Document:

<PAGE>

                                                                    EXHIBIT 10.2

                               October 29, 1997

Ms. Nancy V. Westcott
510 Brierhill Road
Deerfield, Illinois  60015

Dear Nancy:

     On behalf of Oratec Interventions, Inc. (the "Company"), I am pleased to
                                                   -------
offer you the position of Chief Financial Officer and Vice President
Administration of the Company.  Speaking for myself, as well as the other
members of the Company's management team, we are all very impressed with your
credentials and we look forward to your future success in this position.

     The terms of your new position with the Company are as set forth below:

     1.   Position.
          --------

          a.  You will become the Chief Financial Officer and Vice President
Administration of the Company, working out of the Company's headquarters office
in Menlo Park, CA.  You will report to the Company's President and Chief
Executive Officer.

          b.  You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties and
obligations required of and from you pursuant to the terms hereof.  During the
term of your employment, you further agree that you will devote all of your
business time and attention to the business of the Company, the Company will be
entitled to all of the benefits and profits arising from or incident to all such
work services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Company's President and
Chief Executive Officer, and you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the business
of the Company.  Nothing in this letter agreement will prevent you from
accepting speaking or presentation engagements in exchange for honoraria or from
serving on boards of charitable organizations, or from owning no more than one
percent (1%) of the outstanding equity securities of a corporation whose stock
is listed on a national stock exchange.

     2.   Start Date.  Subject to fulfillment of any conditions imposed by this
          ----------
letter agreement, you will commence this new position with the Company on
November 3, 1997 (the "Start Date").
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June 28, 1999
Page 2

     3.   Proof of Right to Work.  For purposes of federal immigration law, you
          ----------------------
will be required to provide to the Company documentary evidence of your identity
and eligibility for employment in the United States.  Such documentation must be
provided to us within three (3) business days of your Start Date, or our
employment relationship with you may be terminated.

     4.   Compensation.
          ------------

          a.  Base Salary.  You will be paid a monthly salary of $12,500, which
              -----------
is equivalent to $150,000 on an annualized basis (the "Base Salary").  Your
salary will be payable in two equal payments per month pursuant to the Company's
regular payroll policy (or in the same manner as other officers of the Company).

          b.  Signing Bonus.  In connection with the commencement of your
              -------------
employment, you will be paid a cash bonus of $37,500 (as reduced applicable tax
withholdings) on your Start Date.  In the event that you voluntarily terminate
your employment with the Company before the end of the first year of employment,
you agree to repay the Company 100% of such bonus by personal check or other
negotiable instrument.

          c.  Incentive Bonus.  You will be eligible to receive an annual
              ---------------
incentive bonus of up to 25% of your Base Salary for the calendar year ending
December 31, 1998.  Payment of the bonus will be based on achievement of
specified corporate and individual performance targets mutually agreed upon by
you and the Company's President and Chief Executive Officer within 60 days of
your Start Date.  You will also be eligible to earn incentive bonuses in future
years, again based on achievement of objectives.  With respect to the remainder
of the 1997 calendar year, you will be eligible to receive a prorated portion of
the annual incentive bonus specified above based on achievement of specified
corporate and individual performance targets mutually agreed upon by you and the
Company's President and Chief Executive Officer within 30 days of your Start
Date.

          d.  Annual Review.  Your Base Salary will be reviewed at the end of
              -------------
each calendar year as part of the Company's normal salary review process.

     5.   Stock Options.
          -------------

          a.  Initial Grant. In connection with the commencement of your
              -------------
employment, the Company will recommend that the Board of Directors grant you an
option to purchase 150,000 shares of the Company's Common Stock ("Shares") with
                                                                  ------
an exercise price equal to the fair market value on the date of the grant. These
option shares will become exercisable at the rate of twelve forty-eighths
(12/48) of the Shares twelve months after the Vesting Commencement Date and one
forty-eighth (1/48) of the Shares at the end of each calendar month thereafter.
The Vesting Commencement Date will be your Start Date. Vesting will, of course,
depend on your continued employment with the Company. Notwithstanding the above,
in the event that (i) your employment is terminated by the Company or a
successor other than for Cause (as defined below), or (ii) your job duties,
responsibilities and requirements or compensation are materially reduced or
changed such that they are inconsistent with your prior duties, responsibilities
and requirements or
<PAGE>

