<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 March 31, 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)

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

                               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 April 30, 2001, there were 22,870,133 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 - March 31, 2001 and December 31, 2000..............................      3

              Condensed Statements of Operations - Three months ended March 31, 2001 and 2000..............      4

              Condensed Statements of Cash Flows - Three months ended March 31, 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...................................     17

PART II.      OTHER INFORMATION

     Item 1.  Legal Proceedings............................................................................     17

     Item 2.  Changes in Securities and Use of Proceeds....................................................     17

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

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

     Item 5.  Other Information............................................................................     18

     Item 6.  Exhibits and Reports on Form 8-K.............................................................     18

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>
                                                                             March 31,             December 31,
                                                                                2001                   2000
Assets                                                                      (unaudited)
                                                                          ---------------        ----------------
<S>                                                                       <C>                    <C>
Current assets:
   Cash and cash equivalents.......................................           $ 28,968               $ 33,264
   Available-for-sale investments..................................             22,291                 16,683
   Accounts receivable, net........................................              8,566                  8,352
   Inventories.....................................................              5,449                  6,450
   Prepaid expenses................................................              1,077                  1,537
   Other current assets............................................              1,467                  1,787
                                                                              --------               --------
      Total current assets.........................................             67,818                 68,073
Property and equipment, net........................................              9,384                  8,985
                                                                              --------               --------
                                                                              $ 77,202               $ 77,058
                                                                              ========               ========
Liabilities and stockholders' equity

Current liabilities:
   Accounts payable................................................           $  1,165               $  1,175
   Accrued compensation and benefits...............................              2,412                  3,764
   Other accrued liabilities.......................................              2,021                  1,760
   Current portion of equipment financing obligations..............                 16                     22
                                                                              --------               --------
      Total current liabilities....................................              5,614                  6,721

Common stock, $0.001 par value.....................................                 23                     22
Additional paid-in capital.........................................            101,003                100,244
Deferred stock compensation........................................               (208)                  (230)
Receivable from stockholder........................................                (41)                   (49)
Accumulated other comprehensive income.............................                236                      -
Accumulated deficit................................................            (29,425)               (29,650)
                                                                              --------               --------
Stockholders' equity...............................................             71,588                 70,337

                                                                              $ 77,202               $ 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
                                                                             March 31,
                                                                 -----------------------------
                                                                       2001             2000
                                                                 -----------------------------
<S>                                                                 <C>              <C>
Sales........................................................       $12,811          $12,663
Cost of sales................................................         4,020            3,646

Gross profit.................................................         8,791            9,017
Operating expenses:
      Research and development...............................         1,428            1,318
      Sales and marketing....................................         6,702            6,035
      General and administrative.............................           973            1,035
      Stock compensation (1).................................           182              259
                                                                    -------          -------
Total operating expenses.....................................         9,285            8,647
                                                                    -------          -------
Income (loss) from operations................................          (494)             370
Interest and other income....................................           730              168
Interest and other expense...................................            (1)            (321)
                                                                    -------          -------
Income before income taxes...................................           235              217
Provision for income taxes...................................            12               11
                                                                    -------          -------
Net income...................................................       $   223          $   206
                                                                    =======          =======

Basic net income per share...................................       $  0.01          $  0.05
                                                                    =======          =======

Diluted net income per share.................................       $  0.01          $  0.01
                                                                    =======          =======
Shares used in computing basic net income per share..........        22,671            4,555
Shares used in computing diluted net income per share........        23,475           18,873
</TABLE>

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

    Research and development..............................   $  64   $ 259
    Sales and marketing...................................     118      --
                                                             -----   -----
                                                             $ 182   $ 259
                                                             =====   =====

