross profit

     Gross profit decreased to $8.4 million, or 69% of sales, for the three
months ended June 30, 2001 from $9.8 million, or 72% of sales, for the three
months ended June 30, 2000.  For the six months ended June 30, 2001, gross
profit decreased to $17.2 million, a 9% decline from $18.8 million for the same
period ended June 30, 2000.  The decreases in gross profit are attributable to a
decline in sales and higher manufacturing costs.

 Research and development expenses

     Research and development expenses were stable at $1.5 million for the three
months ended June 30, 2001 and for the three months ended June 30, 2000.
Research and development expenses for the six months ended June 30, 2001 were
$2.9 million, a 3% increase from $2.8 million for the same period ended June 30,
2000.  The changes are related to the addition of headcount and office space for
increased development efforts on next-generation spine devices and advanced
arthroscopy probes, partially offset by discretionary expense management.
Research and development expenses consist of costs related to our research and
development, regulatory and clinical affairs functions, as well as costs
associated with scientific and clinical studies.  We expect to continue to make
substantial investments in research and development and anticipate that research
and development expenses will continue to increase in the future.

 Sales and marketing expenses

     Sales and marketing expenses were also stable at $6.2 million for the three
months ended June 30, 2001 and for the three months ended June 30, 2000.  Sales
and marketing expenses increased 6% for the six months ended June 30, 2001 to
$12.9 million, compared to $12.2 million for the same period ended June 30,
2000.  Increased expenses were primarily due to higher commission expenses
relating to sales compensation programs and expenses associated with our
reimbursement function, offset partially by a higher level of discretionary
expense management.  Sales and marketing expenses consist primarily of costs for
sales, marketing and reimbursement staff, sales commissions, medical conference
participation and physician training programs.  We anticipate that sales and
marketing expenses will increase as we continue to develop our sales and
reimbursement support staffs and expand our physician training programs.

 General and administrative expenses

     General and administrative expenses were $1.1 million for the three months
ended June 30, 2001, a 14% decrease from $1.2 million for the three months ended
June 30, 2000.  General and administrative expenses for the six months ended
June 30, 2001 decreased 10% to $2.0 million from $2.3 million for the same
period ended June 30, 2000.  The decrease in expenses was primarily due to
decreased headcount and lower reserves for bad debt based on our collection
experience, partially offset by higher expenses related to being a public
company.  General and administrative expenses consist primarily of personnel
costs, professional service fees, expenses related to intellectual property
rights and general corporate expenses.  We expect general and administrative
expenses to increase in the future as we add personnel, continue to expand our
patent portfolio and incur reporting and investor related expenses as a public
company.

 Stock compensation expense

     Stock compensation expense was $31,000 and $661,000 for the three months
ended June 30, 2001 and 2000, respectively.  Stock compensation expense for the
six months ended June 30, 2001 was $213,000, compared to $920,000 for the same
period ended June 30, 2000.  This expense relates principally to options granted
to consultants for services rendered.  Stock compensation expense is calculated
using the Black-Scholes option pricing model, in which the stock price is one of
the key variables.  The options are valued over their vesting period, and the
expense is recognized as the options vest.  The decrease in stock compensation
expense is due primarily to options becoming fully vested.

                                      -10-
<PAGE>

 Interest and other income (expense), net

     Net interest and other income was $663,000 for the three months ended June
30, 2001, compared to $468,000 for the three months ended June 30, 2000.  Net
interest and other income for the six months ended June 30, 2001 increased to
$1.4 million, compared to $315,000 for the six months ended June 30, 2000.  Net
interest and other income (expense) is comprised primarily of interest earned on
funds from the initial public offering proceeds, offset by interest expense on
equipment and debt obligations.  During 2000, the company used a portion of its
initial public offering proceeds to pay down substantially all of its debt
balances, thereby decreasing future interest expense.

