Document:

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                                                                    EXHIBIT 10.4

                             EMPLOYMENT AGREEMENT
                             --------------------

     AGREEMENT made as of this 21st day of August 1996, by and between Oratec
Interventions, Inc., a California corporation (the "Company") and Hugh Sharkey
("Executive").

                                   RECITALS
                                   --------

     A.  The Executive is currently an employee of the Company; and

     B.  The Company and Executive desire to enter into an agreement to set
forth certain of the terms and conditions of Executive's employment as President
and Chief Executive Officer of the Company and, after the hiring of a new
President and Chief Executive Officer, as Executive Vice President of the
Company;

     NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto agree as follows:

                                   AGREEMENT
                                   ---------

     1.   Employment.  The Company shall employ Executive as President and Chief
          ----------
Executive Officer of the Company, and, after the hiring of a new President and
Chief Executive Officer, as Executive Vice President of the Company.

     2.   Term of Agreement.  This Agreement shall be effective as of August 21,
          -----------------
1996 and shall have a term of two (2) years.  This Agreement will be renewable
for one (1) year periods after the expiration of the original term if mutually
agreed in writing by Executive and the Company.

     3.   Duties; Compensation.
          --------------------

          (a)  Duties.  Subject to the authority of the Board of Directors (the
               ------
"Board") while Executive is President and Chief Executive Officer, and of the
President and Chief Executive Officer once Executive becomes Executive Vice
President, Executive shall have authority associated with such offices, and
shall perform, on behalf of the Company, all duties and services as are
customarily incident to such offices.  Executive shall devote his full time,
effort and attention during regular business hours to the business and affairs
of the Company and shall perform his duties and services hereunder to the best
of his ability.  The Company acknowledges that Executive may in the future serve
as a director, as a trustee or in a similar position with other corporations or
entities.  Any fees or other compensation received by Executive for service as a
director, as a trustee or in a similar position with another corporation or
entity shall be retained by Executive.

          (b)  Confidentiality.  On August 21, 1996, Executive executed the
               ---------------
Proprietary Information Agreement attached as Exhibit A hereto (the
"Confidentiality Agreement").  Executive hereby represents and warrants to the
Company that he has complied with all
<PAGE>

obligations under the Confidentiality Agreement and agrees to continue to abide
by the terms of the Confidentiality Agreement and further agrees that the
provisions of the Confidentiality Agreement shall survive any termination of
this Agreement or his employment by the Company.

     4.   Compensation. For the duties and services to be performed by Executive
          ------------
hereunder in his capacity as President and Chief Executive Officer of the
Company, the Company shall pay Executive and Executive agrees to accept, the
salary, stock options, bonuses and other benefits described below in this
Section 4.

          (a)  Salary.  Executive shall receive a monthly base salary of
               ------
$11,666.67, which is the equivalent of $140,000 per year, payable in bi-weekly
installments (or at such other times as the other executive officers of the
Company are paid).  The base salary shall be reviewed annually by the Board or
its Compensation Committee and any annual increases will be effective as of the
date determined appropriate by the Board or its Compensation Committee.

          (b)  Bonuses. Executive shall be eligible for an annual bonus based on
               -------
achievement of performance objectives established and agreed to by Executive and
the Board or its Compensation Committee.

          (c)  Employee Benefits. Executive shall be entitled to participate, to
               -----------------
the extent he is eligible under the terms and conditions thereof, in any
hospitalization or medical insurance plans, 401(k) plans, deferred compensation
plans, life insurance plans, vacation, retirement or other employee benefit
plans which are generally available to executives of the Company or are
available to senior executives or a select group of executives of the Company
and which may be in effect from time to time during Executive's employment with
the Company. The Company shall be under no obligation to institute or continue
the existence of any employee benefit plan described herein and may from time to
time amend, modify or terminate any such employee benefit plan. For purposes of
the right to the continuation of medical coverage under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, Executive's employment shall not
be deemed terminated until the expiration of the Company's obligation to make
payments to Executive under Section 5 below.