                            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>
                                                                                        Three months ended
                                                                                             March 31,
                                                                                 ------------------------------
                                                                                         2001              2000
                                                                                 ------------------------------
<S>                                                                              <C>               <C>
Operating activities
Net income.....................................................................       $   223           $   206
Adjustments to reconcile net income to net cash used in operating activities:
  Depreciation and amortization................................................         1,021               861
  Compensation expense for options granted to non-employees....................           160               236
  Amortization of stock compensation...........................................            22                23
Changes in operating assets and liabilities:
  Accounts receivable..........................................................          (214)           (1,412)
  Inventories..................................................................         1,001              (290)
  Prepaid expenses and other current assets....................................           780              (316)
  Accounts payable.............................................................           (11)              414
  Accrued compensation and benefits............................................        (1,352)             (489)
  Other accrued liabilities....................................................           261               138
                                                                                    ---------         ---------
      Net cash provided by (used in) operating activities......................         1,891              (629)
                                                                                    ---------         ---------
Investing activities:
Purchases of available-for-sale investments....................................        (7,970)               --
Sales of available-for-sale investments........................................         2,598             2,931
Capital expenditures...........................................................        (1,421)           (3,345)
                                                                                    ---------         ---------
      Net cash used in investing activities....................................        (6,793)             (414)
                                                                                    ---------         ---------
Financing activities:
Proceeds from issuance of common stock.........................................           603               542
Repayment of shareholder receivables...........................................             8                --
Repayment of notes payable.....................................................            --              (501)
Repayment of equipment financing obligations...................................            (6)             (314)
                                                                                    ---------         ---------
      Net cash provided by (used in) financing activities......................           606              (273)
                                                                                    ---------         ---------
Net decrease in cash and cash equivalents......................................        (4,296)           (1,316)
Cash and cash equivalents at beginning of period...............................        33,264             5,943
                                                                                    =========         =========
Cash and cash equivalents at end of period.....................................       $28,968           $ 4,627
                                                                                    =========         =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Cash payments for interest.................................................       $     1           $   313
                                                                                    =========         =========
</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):

                                                    Three months ended March 31,
                                                    ----------------------------
                                                        2001         2000
                                                      --------     -------
Net income.........................................   $    223     $   206
                                                      ========     =======
Shares used in the calculation:
Weighted-average common shares outstanding
used to compute basic net income per share.........     22,671       4,555
Weighted-average effect of dilutive securities:
Options............................................        782       2,090
Warrants...........................................         22         148
    Redeemable convertible preferred shares........         --      12,080
Weighted-average shares used to compute diluted
    net income per share...........................     23,475      18,873
                                                      ========     =======
Net income per share:
Basic..............................................   $   0.01     $  0.05
                                                      ========     =======
Diluted............................................   $   0.01     $  0.01
                                                      ========     =======

     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 months ended March 31,
2001 and 2000 are as follows (in thousands):

                                                         Three months
                                                        ended March 31,
                                                      -----------------
                                                       2001        2000
                                                      -----       -----
Net income.........................................   $ 223       $ 206
                                                      -----------------
Unrealized gain on available-for-sale                   236          --
investments........................................   $ 459       $ 206
                                                      =================


4.   Balance Sheet Detail (in thousands):

                                                   March 31,    December 31,
                                                   -------------------------
                                                       2001          2000
                                                   -----------     ---------
     Inventory:
         Raw materials............................   $ 2,158       $ 2,573
         Work-in-process..........................       112           189
         Finished goods...........................     2,528         3,094
         Generators held for sale.................       651           594
                                                     -------       -------
     Total........................................   $ 5,449       $ 6,450
                                                     =======       =======

     Other accrued liabilities:
         Accrued professional fees................   $   634       $   584
         Dealer commissions.......................       446           349
         Clinical and development costs...........       328           281
         Other....................................       613           546
                                                     -------       -------
     Total........................................   $ 2,021       $ 1,760
                                                     =======       =======

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.

                                      -7-
<PAGE>

6.      Segment Information:

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

                                                       Three months
                                                      ended March 31,
                                                     ------------------
                                                        2001      2000
                                                     ------------------
     Spine........................................   $ 6,188   $ 6,760
     Arthroscopy..................................     6,623     5,903
                                                     -------   -------
                                                     $12,811   $12,663
                                                     =======   =======

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 three months ended March 31, 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
three months ended March 31, 2001, we produced a profit of $223,000 compared to
a profit of $206,000 for the three months ended March 31, 2000. Our
profitability is attributable to both increased sales and interest earned on
proceeds from our initial public offering in April 2000. At March 31, 2001 we
had an accumulated deficit of $29.4 million.

        For the three months ended March 31, 2001, only 1% 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

                                      -8-
<PAGE>

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.

        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

        Sales increased 1% to $12.8 million for the three months ended March 31,
2001 from $12.7 million for the three months ended March 31, 2000. Our
arthroscopy business increased 12% to $6.6 million in the first three months of
2001 from $5.9 million for the first three months of 2000 as the continuing
market acceptance of our Vulcan arthroscopy system and new product introductions
led to greater account penetration, increased probe utilization rates, and a
higher number of active customers. Sales decreased in our spine business to $6.2
million in the first three months of 2001 from $6.8 million in the first three
months of 2000, or 8%, 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.