 Provision for income taxes

     The income tax provision for the three and six months ended June 30, 2001
and 2000 is based on an estimated effective annual tax rate of 5%.  The income
tax provision represents primarily current state and federal minimum income
taxes after utilization of net operating loss carryforwards.

     As of December 31, 2000 we had net operating loss carryforwards of
approximately $29.0 million for federal and $13.0 million for state income tax
purposes.  We also had research and development credit carryforwards of
approximately $400,000 for federal income tax purposes.  The income tax
provision for the quarter ended June 30, 2001 was $13,000 and $25,000 for the
six months ended June 30, 2001.  This amount primarily represents current
federal and state minimum income taxes after utilization of net operating loss
and research and development credit carryforwards.  The net operating loss
carryforwards will expire at various dates beginning in 2001 through 2020, if
not utilized.  The net operating loss carryforwards are subject to an annual
limitation due to ownership change limitations of the Internal Revenue Service
Code of 1986.  The annual limitation may result in the expiration of the net
operating losses before utilization.

 Liquidity and Capital Resources

     Net cash provided by operating activities was $3.9 million for the six
months ended June 30, 2001, compared to net cash used of $704,000 for the six
months ended June 30, 2000.  Non-cash items for the six months ended June 30,
2001 relate primarily to depreciation and amortization charges on generators and
equipment of $2.4 million.  Cash provided by operating activities for the six
months ended June 30, 2001 was primarily related to decreases in inventories and
prepaid expenses and other current assets, partially offset by decreases in
accrued compensation and benefits.

     Net cash used in investing activities was $7.3 million for the six months
ended June 30, 2001, compared to $2.8 million for the six months ended June 30,
2000.  The increase was related to the purchases of available-for-sale
investments as we invested the proceeds from our initial public offering.

     Net cash provided by financing activities was $1.3 million for the six
months ended June 30, 2001, compared to $53.1 million for the six months ended
June 30, 2000.  The change was due mainly to the cash received from the initial
public offering on April 10, 2000, and subsequent stock sales that provided
$60.0 million in cash proceeds in the six months ended June 30, 2000.  In
addition, lower debt repayments were made in 2001 as we used part of our
proceeds from our initial public offering in April 2000 to repay substantially
all of our debts.

     As of June 30, 2001, our principal debt and other commitments consisted of
$10,000 outstanding under our equipment loans.  We expect to increase our
capital expenditures consistent with our anticipated growth in generator
placements, manufacturing and personnel.  We also may increase our capital
expenditures as we expand our product lines or invest to address new markets.

     Our principal source of liquidity at June 30, 2001 consisted of $52.5
million of cash and available-for-sale investments, primarily from our initial
public offering.  Our offering raised net proceeds of approximately $58.8
million.  We believe that our current cash position, along with cash generated
from the

                                      -11-
<PAGE>

future sales of products, will be sufficient to meet our operating and capital
requirements for the next 18 months. If existing cash and cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights senior to holders of common stock, and could
contain covenants that restrict our operations. Any additional funding, if
required, may not be available in amounts or on terms acceptable to us, if at
all. If we are unable to obtain this additional funding, if needed, we may be
required to reduce the scope of our planned product development and marketing
efforts, which could harm our results of operations and financial condition.

 Factors That May Affect Future Results

Because several large insurance companies have refused to reimburse health care
providers for our procedures, physicians, hospitals and other health care
providers may be reluctant to use our products and sales may decline.

     Physicians, hospitals and other health care providers are unlikely to
purchase our products if they do not receive reimbursement from payors for the
cost of the procedures using our products. There are payors, including a number
of managed care organizations, that have refused to reimburse for the cost of
procedures using our spine products until long term peer reviewed clinical data
has been published. In addition, even upon the publication of peer reviewed
data, payors still may not reimburse for the procedure based on payor criteria.
The advent of contracted rates per procedure has also made it difficult to
receive reimbursement for disposable products, even if the use of these products
improves clinical outcomes. If our customers are unable to receive reimbursement
for procedures using our products, we may be unable to meet our revenue goals
and may not achieve or sustain profitability.