          (d)  Car Allowance.  Executive shall be entitled to receive a car
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allowance payment of $500 per month.

          (e)  Reimbursement of Expenses. Executive shall be authorized to incur
               -------------------------
and shall be reimbursed by the Company for reasonable expenses, provided that
such expenses are substantiated in accordance with Company policies.

     5.   Termination and Termination Payments.
          ------------------------------------

          (a)  Voluntary Termination.  Executive has the right to terminate his
               ---------------------
employment by the Company upon not less than one (1) month prior written notice
to the Company.  In the event of such election, Executive's employment shall
terminate effective upon the date set forth in such notice.  In such event, the
Company shall pay Executive all compensation (including base salary but
excluding bonus) due him to the date of termination.
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          (b) Involuntary Termination Without Cause.  The Company shall have the
              -------------------------------------
right to terminate Executive's employment without Cause upon not less than one
month prior written notice to Executive.  If the Company shall terminate
Executive's employment without Cause the Company shall (i) pay Executive all
compensation (including the base salary and an amount equal to the most recent
annual bonus, if any, paid to Executive) and benefits due him to the date of his
termination and for a period of one (1) year following the date of such
termination if such termination occurs during the first year of the term of this
Agreement, and for a period of six (6) months if such termination occurs during
the second year of the term of this Agreement or any renewal period; and (ii)
accelerate the vesting of all restricted stock and stock options held by
Executive such that the restricted stock and options shall be immediately vested
or exercisable in full, as applicable, as of the date of termination.  During
such period, Executive shall continue to be entitled to participate in the
Company's employee benefits plans or arrangements (as set forth in Section 4
above) on the same basis as if he were an employee.

          (c) Involuntary Termination With Cause.  The Company shall have the
              ----------------------------------
right to terminate Executive's employment with "Cause" upon three (3) days
written notice to Executive.  In such event, the Company shall pay Executive all
compensation (including base salary but excluding bonus) due him to the date of
his termination.

          (d) "Cause" Defined.  For the purposes of this Agreement, "Cause"
               --------------
shall mean (A) willful and repeated failure to comply with the lawful written
directions of the Board while Executive is President and Chief Executive
Officer, and of the President and Chief Executive Officer, once Executive
becomes Executive Vice President, (B) gross negligence or willful misconduct in
the performance of duties to the Company and/or it subsidiaries, (C) commission
of any act of fraud with respect to the Company and/or its subsidiaries, or (D)
conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company and/or it subsidiaries, in
each case as determined in good faith by the Board while Executive is President
and Chief Executive Officer, and by the President and Chief Executive Officer
once Executive becomes Executive Vice President.  In each of the foregoing
circumstances except (D), written notice shall be given to Executive specifying
in reasonable detail the facts giving rise thereto and that continuation may be
cause for termination unless such conduct is cured to the satisfaction of the
Board while Executive is President and Chief Executive Officer, and of the
President and Chief Executive Officer once Executive becomes Executive Vice
President within five (5) business days of receipt of such notice by Executive.

     6.   Noncompetition Covenant.  During the period specified below, Executive
          -----------------------
hereby agrees that he shall not do any of the following without the prior
written consent of the Board:

          (a) Compete.  Carry on anywhere in the United State any business or
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activity (whether directly or indirectly, as a partner, shareholder, principal,
agent, director, affiliate or consultant) which is directly competitive with the
Business conducted by the Company.  It is agreed that ownership of no more than
one percent of the outstanding voting stock of a publicly traded corporation,
ownership of no more than five percent of the outstanding voting stock of a
privately held corporation or ownership of no more than ten percent of the
limited partnership interests of a partnership shall not constitute a violation
of this provision.  As used herein, the
<PAGE>

"Business" conducted by the Company shall consist of the ablation of neural and
other tissues in and around the spine (to exclude the brain) and coagulation of
collagenous musculo-skeletal structures.

