<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 September 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 October 31, 2001, there were 23,096,824 shares of the
                     registrant's Common Stock outstanding.

<PAGE>

                                      INDEX
                                      -----
<TABLE>

PART I.           FINANCIAL INFORMATION                                                                 Page
<S>      <C>                                                                                            <C>

         Item 1.  Financial Statements (unaudited)

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

                  Condensed Statements of Operations - Three and nine months ended
                    September 30, 2001 and 2000........................................................  4

                  Condensed Statements of Cash Flows - Nine months ended
                    September 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..........................................................  9

         Item 3.  Quantitative and Qualitative Disclosures About Market Risk........................... 19

PART II.          OTHER INFORMATION

         Item 1.  Legal Proceedings.................................................................... 20

         Item 2.  Changes in Securities and Use of Proceeds............................................ 20

         Item 3.  Defaults Upon Senior Securities...................................................... 20

         Item 4.  Submission of Matters to a Vote of Security Holders.................................. 20

         Item 5.  Other Information.................................................................... 20

         Item 6.  Exhibits and Reports on Form 8-K..................................................... 20

SIGNATURES............................................................................................. 21
</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>
                                                                         September 30,      December 31,
                                                                              2001               2000
                                                                         -------------      ------------
Assets                                                                    (unaudited)
<S>                                                                      <C>                <C>
Current assets:
     Cash and cash equivalents.......................................     $  31,112          $  33,264
     Available-for-sale investments..................................        20,286             16,683
     Accounts receivable, net........................................         8,310              8,352
     Inventories.....................................................         5,382              6,450
     Prepaid expenses ...............................................           478              1,537
     Other current assets............................................           906              1,787
                                                                          ---------          ---------
              Total current assets...................................        66,474             68,073
Property and equipment, net..........................................         9,064              8,985
Intangible assets....................................................         3,480                  -
Other long term assets...............................................           100                  -
                                                                          ---------          ---------
                                                                          $  79,118          $  77,058
                                                                          =========          =========

Liabilities and stockholders' equity

Current liabilities:
     Accounts payable................................................     $   1,715          $   1,175
     Accrued compensation and benefits...............................         2,442              3,764
     Other accrued liabilities.......................................         2,155              1,760
     Current portion of equipment financing obligations..............             5                 22
                                                                          ---------          ---------
              Total current liabilities..............................         6,317              6,721

Stockholders' equity:
       Common stock, $0.001 par value................................            23                 22
       Additional paid-in capital....................................       101,757            100,244
       Deferred stock compensation...................................          (163)              (230)
       Receivable from stockholder...................................           (29)               (49)
       Accumulated other comprehensive income........................           361                  -
       Accumulated deficit...........................................       (29,148)           (29,650)
                                                                          ---------          ---------
              Total stockholders' equity.............................        72,801             70,337
                                                                          ---------          ---------
                                                                          $  79,118          $  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                Nine months ended
                                                               September 30,                  September 30,
                                                       --------------------------        ------------------------
                                                          2001             2000             2001           2000
                                                       ---------        ---------        ---------      ---------
<S>                                                    <C>              <C>              <C>            <C>
Sales............................................      $  11,233        $  11,528        $  36,308      $  37,754
Cost of sales....................................          3,653            3,954           11,537         11,382
                                                       ---------        ---------        ---------      ---------
Gross profit.....................................          7,580            7,574           24,771         26,372
Operating expenses:
     Research and development....................          1,346            1,489            4,239          4,293
     Sales and marketing.........................          5,472            4,979           18,409         17,210
     General and administrative..................          1,285            1,294            3,326          3,568
     Stock compensation (1)......................             38              182              251          1,102
                                                       ---------        ---------        ---------      ---------
Total operating expenses.........................          8,141            7,944           26,225         26,173
                                                       ---------        ---------        ---------      ---------