June 28, 1999
Page 3

compensation, in either case in connection with, or as a result of, a Change of
Control (as defined below), one hundred percent (100%) of the option that has
not yet become exercisable shall become exercisable on the effective date of
such termination, reduction or change. For purposes of this letter, a
termination or material reduction or change will be deemed to have occurred in
connection with, or as a result of, a Change in Control if it occurs within 12
months of such Change in Control. The option will be an incentive stock option
to the maximum extent allowed by the tax code and will be subject to the terms
of the Company's 1995 Stock Plan and the Stock Option Agreement between you and
the Company.

          b.  Subsequent Option Grants.  Subject to the discretion of the
              ------------------------
Company's Board of Directors, you may be eligible to receive additional grants
of stock options from time to time in the future, on such terms and subject to
such conditions as the Board of Directors shall determine as of the date of any
such grant.

     6.   Benefits.
          --------

          a.  Employee Benefits.  You will be entitled to participate, to the
              -----------------
extent you are eligible under the terms and conditions thereof, in any 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 your 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.

          b.  Relocation Expenses.  In connection with your relocation from the
              -------------------
Chicago area to the San Francisco Bay Area, the Company will reimburse you for
the relocation expenses estimated on Schedule 1 hereto.  Any amounts received by
you for relocation expense reimbursement will be reported as taxable income to
you in the year received as required by applicable tax law; provided that you
will be fully "grossed up" for the taxes you pay as a result of this relocation
expense reimbursement.

     In the event that you voluntarily terminate your employment with the
Company before the end of your first year of employment, you agree to repay the
Company 100% of the relocation expenses estimated in Schedule 1 hereto by
personal check or other negotiable instrument.

     7.   Severance Agreement.  If your employment is terminated by the Company
          -------------------
or its successor for any reason other than Cause, as defined below, you will be
entitled to receive continuation of your Base Salary and medical insurance
benefits for the number of months following the date of termination of your
employment as set forth below:

          a.  Twelve (12) months if the termination occurs within two (2) years
of your Start Date.
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June 28, 1999
Page 4

          b.  Six (6) months if the termination occurs more than two (2) years
after your Start Date.

          c.  Twelve (12) months if the termination or the material reduction or
change (as described in Section 5(a)(ii)) occurs at any time during your
employment with the Company in connection with, or as a result of, a Change of
Control of the Company.

     In addition, if your employment is terminated by the Company or its
successor for any reason other than Cause, the Company will provide executive-
level outplacement services to you.

     8.   Definitions.
          -----------

          a.  Cause.  For purposes of this letter agreement, "Cause" shall mean
              -----                                           -----
(a) willful misconduct or gross negligence in performance of your duties
hereunder; (b) refusal to comply in any material respect with the legal
directives of the Company's Board of Directors so long as such directives are
not inconsistent with your position and duties, which is not remedied (if
remediable) within twenty (20) working days after written notice from the
Company's Board of Directors, which written notice shall state that failure to
remedy such conduct may result in termination for Cause; (c) a deliberate
attempt to do an injury to the Company; (d) conduct, dishonest, fraudulent or
otherwise, that materially discredits the Company or is materially detrimental
to the reputation of the Company; (e) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company; or (f) material breach of any element of the Company's
Proprietary Information Agreement, including without limitation, the theft or
other misappropriation of the Company's proprietary information, in each case as
determined in good faith by the Company's Board of Directors.

          b.  Change of Control. For purposes of this letter 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.

     9.   Limitation on Change of Control Benefits.  In the event that the
          ----------------------------------------
severance and stock option acceleration benefits provided in this letter
agreement in connection with, or as a result of, a Change of Control of the
Company (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section, would be subject to the excise tax imposed by Section 4999 of the
Code,
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June 28, 1999
Page 5

then such benefits shall be payable either: (a) in full, or (b) as to such
lesser amount which would result in no portion of such benefits being subject to
excise tax under Section 4999 of the Code, whichever of the foregoing amounts,
taking into account the applicable federal, state and local income taxes and the
excise tax imposed by Section 4999, results in your receipt on an after-tax
basis, of the greatest amount of benefits, notwithstanding that all or some
portion of such benefits may be taxable under Section 4999 of the Code. Unless
you and the Company otherwise agree in writing, any determination required under
this Section 9 shall be made in writing by independent public accountants
appointed by you and reasonably acceptable to the Company (the "Accountants"),
whose determination shall be conclusive and binding upon you and the Company for
all purposes. For purposes of making the calculations required by this Section
9, the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Section 280G and 4999 of the Code. The Company and
you shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 9.