If physicians do not support the use of our products, we may not achieve future
sales growth.

     Our product sales have mainly been to a group of early adopting physicians
who are receptive to minimally invasive techniques. Other physicians may not
purchase our products until there is long term clinical evidence to convince
them to alter their existing treatment methods and recommendations from
prominent physicians that our products are effective in treating spine and joint
disorders. In addition, physicians tend to be slow to change their medical
treatment practices because of perceived liability risks arising from the use of
new products and the uncertainty of third party reimbursement. If we fail to
gain further physician support for our products, we may not achieve expected
revenues and may not achieve or sustain profitability.

Our stock price, like that of many early stage medical technology companies, has
been volatile.

     If our future quarterly sales or operating results are below the
expectations of securities analysts or investors, the price of our common stock
would likely decline. Stock price fluctuations may be exaggerated if the trading
volume of our common stock is low.

     In the past, securities class action litigation has often been brought
against a company after a period of volatility in the market price of its stock.
Any securities litigation claims brought against us could result in substantial
expense and the diversion of management's attention from our core business.

Because we lack sufficient long term outcomes data regarding the efficacy of our
products, we could find that our long term data does not support our current
clinical results.

     Because our spine products are supported by only three years of patient
follow up and our arthroscopy products are supported by only four years of
patient follow up, we could discover that our current clinical results cannot be
supported. If longer term patient studies or clinical experience indicate that
treatments with our products do not provide patients with sustained benefits,
our sales could decline. If longer term patient studies or clinical experience
indicate that our procedures cause tissue damage, motor

                                      -12-
<PAGE>

impairment or other negative effects, we could be subject to significant
liability. Further, because some of our data has been produced in studies that
are not randomized and involve small patient groups, our results may not be
reproduced in wider patient populations. In addition, we are aware of pre-
clinical studies related to our spine and arthroscopy products that have
produced data that is inconsistent with our scientific findings. If we are
unable to produce clinical data that is supported by the independent efforts of
other clinicians, our business could suffer.

Because we expect operating expenses to increase substantially in the
foreseeable future and cannot be certain that revenues will continue to
increase, we may not achieve or sustain profitability.

     We anticipate that our operating expenses will increase substantially in
absolute dollars for the foreseeable future as we expand our sales and
marketing, manufacturing, product development and administrative staff. Although
we attained profitability during the first three quarters of 2000 and the first
two quarters of 2001, we were not profitable in the fourth quarter of 2000. If
sales do not grow, we may not be able to achieve or maintain profitability in
the future. We incurred losses of $9.7 million in 1999 and generated income of
$1.0 million in 2000.  As of June 30, 2001, we had an accumulated deficit of
approximately $29.2 million.

Because we are introducing new products and technology into the spine and
arthroscopy markets, we may fail to gain market acceptance for our products and
our business could suffer.

     We have developed products for spine and joint disorders that we believe
are not effectively addressed by existing medical devices. Because we are
introducing novel technology into these markets, we face the challenge of
gaining widespread acceptance of our products. If we fail at this task, we may
not achieve expected revenues and may not achieve or sustain profitability.

Because we face significant competition from companies with greater resources
than we have, we may be unable to compete effectively.

     The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We compete with many larger companies that
enjoy several competitive advantages, including:

          .  established distribution networks;

          .  products that are supported by long term clinical data;

          .  products that have been approved for reimbursement;

          .  established relationships with health care providers and payors;
             and

          .  greater resources for product development, sales and marketing and
             patent litigation.

At any time, other companies may develop additional directly competitive
products. For example, Radionics, a division of Tyco International, launched a
competing spine product during the second quarter of 2001, and Smith & Nephew
launched a competing line of arthroscopy products in July of 2001.

Because of the importance of our patent portfolio to our business, we may lose
market share to our competitors if we fail to protect our intellectual property
rights.