Income (loss) from operations....................           (561)            (370)          (1,454)           199
Interest and other income........................            592              804            1,986          1,744
Interest and other expense.......................             (2)            (125)              (4)          (750)
                                                       ---------        ---------        ---------      ---------
Income before income taxes.......................             29              309              528          1,193
Provision for income taxes.......................              1               15               26             60
                                                       ---------        ---------        ---------      ---------
Net income.......................................      $      28        $     294        $     502      $   1,133
                                                       =========        =========        =========      =========
Basic net income per share.......................      $    0.00        $    0.01        $    0.02      $    0.07
                                                       =========        =========        =========      =========
Diluted net income per share.....................      $    0.00        $    0.01        $    0.02      $    0.05
                                                       =========        =========        =========      =========

Shares used in computing basic net
income per share.................................         23,080           22,140           22,909         15,944
Shares used in computing diluted net
income per share.................................         23,793           24,776           23,595         22,737


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

       Research and development..................      $      38        $     182        $     133      $   1,102
       Sales and marketing.......................             --               --              118             --
                                                       ---------        ---------        ---------      ---------
                                                       $      38        $     182        $     251      $   1,102
                                                       =========        =========        =========      =========
</TABLE>

                             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>
                                                                                   Nine months ended
                                                                                      September 30,
                                                                                  --------------------
                                                                                    2001        2000
                                                                                  --------    --------
<S>                                                                               <C>         <C>
Operating activities:
Net income ....................................................................   $    502    $  1,133
Adjustments to reconcile net income to net cash provided by (used) in operating
     activities:
   Depreciation and amortization ..............................................      3,396       2,608
    Compensation expense for options granted to non-employees .................        184       1,035
   Amortization of deferred stock compensation ................................         67          67
Changes in operating assets and liabilities:
     Accounts receivable ......................................................         42      (1,368)
     Inventories ..............................................................      1,068      (2,903)
     Prepaid expenses and other current assets ................................      1,940      (1,229)
     Other long term assets ...................................................       (100)         --
     Accounts payable .........................................................       (392)       (149)
     Accrued compensation and benefits ........................................     (1,322)        617
     Other accrued liabilities ................................................        395          42
                                                                                  --------    --------

               Net cash provided by (used in) operating activities ............      5,780         (27)
                                                                                  --------    --------

Investing activities:
Purchases of available-for-sale investments ...................................    (12,770)         --
Sales of available-for-sale investments .......................................        500          --
Maturities of available-for-sale investments ..................................      9,029       2,931
Purchase of intangible assets .................................................     (2,548)         --
Capital expenditures ..........................................................     (3,475)     (7,100)
                                                                                  --------    --------

               Net cash used in investing activities ..........................     (9,264)     (4,169)

Financing activities:
Proceeds from issuance of common stock ........................................      1,329      60,369
Repayment of stockholder receivable ...........................................         20           9
Repayment of notes payable ....................................................         --      (4,000)
Repayment of bank borrowings ..................................................         --      (3,427)
Repayment of equipment financing obligations ..................................        (17)     (3,438)
                                                                                  --------    --------

               Net cash provided by financing activities ......................      1,332      49,513
                                                                                  --------    --------
Net increase (decrease) in cash and cash equivalents ..........................     (2,152)     45,317
Cash and cash equivalents at beginning of period ..............................     33,264       5,943
                                                                                  --------    --------

Cash and cash equivalents at end of period ....................................   $ 31,112    $ 51,260
                                                                                  ========    ========

Supplemental disclosure of cash flow information:
         Cash payments for interest ...........................................   $      4    $    735
                                                                                  ========    ========