          (b) Solicit Business.  Solicit or influence or attempt to influence
              ----------------
any client, customer or other person either directly or indirectly, to direct
his or its purchase of the Company's products and/or services to any person,
firm, corporation, institution or other entity in competition with the Business
of the Company.

          (c) Solicit Personnel.  Solicit or influence or attempt to influence
              -----------------
any person employed by the Company to terminate or otherwise cease his
employment with the Company or become an employee of any competitor of the
Company.

          (d) Termination.  The covenants set forth in this Section 6 shall be
              -----------
effective commencing as of the date hereof and shall continue for so long as
cash payments are made to Executive under this Agreement.

     7.   Successors.  Any successor to the Company (whether direct or indirect
          ----------
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession.  The terms of this Agreement and all of Executive's rights hereunder
shall inure to the benefit of, and be enforceable by, Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.

     8.   Notice.  Notices and all other communications contemplated by this
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Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or sent by facsimile or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid.  Mailed notices to
Executive shall be addressed to Executive at the address recorded in Executive's
personnel file.  In the case of the Company, mailed notices shall be addressed
to its corporate headquarters, and all notices shall be directed to the
attention of its Secretary.

     9.   Miscellaneous Provisions.
          ------------------------

          (a) No Duty to Mitigate.  Employee shall not be required to mitigate
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the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor shall any such payment be reduced by any
earnings that Employee may receive from any other source.

          (b) Waiver.  No provision of this Agreement shall be modified, waived
              ------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by Executive and by an authorized officer of the Company
(other than Executive).  No waiver by either party or any breach of, or of
compliance with, any condition or provision of this
<PAGE>

Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision at another time.

          (c) Whole Agreement.  No agreements, representations or understanding
              ---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereto.

          (d) Choice of Law.  The validity, interpretation, construction and
              -------------
performance of this Agreement shall be governed by the laws of the State of
California.

          (e) Severability.  If any term or provision of this Agreement or the
              ------------
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such terms or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.

          (f) Employment Taxes.  All payments made pursuant to this Agreement
              ----------------
will be subject to withholding of applicable income and employment taxes.

          (g) Assignment of Company.  The Company may assign its rights under
              ---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company.  In the
case of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs you.

          (h) Counterparts.  This Agreement may be executed in counterparts,
              ------------
each of which shall be deemed an original, but all of this together will
constitute one and the same instrument.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

                                    ORATEC INTERVENTIONS, INC.

                                    By: /s/ Patrick Latterell
                                        ----------------------
                                    Title:

                                    HUGH SHARKEY, an individual

                                    /s/ Hugh Sharkey
                                    --------------------------
                                    Hugh Sharkey
<PAGE>

                                   EXHIBIT A

                           CONFIDENTIALITY AGREEMENT
<PAGE>

                    FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

     THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "First Amendment") is
                                                         ---------------
entered into as of July 14, 1997 (the "Effective Date") between Oratec
                                       --------------
Interventions, Inc., a California corporation ("Oratec"), and Hugh Sharkey
                                                ------
("Executive").
  ---------

                                   RECITALS
                                   --------

     A.  The Company and Executive entered into an Employment Agreement dated as
of August 21, 1996 (the "Agreement").
                         ---------

     B.  On the Effective Date, the Company hired a new President and Chief
Executive Officer, as contemplated in the Agreement, and Executive resigned from
such positions.

     C.  The Compensation Committee of the Board of Directors has approved
certain amendments to the Agreement, and the parties wish to amend the Agreement
in accordance therewith.  Terms used herein but not defined herein shall have
the same meanings ascribed to them in the Agreement.

     NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto agree as follows:

                                   AGREEMENT
                                   ---------

     1.  Employment.  Executive hereby resigns as President and Chief Executive
         ----------
Officer of the Company.  The Company shall employ Executive as Executive Vice
President and Chief Technical Officer of the Company.