     10.  Proprietary Information Agreement.  Your acceptance of this offer and
          ---------------------------------
commencement of employment with the Company is contingent upon the execution,
and delivery to an officer of the Company, of the Company's Proprietary
Information Agreement, a copy of which is enclosed for your review and execution
(the "Proprietary Information Agreement"), prior to or on your Start Date.
      ---------------------------------

     11.  Confidentiality of Terms.  You agree to follow the Company's strict
          ------------------------
policy that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including other
employees of the Company; provided, however, that you may discuss such terms
with members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting advice.

     12.  At-Will Employment.  Notwithstanding the Company's obligation
          ------------------
described in Sections 5a, 7 or elsewhere herein, your employment with the
Company will be on an "at will" basis, meaning that either you or the Company
may terminate your employment at any time for any reason or no reason, without
obligation or liability, except as specifically provided herein. We are all
delighted to be able to extend you this offer and look forward to working with
you.  To indicate your acceptance of the Company's offer, please sign and date
this letter in the space provided below and return it to me, along with a signed
and dated copy of the Proprietary Information Agreement. This letter, together
with the Proprietary Information Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements, whether written or oral.  This letter may not be modified or amended
except by a written agreement, signed by the Company and by you.

                                    Very truly yours,
<PAGE>

June 28, 1999
Page 6

                                    ORATEC INTERVENTIONS, INC.

                                    By: /s/ Kenneth W. Anstey
                                        ---------------------

                                    Title: President and Chief Executive Officer

ACCEPTED AND AGREED:

NANCY V. WESTCOTT

/s/ Nancy V. Westcott
---------------------
Signature

10/30/97
---------------------
Date

Enclosure:  Proprietary Information Agreement
<PAGE>

                                  SCHEDULE 1

                         ESTIMATED RELOCATION EXPENSES
                         -----------------------------<PAGE>

                                                                    EXHIBIT 10.3

                          ORATEC INTERVENTIONS, INC.

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

     This Employment Agreement (the "Agreement") is dated as of July 14, 1997 by
                                     ---------
and between Kenneth W. Anstey ("Employee") and Oratec Interventions, Inc., a
                                --------
California corporation (the "Company").
                             -------

     1.   Employment Term.  The Company agrees to employ Employee, and Employee
          ---------------
agrees to be employed by the Company, under the terms and conditions set forth
in this Agreement, for a period commencing on July 14, 1997 and ending July 13,
2001, unless such period is terminated earlier pursuant to Section 5 below (the
"Initial Term").  This Agreement may be extended for additional one (1) year
term(s) after the end of the Initial Term if Employee and the Company mutually
agree in writing to such extension(s).

     2.   Duties.
          ------

          (a)  Position.  Employee shall be employed as President and Chief
               --------
Executive Officer of the Company.  In such capacity he shall report to and be
subject to the direction and control of the Company's Board of Directors.
Employee shall also continue to serve on, and be a member of, the Company's
Board of Directors.

          (b)  Obligations to the Company.  Employee agrees to the best of his
               --------------------------
ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the terms hereof.  During the term of Employee's employment relationship with
the Company, Employee further agrees that he will devote all of his business
time and attention to the business of the Company, he will not render commercial
or professional services of any nature to any person or organization, whether or
not for compensation, without the prior written consent of the Company's Board
of Directors, and he will not directly or indirectly engage or participate in
any business that is competitive in any manner with the business of the Company.
Nothing in this Agreement will prevent Employee from accepting speaking
engagements in exchange for honoraria, from serving on boards of charitable
organizations or on the boards of up to three for-profit corporations other than
the Company (provided that Employee may serve on the boards of up to four such
corporations until December 31, 1997), or from investing in other businesses
provided he is not actively participating in any such business as a director,
employee, independent contractor, partner, principal, agent or otherwise, and
provided further that any such business is not competitive with the business
conducted by the Company (as conducted now or during the term of Employee's
employment), and no consent from the Company's Board of Directors shall be
required for any such activities.  Employee will comply with and be bound by the
Company's operating policies, procedures and practices from time to time in
effect during the term of Employee's employment.