Supplemental disclosure of non-cash investing activities:
         Purchase of intangible assets ........................................   $    932    $     --
                                                                                  ========    ========
</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 subject 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   Nine months ended
                                                           September 30,       September 30,
                                                         -----------------   -----------------
                                                           2001      2000      2001      2000
                                                         -------   -------   -------   -------
<S>                                                      <C>       <C>       <C>       <C>
Net income .........................................     $    28   $   294   $   502   $ 1,133
                                                         =======   =======   =======   =======
Shares used in the calculation:
Weighted-average common shares outstanding
   used to compute basic net income per share ......      23,080    22,140    22,909    15,944
Weighted-average effect of dilutive securities:
   Options .........................................         695     2,444       667     2,444
   Warrants ........................................          18       192        19       192
   Redeemable convertible preferred shares .........          --        --        --     4,157
                                                         -------   -------   -------   -------
Weighted-average shares used to compute diluted
    net income per share ...........................      23,793    24,776    23,595    22,737
                                                         =======   =======   =======   =======
Net income per share:
Basic ..............................................     $  0.00   $  0.01   $  0.02   $  0.07
                                                         =======   =======   =======   =======
Diluted ............................................     $  0.00   $  0.01   $  0.02   $  0.05
                                                         =======   =======   =======   =======
</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.


                                      -6-

<PAGE>

3.       Comprehensive Income:

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

<TABLE>
<CAPTION>
                                                        Three months ended     Nine months ended
                                                          September 30,           September 30,
                                                      ---------------------   -------------------
                                                        2001          2000      2001        2000
                                                      --------      -------   --------   --------
<S>                                                   <C>           <C>       <C>        <C>
Net income........................................    $     28      $   294   $    502   $  1,133
                                                           144           --        361         --
                                                      --------      -------   --------   --------
Unrealized gain on available-for-sale
investments ......................................    $    172      $   294   $    863   $  1,133
                                                      ========      =======   ========   ========
</TABLE>

4.       Balance Sheet Detail (in thousands):

<TABLE>
<CAPTION>
                                                                September 30,        December 31,
                                                                -------------        ------------
                                                                    2001                 2000
                                                                    ----                 ----
         <S>                                                    <C>                  <C>
         Inventories:
              Raw materials....................................  $    2,205           $    2,573
              Work-in-process..................................          17                  189
              Finished goods...................................       2,432                3,094
              Generators held for sale.........................         728                  594
                                                                 ----------           ----------
         Total.................................................  $    5,382           $    6,450
                                                                 ==========           ==========

         Other accrued liabilities:
              Accrued professional fees........................  $      903           $      584
              Dealer commissions...............................         380                  349
              Clinical and development costs...................         486                  281
              Other............................................         386                  546
                                                                 ----------           ----------
         Total.................................................  $    2,155           $    1,760
                                                                 ==========           ==========
</TABLE>

5.       Product Acquisition Costs:

         Product acquisition costs generally relate to intellectual property
rights, which at the time of acquisition, are already marketed or are cleared by
the FDA for marketing. Product acquisition costs are capitalized and amortized
ratably over the estimated life cycle of the products. At the time of the
acquisition, the product life cycle is estimated based on the patent life of the
product and management's assessment of future sales and profitability of the
product. This estimate is assessed regularly during the amortization period, and
the asset's value or useful life will be adjusted as required.

         In September 2001, the Company acquired certain assets of Medical
Product Specialists ("MPS"), a privately held California corporation, including
the MedFlo pain pump and the intellectual property rights, manufacturing and
quality systems, and regulatory clearances related to the MedFlo pain pump. The
cost of this acquisition was capitalized as intangible assets and will be
amortized ratably over the estimated life of 15 years.

                                      -7-

<PAGE>

         In connection with this acquisition, the Company entered into a
manufacturing agreement with MPS under which MPS will supply the Company with
the MedFlo pain pumps for a minimum two year period.

6.       Recent Accounting Pronouncements:

         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. Adoption of SFAS 141 did 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
amortization, which will be replaced with the periodic evaluation of goodwill
for impairment. SFAS 142 is effective for fiscal years 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.