     2.  Duties.  Subject to the authority of the Board, Executive shall have
         ------
the authority associated with the offices of Executive Vice President and Chief
Technical Officer, and shall perform, on behalf of the Company, all duties and
services as are customarily incident to such offices.  Among other things,
Executive is expected to participate in business development and fund raising,
including participation in "working group" meetings associated with an initial
public offering of the Company's securities.  In addition, Executive may
continue to attend a reasonable number of business conferences, seminars,
meetings of professional societies to the extent such activities contribute to
the performance of Executive's duties.

     3.  Bonus.  The Company shall pay Executive, within seven (7) days of the
         -----
closing of the Company's Series D financing, the amount of $70,000, representing
a 25% annual bonus of Executive's base salary of $11,666.67 per month for
Executive's two (2) years of service as the Company's President and Chief
Executive Officer.  In addition, within a reasonable period of time following
the Effective Date, the Company shall institute a performance bonus plan for
Executive based upon milestones determined by the President of the Company.
<PAGE>

     4.  Common Stock.  Executive shall be entitled to keep 5,000 shares of the
         ------------
Company's Common Stock currently registered in Executive's name on certificate
CS-81 which Executive repurchased from Ron Lax on October 25, 1995.

     5.  Acceleration of Vesting.  In the event of a Change of Control, (a)
         -----------------------
Executive's option for 40,000 shares of Common Stock granted on April 25, 1996
will be deemed to be 100% vested, and (b) the Company's repurchase option with
respect to (i) 150,000 shares of Common Stock held in the name of Smith Barney
Shearson as IRA Custodian FBO Hugh Sharkey IRA Account #595-62497-1-7-019 and
(ii) 444,000 shares of Common Stock held in the name of Sharkey-Daly Family
Trust U/D/T dated 9-23-96, will lapse in its entirety, in each case as of the
date of consummation of such Merger.  For purposes of the Agreement, a "Change
                                                                        ------
of Control" shall mean the occurrence of any of the following events: (i) an
----------
acquisition of the Company by another entity by means of any transaction or
series of related transactions (including, without limitation, any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company), or (ii) a
sale of all or substantially all of the assets of the Company (collectively, a
"Merger"), so long as in either case (x) the Company's shareholders of record
immediately prior to such Merger will, immediately after such Merger, hold less
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (y) the Company's shareholders of record immediately prior to such
Merger will, immediately after such Merger, hold less than sixty percent (60%)
of the voting power of the surviving or acquiring entity and a majority of the
members of the Board of Directors of the surviving or acquiring entity
immediately after such Merger were not members of the Board of Directors of the
Company immediately prior to such Merger.

     6.  Except as expressly amended by this First Amendment, the Agreement
shall remain in full force and effect, and the terms of the Agreement are
incorporated herein and made a part hereof.

     The parties have executed this First Amendment to Employment Agreement,
effective as of the Effective Date.

ORATEC INTERVENTIONS, INC.                        HUGH SHARKEY, An individual

By: /s/ Kenneth Anstey                            /s/ Hugh Sharkey
    -----------------------------                 -----------------------------
Kenneth Anstey, President and CEO                 Hugh Sharkey<PAGE>

                                                                    EXHIBIT 10.5

                                January 1, 1996

Mr. Roger Lipton
[Address]

Dear Roger:

     On November 29, 1995, (the "Grant Date") Oratec's Board of Directors
granted you an option to purchase 110,000 shares of Oratec's Common Stock (the
"Option") and a warrant to purchase 50,000 shares of Oratec's Series B Preferred
Stock (the Warrant").  Both the Option and the Warrant contain certain vesting
provisions.

     The Board has determined to modify the terms of the Option and the Warrant.
In the event of a merger or consolidation of the Company in which the Company is
not the surviving corporation or a sale of all or substantially all of the
Company's assets (collectively, a "Merger"), the Option and the Warrant shall
become fully exercisable immediately prior to the completion of the Merger.

     Please let me know if you have questions regarding the above..

                                        Sincerely,

                                        /s/ Hugh Sharkey
                                        Hugh Sharkey
                                        President and Chief Executive Officer

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