     3.   At-Will Employment.  The Company and Employee acknowledge that
          ------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and that Employee's employment with the Company may be
terminated by either party at any time for any or no reason, subject only to the
specific provisions of this Agreement.  If Employee's
<PAGE>

employment terminates for any reason, Employee shall not be entitled to any
payments, benefits, damages, award or compensation other than as provided in
this Agreement. The rights and duties created by this Section 3 may not be
modified in any way except by a written agreement executed by Company's Board of
Directors and Employee.

     4.   Compensation.  For the duties and services to be performed by Employee
          ------------
hereunder, the Company shall pay Employee, and Employee agrees to accept, the
salary, bonuses stock options, and other benefits described below in this
Section 4 during the Initial Term.

          (a)  Salary.  Employee shall receive a monthly salary of $16,667
               ------
payable in two equal payments per month pursuant to the Company's normal payroll
practices.  The Base Salary shall be reviewed annually by the Company's Board of
Directors or its Compensation Committee, and any adjustment will be effective as
of the date determined appropriate by the Board of Directors or its Compensation
Committee.

          (b)  Bonuses.  For each fiscal year of the Company during the Initial
               -------
Term, Employee shall be eligible to receive a cash bonus of up to 40% of the
Base Salary.  At such time as the Company completes an initial public offering
of its Common Stock, the eligible bonus amount shall increase to 50% of the Base
Salary.  Such bonus shall be based on achievement of specified corporate and
individual performance targets established by the Board of Directors or its
Compensation Committee.  The bonus shall be structured to provide for a portion
of the bonus to be earned upon partial achievement of the targets, and to
provide for an overachievement bonus upon achieving results in excess of the
targets, in each case based on a formula to be determined by the Board of
Directors or its Compensation Committee.

          (c)  Stock Options.  In connection with the commencement of Employee's
               -------------
employment, the Board of Directors shall grant to Employee an option to purchase
420,000 shares of the Company's Common Stock (the "Shares").  The option shall
                                                   ------
be granted with an exercise price equal to the fair market value on the date of
the grant.  The option shall become exercisable during Employee's employment at
the rate of six forty-eighths (6/48) of the Shares six (6) months after the
Vesting Commencement Date and one-forty-eighth (1/48) of the Shares at the end
of each calendar month thereafter.  The Vesting Commencement Date shall be the
date on which Employee commences his employment with the Company.
Notwithstanding the above, in the event that (i) Employee's employment is
terminated by the Company or a successor other than for Cause (as defined in
Section 6 below), or (ii) Employee's job duties, responsibilities and
requirements are materially reduced or changed such that they are inconsistent
with Employee's prior duties, responsibilities and requirements, in either case
in connection with, or as a result of, a Change of Control (as defined in
Section 8 below), one hundred percent (100%) of the option has not yet become
exercisable shall become exercisable on the effective date of such termination,
reduction or change.  The option will be an incentive stock option to the
maximum extent allowed by the Internal Revenue Code of 1986, as amended, and
will be subject to the terms of the Company's 1995 Stock Plan and the Stock
Option Agreement between Employee and the Company.  Subject to the discretion of
the Company's Board of Directors, Employee shall be eligible to receive
additional grants of stock options from

                                      -2-
<PAGE>

time to time in the future, on such terms and subject to such conditions as the
Board of Directors shall determine as of the date of any such grant.

          (d)  Employee Benefits.  Employee shall be entitled to participate, to
               -----------------
the extent he is eligible under the terms and conditions thereof, in any 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 Employee'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.