         In October 2001, the FASB issued Statement No. 144, "Accounting for
Impairment or Disposal of Long Lived Assets" ("SFAS 144"), which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 provides a single
accounting model for, and supercedes previous guidance on, accounting and
reporting for impairment and disposal of long lived assets. SFAS 144 sets new
criteria for the classification of assets held for sale and changes the
reporting of discontinued operations. The Company does not believe that the
adoption of SFAS 144 will have a material impact on its financial statements.

7.       Segment Information:

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

<TABLE>
<CAPTION>
                                            Three months ended      Nine months ended
                                              September 30,            September 30,
                                          --------------------    --------------------
                                            2001        2000         2001       2000
                                            ----        ----         ----       ----
      <S>                                 <C>         <C>         <C>         <C>
      Spine ...........................   $  4,797    $  5,724    $ 16,491    $ 19,766

      Arthroscopy......................      6,436       5,804      19,817      17,988
                                          --------    --------    --------    --------
                                          $ 11,233    $ 11,528    $ 36,308    $ 37,754
                                          ========    ========    ========    ========
</TABLE>

8.       Litigation

         The Company is currently involved in a patent lawsuit relating to a
complaint filed on August 15, 2001 against Radionics, Inc. The Company added
Tyco Healthcare Group LP ("Tyco") as a defendant on August 22, 2001. The parties
remaining in the proceeding are Tyco and the Company. The factual basis
underlying the dispute is the Company's claim that the sale by Tyco of one of
its spine products uses a procedure that infringes two of the Company's patents.
On September 21, 2001, Tyco filed an answer and affirmative defenses to the
Company's complaint denying certain of the allegations in the complaint and
asserting a counterclaim requesting declaratory relief that Tyco is not
infringing the Company's patents and that the Company's asserted patents are
invalid and are unenforceable. In addition, Tyco asserted that the Company's
marketed spine treatment procedure infringes a patent allegedly

                                      -8-

<PAGE>

exclusively licensed to Tyco. At the present time, this matter is in its
preliminary stages and no trial date has been set. The Company believes that its
claims and defenses have merit, but cannot be certain as to the potential
outcome. In addition to this patent dispute, the Company may from time to time
become a party to various legal proceedings arising in the ordinary course of
business.

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 do not
guarantee 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 nine months ended September 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
nine months ended September 30, 2001, we produced a profit of $502,000 compared
to a profit of $1.1 million for the nine months ended September 30, 2000. Our
profitability is attributable to both sales and interest earned on proceeds from
our initial public offering in April 2000. At September 30, 2001 we had an
accumulated deficit of $29.1 million.

         For the nine months ended September 30, 2001, only 2% of our sales were
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 placing spine generators with
customers for a demonstration period, after which we convert these placements to
sales.

         In September 2001, we acquired certain assets of Medical Product
Specialists, including the MedFlo pain pump and the intellectual property
rights, manufacturing and quality systems and regulatory clearances related to
the MedFlo pain pump. The MedFlo pain pump is an elastomeric infusion device
that delivers a controlled flow of pain medication directly to a surgical wound
site through a multiport catheter. We plan to initially sell the MedFlo pain
pump for use in arthroscopic procedures to treat postoperative

                                       -9-

<PAGE>

pain and expect to launch the product late in the fourth quarter of 2001. We
expect the MedFlo pain pump to help support our sales and earnings growth in
2002 and beyond, and to result in a small operating expense investment in the
fourth quarter of 2001. We are in the process of reviewing clinical applications
for the MedFlo pain pump related to spine surgery. We have entered into an
agreement with Medical Product Specialists that requires their continued
manufacture of the MedFlo pain pump for us for a minimum two year period.

         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.

         We continue to experience difficulty in the area of payor
reimbursement. Several large insurance companies have refused to reimburse for
procedures using our spine products. We have experienced declines in sales of
our spine products as a result of the failure of insurance companies to
reimburse our customers for procedures using our products. If our customers
continue to experience difficulty in receiving reimbursement, they may refuse to
use our products and we may continue to experience a decline in our spine
revenues.