     Protection of our patent portfolio is key to our future success,
particularly because we compete in the medical device industry. We rely on
patent protection, as well as a combination of copyright, trade secret and
trademark laws, and nondisclosure and confidentiality agreements and other
contractual restrictions to protect our proprietary technology. However, these
legal means afford only limited protection and may not adequately protect our
rights or permit us to gain or keep any competitive

                                      -13-
<PAGE>

advantage. For example, our patents may be challenged, invalidated or
circumvented by third parties. Our patent applications and the notices of
allowance we have received may not issue as patents in a form that will be
advantageous to us. Our patents and applications cover particular aspects of our
products and technology. There may be more effective technologies, designs or
methods. If the most effective treatment method is not covered by our patents or
applications, it could have an adverse effect on our sales. If we lose any key
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by those former employees.
Furthermore, the laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the U.S. Finally, even if our
intellectual property rights are adequately protected, litigation may be
necessary to enforce our intellectual property rights, which could result in
substantial costs to us and result in a substantial diversion of management
attention. If our intellectual property is not adequately protected, our
competitors could use the intellectual property that we have developed to
enhance their products and compete more directly with us, which could result in
a decrease in our market share.

Because the medical device industry is litigious, we are susceptible to an
intellectual property suit.

     There is a substantial amount of litigation over patent and other
intellectual property rights in the medical device industry generally, and in
the spine and arthroscopy market segments particularly. Whether a product
infringes a patent involves complex legal and factual issues, the determination
of which is often uncertain. In addition, because patent applications can take
many years to issue, there may be applications now pending of which we are
unaware, which may later result in issued patents that our products may
infringe. There could also be existing patents that one or more of our products
may inadvertently be infringing of which we are unaware. As the number of
competitors in the markets for minimally invasive treatment of spine and joint
disorders grows, the possibility of a patent infringement claim against us
increases. Infringement and other intellectual property claims, with or without
merit, can be expensive and time consuming to litigate and divert management's
attention from our core business.

If we are sued for patent infringement, we could be prevented from selling our
products and our business could suffer.

     We are aware of the existence of patents held by competitors in the spine
and arthroscopy markets, which could result in a patent lawsuit against us.
However, following a review of those patents with outside experts, we believe
they are invalid or that if valid, we do not infringe. In the event that we are
subject to a patent infringement lawsuit and if the relevant patent claims are
upheld as valid and enforceable, we believe we have defenses based on
noninfringement. If our products are found to infringe a valid patent, we could
be prevented from selling them unless we can obtain a license or are able to
redesign the product to avoid infringement. A license may not be available or if
available may be on terms unacceptable to us, or we may not be successful in any
attempt to redesign our products to avoid any infringement. Modification of our
products or development of new products could require us to conduct additional
clinical trials for these new or modified products and to revise our filings
with the FDA, which is time consuming and expensive. If we are not successful in
obtaining a license or redesigning our products, we may be unable to sell our
products and our business could suffer.

Product liability claims brought against us could result in payment of
substantial damages to plaintiffs.

     We manufacture medical devices that are used on patients in surgical
procedures, and we are thus subject to product liability lawsuits as part of our
ordinary course of business. Although we are involved in product liability
actions, we do not believe any of these are material to our business or
financial condition. We have reported to the FDA instances of burns, probe
breakage and nerve inflammation which were related to the use of our arthroscopy
products.  We have also reported to the FDA instances involving electrical
shorts in our SpineCATH catheter which resulted in small burns at the entry
point on the skin and instances of SpineCATH catheter breakage.  We believe that
both the electrical shorts and catheter breakage were related, in the majority
of the reported instances, to over manipulation of the catheter, which caused
the catheter to kink.  In addition, we have reported instances of infection and
motor and nerve impairment related to the IDET procedure. We do not believe that
any of these instances were the result of

                                      -14-
<PAGE>

design flaws. In addition, we have emphasized to our physician customers the
importance of following the correct protocol during the IDET procedure.