          (e)  Relocation.  Upon submission of appropriate receipts, the Company
               ----------
shall reimburse Employee for the following relocation expenses incurred during
Employee's employment with the Company:

                    (i)   Closing costs incurred on the sale of Employee's
apartment in Boston if such sale occurs within two (2) years of commencement of
Employee's employment with the Company;

                    (ii)  Closing costs incurred on the purchase of a new
residence for Employee in California if such purchase occurs within two (2)
years of commencement of Employee's employment with the Company;

                    (iii) All reasonable out-of-pocket moving expenses incurred
by Employee in moving to a new residence in California;

                    (iv)  Reasonable travel expenses for up to three (3)
househunting trips for Employee and his family, including transportation,
accommodations and reasonable expenses for meals and other incidentals; and

                    (v)   Housing expenses in California for Employee and his
family for up to ninety (90) days after commencement of Employee's employment
with the Company until Employee moves into a new residence in California.

          Employee shall be responsible for the payment of any taxes payable
under applicable tax law on the relocation payments payable under this section
4(e).

          (f)  Car Allowance.   The Company shall provide to Employee a car
               -------------
allowance of $500 a month.  Employee shall be responsible for the payment of any
taxes payable under applicable tax law on such allowance.

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

                                      -3-
<PAGE>

     5.   Termination of Employment and Severance Benefits.
          ------------------------------------------------

          (a)  Termination of Employment.  This Agreement may be terminated upon
               -------------------------
the occurrence of any of the following events:

               (i)   The date written notice is delivered to Employee by the
Company stating that the Company terminating Employee for Cause (as defined in
Section 6 below) ("Termination for Cause"); provided that nothing contained in
                   ---------------------
this Section 5(a)(i) shall limit or otherwise modify Employee's right to contest
in the manner set forth in Section 15(h) below the Company's determination that
such termination is for Cause (as defined in Section 6 below).

               (ii)  The date written notice is delivered to Employee by the
Company stating that the Company is terminating Employee without Cause, which
determination may be made by the Company at any time at the Company's sole
discretion, for any or no reason ("Involuntary Termination");
                                   -----------------------

               (iii) The date written notice is delivered to the Company by
Employee stating that Employee is electing to terminate his employment with the
Company ("Voluntary Termination"); or
          ---------------------

               (iv)  Following Employee's death or disability (as defined in
Section 9 below).

          (b)  Severance Benefits.  Employee shall be entitled to receive
               ------------------
severance benefits upon termination of employment only as set forth in this
Section 5(b):

               (i)   Termination for Cause. If Employee's employment is
                     ---------------------
terminated for Cause, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies to the extent, if any, provided for under such plans
and policies in effect on the date of termination and in accordance with
applicable law.

               (ii)  Involuntary Termination. If Employee's employment is
                     -----------------------
terminated as a result of an Involuntary Termination other than for Cause (as
defined in Section 6 below) and other than by reason of Employee's Voluntary
Termination, Employee will be entitled to receive a severance payment equal to
twelve (12) months of the Base Salary plus the amount of Employee's target bonus
for the fiscal year in which the termination occurs to the extent that the bonus
has been earned as of such date, as determined by the Board of Directors or its
Compensation Committee based upon the specific corporate and individual
performance targets established for such fiscal year. Such payment shall be
reduced by applicable income and employment taxes and shall be made in two equal
installments as follows: (i) one-half within seven (7) days of the effective
date of the termination, and (ii) one-half on the six-month anniversary thereof.
Health insurance benefits with the same coverage provided to Employee prior to
the termination and in all other respects significantly comparable to those in
place immediately prior to the termination will be provided at the Company's
cost for a period of

                                      -4-
<PAGE>

twelve (12) months through reimbursement of premiums paid by Employee for such
coverage (which coverage shall be provided pursuant to the terms of the
Consolidated Omnibus Reconciliation Act of 1985, as amended, ("COBRA") once
available to employees of the Company). In addition, the stock option held by
Employee that is unexercisable as of the date of such termination shall become
exercisable on the effective date of such termination with respect to fifty
percent (50%) of the Shares (as defined in Section 4(c) above) subject to such
unexercisable option. As a condition of, and in exchange for, the receipt of
such severance benefits, Employee shall execute and deliver to the Company (and
remain in full compliance with): (i) a Settlement Agreement and Release of
Claims in a form satisfactory to the Company; and (ii) a resignation from all of
Employee's positions with the Company, including from the Board of Directors and
any committee thereof on which Employee serves, in a form satisfactory to the
Company.