         The medical device market is litigious, and in the ordinary course of
business we will become a party to product liability proceedings, as well as
patent infringement lawsuits as we defend our patent rights. For example, on
August 15, 2001, we filed a complaint against Radionics, Inc., which alleges
that a Radionics spine product infringes certain of our patents. On August 22,
2001 we added Tyco Healthcare Group LP to the complaint. The costs of this and
other 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 11% to $6.4 million in the three months
ended September 30, 2001 from $5.8 million for the three months ended September
30, 2000. For the nine months ended September 30, 2001, arthroscopy sales
increased 10% to $19.8 million compared to $18.0 million for the same period
ended September 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 $4.8 million for the three months ended September 30, 2001
from $5.7 million for the three months ended September 30, 2000, or 16%. For the
nine months ended September 30, 2001, spine sales decreased to $16.5 million
compared to $19.8 million for the same period ended September 30, 2000, or 17%.
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 in use
at hospitals and clinics. Sales overall decreased 3% to $11.2 million for the
three months ended September 30, 2001 from $11.5 million for the three months
ended September 30, 2000 and 4% to $36.3 million for the nine months ended
September 30, 2001, compared to $37.8 million for the same period ended
September 30, 2000.


                                      -10-

<PAGE>

   Cost of sales

         Cost of sales decreased to $3.7 million for the three months ended
September 30, 2001, an 8% decrease from $4.0 million for the three months ended
September 30, 2000, due primarily to a decrease in expenses and inventory
reserves related to lower inventory levels. Cost of sales increased 1% for the
nine months ended September 30, 2001, to $11.5 million, compared to $11.4
million for the same period ended September 30, 2000. The increase in cost of
goods sold between the nine month periods was due primarily to lower production
volumes in our manufacturing operations resulting in higher unit costs and
increased inventory reserves related to new product introductions. Cost of sales
consists of material, labor and overhead costs, inventory reserves, as well as
depreciation on arthroscopy generators placed with customers for their use with
our disposable products.

   Gross profit

         Gross profit remained consistent at $7.6 million, or 67% of sales, for
the three months ended September 30, 2001, and $7.6 million, or 66% of sales,
for the three months ended September 30, 2000. For the nine months ended
September 30, 2001, gross profit decreased to $24.8 million, or 68% of sales, a
6% decline from $26.4 million, or 70% of sales, for the same period ended
September 30, 2000. The decrease in gross profit was attributable to a decline
in sales and lower production volumes.

   Research and development expenses

         Research and development expenses decreased 10% to $1.3 million for the
three months ended September 30, 2001 compared to $1.5 million for the three
months ended September 30, 2000. Research and development expenses for the nine
months ended September 30, 2001 were $4.2 million, a 1% decrease from $4.3
million for the same period ended September 30, 2000. The changes are related to
the increased costs associated with office space for increased development
efforts related to our next-generation spine devices and advanced arthroscopy
probes, more than 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 increase in the future.

   Sales and marketing expenses

         Sales and marketing expenses increased 10% to $5.5 million for the
three months ended September 30, 2001 compared to $5.0 million for the three
months ended September 30, 2000. Sales and marketing expenses increased 7% for
the nine months ended September 30, 2001 to $18.4 million, compared to $17.2
million for the same period ended September 30, 2000. Increased expenses were
due primarily to higher commission expenses relating to sales compensation
programs. 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.

   General and administrative expenses

         General and administrative expenses remained consistent at $1.3 million
for the three months ended September 30, 2001 and for the three months ended
September 30, 2000. General and administrative expenses for the nine months
ended September 30, 2001 decreased 7% to $3.3 million from $3.6 million for the
same period ended September 30, 2000. The decrease in expenses was due primarily
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 and patent litigation expenses. 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


                                      -11-

<PAGE>

in the future as we add personnel, continue to expand and protect our patent
portfolio and incur reporting and investor related expenses as a public company.