     Any product liability claim brought against us, with or without merit,
could result in the increase of our product liability insurance rates or the
inability to secure coverage in the future. In addition, we would have to pay
any amount awarded by a court in excess of policy limits. Our insurance policies
have various exclusions, and thus we may be subject to a product liability claim
for which we have no insurance coverage, in which case we may have to pay the
entire amount of any award. Even in the absence of a claim, our insurance rates
may rise in the future to a point where we decide not to carry this insurance.
Finally, even a meritless or unsuccessful product liability claim would be time
consuming and expensive to defend and could result in the diversion of
management's attention from our core business.

You may have a difficult time evaluating our company because we have a limited
operating history.

     You can only evaluate our business based on a limited operating history
because we began selling arthroscopy products in 1997 and spine products in
1998. This short history may not be adequate to enable you to fully assess our
ability to successfully develop our products, achieve market acceptance of our
products and respond to competition.

Any failure to build and manage our sales organization may negatively affect our
market share and revenues.

     We currently have two separate sales forces, one for each of our spine and
arthroscopy product lines, and we rely on a combination of direct sales
employees and sales agents to sell each product line in the U.S. We need to
expand both the spine and arthroscopy sales teams during this fiscal year to
achieve our market share and revenue growth goals. There are significant risks
involved in building and managing our spine and arthroscopy sales forces,
including:

          .  failure to manage the development and growth of two distinct sales
             forces;

          .  failure to adequately train both our employees and our outside
             sales agents in the use and benefits of our products; and

          .  dependence on outside agencies, over, which we have limited, or no
             control.

Any failure in our physician training efforts could significantly reduce product
sales.

     It is critical to the success of our sales effort to train a sufficient
number of physicians and to provide them adequate instruction in the use of our
products. We rely on physicians to spend their time and money to attend our
training sessions. If physicians are not properly trained, they may misuse or
ineffectively use our products. This may result in unsatisfactory patient
outcomes, patient injury, negative publicity or lawsuits against us, any of
which could have an adverse effect on our product sales.

If we fail to support our anticipated growth in operations, our business could
suffer.

     To succeed in the implementation of our business strategy, our management
team must rapidly execute our sales strategy and further develop products, while
managing anticipated growth by implementing effective planning and operating
processes. To manage anticipated growth in operations, we must increase our
manufacturing and quality assurance staff, expand our sales teams and expand our
manufacturing facility. Our systems, procedures and controls may not be adequate
to support our expected growth in operations.  Because we have limited control
over third party distributors, we may be unable to sell our products in
international markets.

     We rely on third party distributors, over whom we have limited control, to
sell our products in international markets. We have an exclusive agreement with,
and are dependent upon, DePuy AcroMed for

                                      -15-
<PAGE>

the marketing and sales of our spine products internationally. We also have
exclusive distributor relationships for the sale of our arthroscopy products in
foreign countries, including Australia, Belgium, Canada, Italy, Spain and
Taiwan.

Because we compete with Mitek, an Ethicon division of Johnson & Johnson, in the
arthroscopy market, a conflict with them could negatively affect our
international spine sales efforts, which are conducted exclusively by DePuy
AcroMed, another division of Johnson & Johnson.

     Because our exclusive international spine product distributor is affiliated
with competitors in both the spine and arthroscopy markets, they may devote
insufficient resources to sales of our products or a conflict may arise which
could disrupt international sales. If DePuy AcroMed fails to devote adequate
resources to our products, we could fail to achieve expected international
sales. If a conflict arises which we could not readily resolve, there could be a
period of declining international sales as we search for an alternative means of
international product distribution.

Complying with FDA and other regulations is an expensive and time consuming
process and any failure to comply could result in substantial penalties.