               (iii) Voluntary Termination. If Employee's employment terminates
                     ---------------------
by Voluntary Termination, then Employee shall not be entitled to receive payment
of any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
plus the amount of Employee's target bonus for the fiscal year in which the
termination occurs to the extent that the bonus has been earned as of such date,
as determined by the Board of Directors or its Compensation Committee based upon
the specific corporate and individual performance targets established for such
fiscal year. In addition, Employee's benefits will be continued under the
Company's then existing benefit plans and policies to the extent, if any,
provided for under such plans and policies in effect on the date of termination
and in accordance with applicable law.

               (iv) Termination by Reason of Death or Disability. In the event
                    --------------------------------------------
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 9 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
accordance with applicable law. In addition, Employee's estate or representative
will receive the amount of Employee's target bonus for the fiscal year in which
the death or Disability occurs to the extent that the bonus has been earned as
of the date of Employee's death or Disability, as determined by the Board of
Directors or its Compensation Committee based on the specific corporate and
individual performance targets established for such fiscal year.

     6.   Definition of Cause.  For purposes of this Agreement, "Cause" for
          -------------------                                    -----
Employee's termination will exist at any time after the happening of one or more
of the following events, in each case as determined in good faith by the
Company's Board of Directors:

          (a)  Employee's

               (i) willful misconduct or gross negligence in performance of his
duties hereunder, or

                                      -5-
<PAGE>

               (ii) refusal to comply in any material respect with the legal
directives of the Company's Board of Directors so long as such directives are
not inconsistent with the Employee's position and duties,

which is not remedied (if remediable) within twenty (20) working days after
written notice from the Company's Board of Directors, which written notice shall
state that failure to remedy such conduct may result in Termination for Cause;

          (b)  Employee's deliberate attempt to do an injury to the Company;

          (c)  Employee's conduct, dishonest, fraudulent or otherwise, that
materially discredits the Company or is materially detrimental to the reputation
of the Company;

          (d)  Employee's conviction of a felony or a crime involving moral
turpitude causing material harm to the standing and reputation of the Company;
or

          (e)  Employee's material breach of any element of the Company's
Proprietary Information Agreement, including without limitation, Employee's
theft or other misappropriation of the Company's proprietary information.

     7.   Definition of Involuntary Termination. For purposes of this Agreement,
          -------------------------------------
"Involuntary Termination" shall include (a) any termination by the Company other
 -----------------------
than for Cause, (b) any reduction in Employee's base salary except as part of a
general salary reduction applicable to all of the Company's executive officers,
and (c) any Voluntary Termination by Employee following a material reduction or
change in job duties, responsibilities and requirements inconsistent with
Employee's position with the Company and Employee's prior duties,
responsibilities, and requirements or a change in Employee's reporting
relationship such that Employee is no longer reporting to the Company's Board of
Directors, provided that, in the case of subsection (c), Employee provides
written notice to the Company within thirty (30) days of the effective date of
such reduction or change.

     8.   Definition of Change of Control.  For purposes of this 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.

     9.   Definition of Disability. For purposes of this Agreement, "Disability"
          ------------------------                                   ----------
shall mean that Employee has been unable to perform his duties hereunder as the
result of his

                                      -6-
<PAGE>

incapacity due to physical or mental illness, and such inability, which
continues for at least 120 consecutive calendar days or 150 calendar days during
any consecutive twelve-month period, if shorter, after its commencement, is
determined to be total and permanent by a physician selected by the Company and
its insurers and acceptable to Employee or to Employee's legal representative
(with such agreement on acceptability not to be unreasonably withheld).

     10.  Proprietary Agreement.  Employee shall sign a Proprietary Information
          ---------------------
Agreement (the "Proprietary Agreement") in the form attached hereto as Exhibit
                ---------------------                                  -------
A.  Employee hereby agrees to continue to abide by the terms of the Proprietary
Agreement and further agrees that the provisions of the Proprietary Agreement
shall survive any termination of this Agreement or of Employee's employment
relationship with the Company.

     11.  Noncompetition Covenant.  Employee hereby agrees that he shall not,
          -----------------------
during the term of his employment pursuant to this Agreement and for six (6)
months thereafter, without the prior written consent of the Company's Board of
Directors, participate in any business or activity (as a director, employee,
independent contractor, partner, principal, agent, shareholder or otherwise)
which is competitive with the business conducted by the Company (as conducted
now or during the term of Employee's employment), nor engage in any other
activities that conflict with Employee's obligations to the Company.