   Stock compensation expense

         Stock compensation expense was $38,000 and $182,000 for the three
months ended September 30, 2001 and 2000, respectively. Stock compensation
expense for the nine months ended September 30, 2001 was $251,000, compared to
$1.1 million for the same period ended September 30, 2000. This expense relates
principally to amortization of deferred stock compensation and stock
compensation related to options granted to consultants for services rendered.
Stock compensation expense for consultant options is calculated using the
Black-Scholes option pricing model, in which the stock price is one of the key
variables. The options are revalued over their vesting period, and the expense
is recognized as the options vest. The decrease in stock compensation expense is
due primarily to these consultant options becoming fully vested.

   Interest and other income (expense), net

         Net interest and other income was $590,000 for the three months ended
September 30, 2001, compared to $679,000 for the three months ended September
30, 2000. Net interest and other income for the nine months ended September 30,
2001 increased to $2.0 million, compared to $994,000 for the nine months ended
September 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, we
used a portion of our initial public offering proceeds to pay down substantially
all of our debt balances, thereby decreasing current and future interest
expense.

   Provision for income taxes

         The income tax provision for the three and nine months ended September
30, 2001 and 2000 is based on an estimated effective annual tax rate of 5%. The
income tax provision was $1,000 for the quarter ended September 30, 2001 and
$26,000 for the nine months ended September 30, 2001. The income tax provision
represents primarily current state and federal minimum income taxes after
utilization of net operating loss and research and development credit
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 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 $5.8 million for the nine
months ended September 30, 2001, compared to net cash used of $27,000 for the
nine months ended September 30, 2000. Non-cash items for the nine months ended
September 30, 2001 relate primarily to depreciation and amortization charges on
arthroscopy generators and equipment. Cash provided by operating activities for
the nine months ended September 30, 2001 was related primarily to decreases in
inventories, prepaid expenses and other current assets, partially offset by
decreases in accrued compensation and benefits and accounts payable.

         Net cash used in investing activities was $9.3 million for the nine
months ended September 30, 2001, compared to $4.2 million for the nine months
ended September 30, 2000. The increase was related to the purchases of
available-for-sale investments as we invested the proceeds from our initial
public offering, the purchase of intangible assets, and capital expenditures.


                                      -12-

<PAGE>

         Net cash provided by financing activities was $1.3 million for the nine
months ended September 30, 2001, compared to $49.5 million for the nine months
ended September 30, 2000. The decrease was due mainly to the cash received from
the initial public offering on April 10, 2000, and subsequent stock sales from
stock option exercises that provided $60.4 million in cash proceeds in the nine
months ended September 30, 2000, offset by debt repayments made in 2000.

         As of September 30, 2001, our principal debt and other commitments
consisted of $5,000 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 September 30, 2001 consisted of
$51.4 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 future sales of products, will be sufficient to meet our operating and
capital requirements for at least 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 continue to refuse to reimburse health
care providers for our procedures, physicians, hospitals and other health care
providers may be reluctant to use our products and spine sales may continue to
decline.

         We continue to experience difficulty in the area of payor
reimbursement. 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 been mainly 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.


                                      -13-

<PAGE>

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 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 were
modestly profitable in the first three 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 September
30, 2001, we had an accumulated deficit of approximately $29.1 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;


                                      -14-

<PAGE>

            .  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 Inc., a division of Tyco, 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.

Litigation related to patent rights could result in significant expenses and if
we were unable to prevail, we could be prevented from selling our products and
our business could suffer.