 Cost of sales

        Cost of sales increased to $4.0 million for the three months ended March
31, 2001, a 10% increase from $3.6 million for the three months ended March 31,
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.

 Gross profit

        Gross profit decreased to $8.8 million, or 69% of sales, for the three
months ended March 31, 2001 from $9.0 million, or 71% of sales, for the three
months ended March 31, 2000. The decrease in overall gross profit is
attributable to sales growing at a slower pace than unit manufacturing costs and
inventory reserves.

                                      -9-
<PAGE>

 Research and development expenses

        Research and development expenses increased 8% to $1.4 million for the
three months ended March 31, 2001 from $1.3 million for the three months ended
March 31, 2000. The increases are related to the addition of headcount and
office space for increased development efforts on next-generation spine devices
and advanced arthroscopy probes. 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 increased 11% to $6.7 million for the three
months ended March 31, 2001 from $6.0 million for the three months ended March
31, 2000. Increased expenses were primarily due to greater overall sales and
marketing headcount, higher commission expenses relating sales compensation
programs and expenses associated with our reimbursement function. 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 $973,000 for the three months
ended March 31, 2001, a 6% decrease from $1.0 million for the three months ended
March 31, 2000. The decrease in expenses during the three months ended March 31,
2001 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 $182,000 and $259,000 for the three
months ended March 31, 2001 and 2000, respectively. 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.

 Interest and other income (expense), net

        Net interest and other income was $729,000 for the three months ended
March 31, 2001, a change from net interest and other expense of $(153,000) for
the three months ended March 31, 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 months ended March 31, 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

                                      -10-
<PAGE>

carryforwards of approximately $400,000 for federal income tax purposes. The
income tax provision for the quarter ended March 31, 2001 was $12,000. 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 $1.9 million for the three
months ended March 31, 2001, compared to net cash used of $629,000 for the three
months ended March 31, 2000. Cash provided was primarily related to increases in
non-cash depreciation and amortization charges on generators and equipment and
decreases in inventories and prepaid expenses, partially offset by decreases in
accrued compensation and benefits.

     Net cash used in investing activities was $6.8 million for the three months
ended March 31, 2001, compared to $414,000 for the three months ended March 31,
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 $606,000 for the three months
ended March 31, 2001, compared to net cash used by financing activities of
$273,000 for the three months ended March 31, 2000. The change was due mainly to
lower debt repayments 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 March 31, 2001, our principal debt and other commitments consisted of
$16,000 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 March 31, 2001 consisted of $51.3
million of cash and available-for-sale investments, primarily from our initial
public offering which was completed on April 4, 2000.  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 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 individual
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

                                      -11-
<PAGE>

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 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
quarter of 2001, we were not profitable in the fourth quarter of 2000. If sales
do not continue to 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 March 31, 2001, we had an accumulated deficit of
approximately $29.4 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.

                                      -12-
<PAGE>

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 Inc., a division of Tyco International, has
launched a spine product which we expect to compete directly with the IDET
system.

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.

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.

                                      -13-
<PAGE>

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 overmanipulation 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 an increase in 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;

                                      -14-
<PAGE>

          .    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,
Canada, Italy, Korea, 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

                                      -15-
<PAGE>

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 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.

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

                                      -16-
<PAGE>

          .    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.

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 March 31, 2001, we had used approximately $10.9 million of
the proceeds of the offering to repay debt balances and an additional $9.5
million to purchase capital equipment.  We intend to use the 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 February 2001, we issued 62,237 shares to one of our lenders upon
exercise of a warrant at a purchase price of $4.25 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.

                                      -17-
<PAGE>

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:


         10.8++  1999 Stock Plan, as amended, and form of option agreement.
         10.9++  1999 Directors' Stock Option Plan, as amended, and form of
                 option agreement.

         ++  Supercedes previously filed exhibit.

         (b) Reports on Form 8-K: Not applicable.

                                      -18-
<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: May 11, 2001

                                      -19-
<PAGE>

                                 EXHIBIT INDEX
                                 -------------

     10.8++  1999 Stock Plan, as amended, and form of option agreement.
     10.9++  1999 Directors' Stock Option Plan, as amended, and form of option
             agreement.

     ++   Supercedes previously filed exhibit.

                                      -20-