     12.  Nonsolicitation Covenant.  Employee hereby agrees that he shall not,
          ------------------------
during the term of his employment pursuant to this Agreement and for twelve (12)
months thereafter, do any of the following, directly or indirectly, without the
prior written consent of the Company's Board of Directors:

          (a)  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; and

          (b)  Solicit Personnel.  Solicit, induce, recruit or encourage any
               -----------------
person employed by the Company to terminate or otherwise cease his employment
with the Company.  This Section 12(b) is to be read in conjunction with Section
7 of the Confidentiality Agreement executed by Employee.

     13.  Limitation on Stock Option Acceleration Benefit.  In the event that
          -----------------------------------------------
the stock option acceleration benefits provided for in this Agreement to the
Employee (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's acceleration benefits under Section 4(c) shall be
payable either:

               (a)  in full, or

(b)  as to such lesser amount which would result in no portion of such benefits
being subject to excise tax under Section 4999 of the Code, whichever of
the foregoing amounts, taking into

                                      -7-
<PAGE>

account the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by the Employee on an after-tax
basis, of the greatest amount of benefits under Section 4(c), notwithstanding
that all or some portion of such benefits may be taxable under Section 4999 of
the Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 13 shall be made in writing by
independent public accountants appointed by the Employee and reasonably
acceptable to the Company (the "Accountants"), whose determination shall be
conclusive and binding upon the Employee and the Company for all purposes. For
purposes of making the calculations required by this Section 13, the Accountants
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 13.

     14.  Conflicts.  Employee represents that his performance of all the terms
          ---------
of this Agreement will not breach any other agreement to which Employee is a
party.  Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement.  Employee further represents that he is entering into or has
entered into an employment relationship with the Company of his own free will.

     15.  Miscellaneous Provisions.
          ------------------------

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

          (b)  Amendments and Waivers. Any term of this Agreement may be amended
               ----------------------
or waived only with the written consent of the parties.

          (c)  Sole Agreement.  This Agreement, including any Exhibits hereto,
               --------------
constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.

          (d)  Notices. Any notice required or permitted by this Agreement shall
               -------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or forty-eight (48) hours after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party's address as set forth below
or as subsequently modified by written notice.

                                      -8-
<PAGE>

          (e)  Choice of Law.  The validity, interpretation, construction and
               -------------
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.

          (f)  Severability.  If one or more provisions of this Agreement are
               ------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith.  In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.

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

          (h)  Arbitration.   Any dispute or claim arising out of or in
               -----------
connection with this Agreement shall be finally settled by binding arbitration
in San Mateo County, California in accordance with the rules of the American
Arbitration Association applicable to commercial arbitration by one arbitrator
appointed in accordance with said rules.  The arbitrator shall apply California
law, without reference to rules of conflicts of law or rules of statutory
arbitration, to the resolution of any dispute.  Judgment on the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof.
Notwithstanding the foregoing, the parties may apply to any court of competent
jurisdiction for preliminary or interim equitable relief, or to compel
arbitration in accordance with this paragraph, without breach of this
arbitration provision.  This Section 15(h) shall not apply to the Proprietary
Agreement.

          (i)  Advice of Counsel Each Party to this Agreement acknowledges that,
               -----------------
in executing this Agreement, such party has had the opportunity to seek the
advice of independent legal counsel, and has read and understood all of the
terms and provisions of this Agreement. This Agreement shall not be construed
against any party by reason of the drafting of preparation hereof.

                           [SIGNATURE PAGE FOLLOWS]

                                      -9-
<PAGE>

     The parties have executed this Agreement the date first written above.

                              ORATEC INTERVENTIONS, INC.

                              By: /s/ Hugh Sharkey
                                 ________________________________

                              Title:_____________________________

                              Address: 3700 Haven Court
                                       Menlo Park, CA  94025

                              KENNETH W. ANSTEY

                              Signature: /s/ Kenneth W. Anstey
                                        -------------------------

                              Address:___________________________
                                      ___________________________

                                      -10-
<PAGE>

                                   EXHIBIT A
                                   ---------

                       PROPRIETARY INFORMATION AGREEMENT

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