         On August 15, 2001, we filed a complaint against Radionics, Inc., and
on August 22, 2001, we added Tyco alleging that methods used in conjunction with
a spine product currently being sold by Tyco infringes two of our patents. Our
complaint seeks damages against Tyco for its sale of the Radionics RF Disc
Catheter Electrode System and permanent injunctive relief enjoining Tyco from
further infringement of our patents. On September 21, 2001 Tyco filed an answer
and affirmative defenses to our complaint, denying certain of the allegations in
the complaint and asserting a counterclaim requesting declaratory relief that
Tyco is not infringing our patents and that our two asserted patents are invalid
and unenforceable. In addition, Tyco asserted a counterclaim against us alleging
that the spine treatment procedures marketed by us infringe a patent exclusively
licensed to Tyco. We believe that our patents are valid, that the sale of the RF
Disc Catheter Electrode System by Tyco infringes our patents and that we have
meritorious defenses to the counterclaims made by Tyco.

         Our dispute with Tyco and other potential future litigation could have
a negative impact on our ability to achieve or maintain profitability. We expect
the Tyco lawsuit and any other patent disputes in which we become involved to
significantly divert the attention of our management team and to represent a
significant cost to us until a final determination on such claims is made. If we
do not prevail in our suit against Tyco or in other potential lawsuits, we could
be required to pay damages and could be prohibited from selling certain of our
products unless we were able to obtain a license. 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.

         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 or
procedure 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 or procedures may infringe. There could also be existing patents that
one or more of our products or procedures 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.

         We are aware of the existence of patents held by other 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 patent infringement lawsuits and if the relevant patent
claims are upheld as valid and enforceable, we believe we have defenses based on
noninfringement. If we are incorrect and our products or procedures are found to
infringe a valid patent, we could be prevented from selling our products or
marketing our procedures unless we can obtain a license or are able to redesign
the product or procedure to avoid infringement. If we are unable to sell our
products and market our procedures, our business would suffer.


                                      -15-

<PAGE>

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 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.

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 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.


                                      -16-

<PAGE>

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 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.


                                      -17-

<PAGE>

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 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.


                                      -18-

<PAGE>

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. For example, during the third quarter we purchased certain assets of
Medical Product Specialists. 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 potential goodwill
               impairment and amortization of other intangible assets.

Acquisitions may 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.

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.


                                      -19-

<PAGE>

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

         On August 15, 2001 we filed a complaint against Radionics, Inc., and
added Tyco on August 22, 2001. This patent dispute is currently pending in the
United States District Court, District of Delaware. The parties remaining in the
proceeding are Tyco and ORATEC. The factual basis underlying the dispute is our
claim that the sale by Tyco of one of its spine products uses a procedure that
infringes two of our patents. On September 21, 2001, Tyco filed an answer and
affirmative defenses to our complaint denying certain of the allegations in the
complaint and asserting a counterclaim requesting declaratory relief that Tyco
is not infringing our patents and that our asserted patents are invalid and are
unenforceable. In addition, Tyco asserted that our marketed spine treatment
procedure infringes a patent allegedly exclusively licensed to Tyco. Our
complaint seeks unspecified monetary damages against Tyco for its sale of its
spine product utilizing our patented methods, as well as permanent injunctive
relief enjoining Tyco from further infringement of our patents. At the present
time, this matter is in its preliminary stages and no trial date has been set.
In addition to this patent dispute, we may from time to time become a party to
various legal proceedings arising in the ordinary course of our business.

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 September 30, 2001, we had used approximately $10.9 million of
the proceeds of the offering to repay debt balances, $11.5 million to purchase
capital equipment, and an additional $2.6 million to fund acquisitions. 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.

         In August 2001, we issued 4,607 shares to one of our lenders upon
exercise of a warrant at a purchase price of $3.00 per share. This issuance was
deemed exempt from registration under Section 4(2) of the Securities Act of 1933
as a transaction not involving a public offering.

Item 3.  Defaults Upon Senior Securities.  Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.  Not applicable.

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.


                                      -20-

<PAGE>
                                   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: November 14, 2001


                                      -21-