     We are subject to a host of federal, state, local and international
regulations regarding the testing, manufacture, distribution, marketing,
promotion, record keeping and reporting of our products. In particular, our
failure to comply with FDA regulations could result in, among other things,
recalls of our products, substantial fines and/or criminal charges against us
and our employees.

Product sales, introductions or modifications may be delayed or canceled as a
result of the FDA regulatory process, which could cause our sales to decline.

     Before we can sell a new medical device in the U.S., we must obtain FDA
clearance, which can be a lengthy and time consuming process. The products we
market have obtained the necessary clearances from the FDA through premarket
notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or
were exempt from the 510(k) clearance process. We have modified some of our
products, but we do not believe these modifications require us to submit new
510(k) notifications. However, if the FDA disagrees with us and requires us to
submit a new 510(k) notification for modifications to our existing products, we
may be required to stop marketing the products while the FDA reviews the 510(k)
notification, or if the FDA requires us to go through a lengthier, more rigorous
examination than we had expected, our product introductions or modifications
could be delayed or canceled, which could cause our sales to decline. In
addition, the FDA may determine that future products will require the more
costly, lengthy and uncertain premarket approval, or PMA, process.

Off label use of our products could result in substantial penalties.

     510(k) clearance only permits us to promote our products for the uses
indicated on the labels cleared by the FDA. We may request additional label
indications for our current products, and the FDA may deny those requests
outright, require additional expensive clinical data to support any additional
indications or impose limitations on the intended use of any cleared product as
a condition of clearance. If the FDA determines that we have promoted our
products for off label use, we could be subject to fines, injunctions or other
penalties.

     Our disposable probes and catheters have been cleared by the FDA for single
use, but we are aware that from time to time physicians reuse our disposable
products. We have strongly advised physicians against reuse of our products.

We may need to raise additional capital in the future and may be unable to do so
on acceptable terms.

     We may need to raise additional funds for operations and to execute our
business strategy. The sale of additional equity or convertible debt securities
could result in additional dilution to our

                                      -16-
<PAGE>

stockholders. If additional funds are raised through the issuance of debt
securities, these securities could have rights senior to holders of common
stock, and could contain covenants that would restrict our operations. Any
additional financing may not be available in amounts or on terms acceptable to
us, if at all.

Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval.

     Our executive officers and directors, and their respective affiliates, own
a substantial percentage of our outstanding common stock. Accordingly, these
stockholders may, as a practical matter, be able to exert significant influence
over matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combinations. This
concentration could have the effect of delaying or preventing a change in
control.

Our certificate of incorporation, our bylaws, Delaware law and our stockholder
rights plan contain provisions that could discourage a takeover.

     Provisions of our certificate of incorporation, our bylaws, Delaware law
and our stockholder rights plan contain provisions that may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable.

We may engage in future acquisitions that could disrupt our business and dilute
our stockholders.

     As part of our business strategy, we expect to review acquisition prospects
that we believe would be advantageous to the development of our business. If we
make any acquisitions, we could take any or all of the following actions, any of
which could materially and adversely affect our financial results and the price
of our common stock:

          .  issue equity securities that would dilute existing stockholders'
             percentage ownership;

          .  incur substantial debt;

          .  assume contingent liabilities; or

          .  take substantial charges in connection with the amortization of
             goodwill and other intangible assets.

     Acquisitions also entail numerous risks, including:

          .  difficulties in assimilating acquired operations, products and
             personnel with our current business;

          .  unanticipated costs;

          .  diversion of management's attention from other business concerns;

          .  adverse effects on existing relationships with our customers;

          .  risks of entering markets in which we have limited or no prior
             experience; and

          .  potential loss of key employees from either our current business or
             the acquired organization.

     We may be unable to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.

                                      -17-
<PAGE>

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     Our market risk disclosures have not changed significantly from those set
forth in Management's Discussion and Analysis of Financial Condition and Results
of Operations in our Form 10-K filing dated March 23, 2001 for the year ended
December 31, 2000.

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings.

     From time to time we are a party to various legal proceedings arising in
the ordinary course of our business.  We are not currently subject to any
material legal proceedings.

Item 2.   Changes in Securities and Use of Proceeds.

     On April 4, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-95815) was declared effective by the
Securities and Exchange Commission, pursuant to which 4,600,000 shares of our
Common Stock were sold on April 10, 2000 for the account of the Company at a
price of $14.00 per share, generating aggregate gross proceeds of $64.4 million
before payment of underwriting discounts and commissions and transaction
expenses.  The managing underwriters were Merrill Lynch & Co., J.P. Morgan & Co.
and U.S. Bancorp Piper Jaffray.  After deducting approximately $4.5 million in
underwriting discounts and commissions and $1.1 million in other transaction
expenses, the net proceeds of the offering were approximately $58.8 million.
None of the payments for underwriting discounts and commissions and other
transaction expenses represented direct or indirect payments to directors,
officers or other affiliates of the Company.  The net proceeds of the offering
have been invested in short term, investment grade, and interest bearing
securities.  As of June 30, 2001, we had used approximately $10.9 million of the
proceeds of the offering to repay debt balances and an additional $10.9 million
to purchase capital equipment.  We intend to use the remaining proceeds from the
offering to expand sales, marketing and reimbursement activities, to develop the
Company's product lines, to fund acquisitions or investments and to fund general
corporate purposes, including working capital.

Item 3.   Defaults Upon Senior Securities.  Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders.

     On April 23, 2001, the Annual Meeting of Stockholders of ORATEC
Interventions, Inc. was held in Menlo Park, California.

     An election of Class I directors was held with the following individuals
being elected to our Board of Directors to serve until our annual meeting of
stockholders for the year ending December 31, 2004:

          .  Richard M. Ferrari (18,450,357 votes for, 560,117 votes withheld)

          .  Wayne R. Moon (18,450,357 votes for, 560,117 votes withheld)

     Other matters voted upon and approved at the meeting and the number of
affirmations, negative votes cast, abstentions and broker non-votes with respect
to each such matter were as follows:

          .  To approve the amendment of the "evergreen" provision of our 1999
             Stock Plan to increase the number of shares by which this plan
             shall be automatically increased on the first day of each year
             beginning in 2002, 2003, 2004 and 2005 from the lesser of 4% of the
             outstanding shares of Common Stock on the last day of the
             immediately preceding year, 1,250,000 shares or such lesser number
             as determined by our Board of Directors to the lesser of 5.5% of
             the outstanding shares of Common Stock on the last day of the
             immediately preceding fiscal year, 1,450,000 shares or such lesser
             number as determined

                                      -18-
<PAGE>

                  by our Board of Directors (9,650,057 votes in favor, 2,658,302
                  votes opposed, 20,662 votes abstaining, 6,681,453 broker non-
                  votes).

               .  To approve the amendment of our 1999 Directors' Stock Option
                  Plan to increase the number of nonstatutory stock options that
                  can be granted to nonemployee directors (11,816,975 votes in
                  favor, 287,395 votes opposed, 225,252 votes abstaining,
                  6,680,852 broker non-votes).

               .  To ratify the appointment of Ernst & Young LLP as our
                  independent auditors for the fiscal year ending December 31,
                  2001 (18,991,327 votes in favor, 2,172 votes opposed, 16,966
                  votes abstaining, 9 broker non-votes).

Item 5.   Other Information.  Not Applicable

Item 6.   Exhibits and Reports on Form 8-K.

          (a)  Exhibits: None
          (b)  Reports on Form 8-K: Not Applicable.

                                  SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                  ORATEC INTERVENTIONS, INC.


                                  By:   /s/ Nancy V. Westcott
                                      -------------------------------------
                                        Nancy V. Westcott
                                        Chief Financial Officer and
                                        Vice President of Administration

Date: August 13, 2001

                                      -19-