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

                                    Form 10-Q

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

                For the quarterly period ended July 4, 1998

                                       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: 0-27422

                             ARTHROCARE CORPORATION
             (Exact name of registrant as specified in its charter)

         DELAWARE                                        94-3180312 
(State of incorporation)                    (I.R.S. Employer Identification No.)

                            595 North Pastoria Avenue
                           Sunnyvale, California 94086
                    (Address of principal executive offices)

                                 (408) 736-0224
              (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 
                                      -----     -----

The number of shares outstanding of the registrant's common stock as of
August 4, 1998 was 8,946,354.








<PAGE>
                    ARTHROCARE CORPORATION

                             INDEX




PART 1:  Financial Information

     Item 1.  Financial Statements

          Condensed Consolidated Balance Sheets as of July 4, 1998 (unaudited)
            and  January 3, 1998

          Condensed Consolidated Statements of Operations (unaudited) for the
            three and six months ended July 4, 1998 and June 27, 1997

          Condensed Consolidated Statements of Cash Flows (unaudited)
            for the six months ended July 4, 1998 and June 27, 1997

          Notes to Condensed Consolidated Financial Statements (unaudited)

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

PART II:  Other Information

     Item 1.  Legal Proceedings
     Item 2.  Changes in Securities
     Item 3.  Defaults upon Senior Securities
     Item 4.  Submission or Matters to Vote of Security Holders
     Item 5.  Other Information
     Item 6.  Exhibits and Reports on Form 8-K

SIGNATURE
<PAGE>




















Part 1.  Financial Information
Item 1.   Financial Statements

                             ARTHROCARE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                      July 4,      January 3,
                                                       1998           1998
                                                   -------------  -------------
                                                   (unaudited)
<S>                                                <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                             $10,299         $8,188
  Available-for-sale securities                           4,575         10,674
  Accounts receivable, net                                3,806          2,223
  Inventory                                               3,744          2,019
  Prepaid expenses and other current assets                 544            210
                                                   -------------  -------------
       Total current assets                              22,968         23,314

Available-for-sale securities                             2,635          1,010
Property and equipment, net                               2,165          1,412
Related party receivables                                   886            876
Other assets                                                 76             63
                                                   -------------  -------------
     Total assets                                       $28,730        $26,675
                                                   =============  =============
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                       $1,742           $968
  Deferred Revenue                                          875            --
  Accrued liabilities                                     2,649          2,004
                                                   -------------  -------------
          Total current liabilities                       5,266          2,972

Deferred rent                                               150            157
                                                   -------------  -------------
          Total liabilities                               5,416          3,129
                                                   -------------  -------------
Stockholders' equity:
  Common stock                                               21              9
  Additional paid in capital                             49,678         49,153
  Notes receivable from stockholders                        (83)           (92)
  Deferred compensation                                    (148)          (228)
  Unrealized gain (loss) on available-for-sale
    securities                                               (7)            10
  Accumulated deficit                                   (26,147)       (25,306)
                                                   -------------  -------------
          Total stockholders' equity                     23,314         23,546
                                                   -------------  -------------
     Total liabilities and stockholders' equity         $28,730        $26,675
                                                   =============  =============
</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
<PAGE>
                             ARTHROCARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                     Three Months Ended       Six Months Ended
                                                 -----------------------  ------------------------
                                                   July 4,    June 28,      July 4,     June 28,
                                                    1998        1997         1998         1997
                                                 ----------- -----------  -----------  -----------
<S>                                              <C>         <C>          <C>          <C>
Net sales                                            $5,673      $2,832      $10,544       $5,093
Cost of sales                                         3,145       1,994        5,995        3,673
                                                 ----------- -----------  -----------  -----------
Gross profit                                          2,528         838        4,549        1,420
                                                 ----------- -----------  -----------  -----------
Operating expenses:
   Research and development                           1,155         873        2,140        1,753
   Sales and marketing                                2,422       1,386        4,538        2,751
   General and administrative                           713         927        1,924        1,818
                                                 ----------- -----------  -----------  -----------
        Total operating expenses                      4,290       3,186        8,602        6,322
                                                 ----------- -----------  -----------  -----------
Loss from operations                                 (1,762)     (2,348)      (4,053)      (4,902)
Interest and other income, net                          668         359        3,212          746
                                                 ----------- -----------  -----------  -----------
Net loss                                            ($1,094)    ($1,989)       ($841)     ($4,156)
                                                 =========== ===========  ===========  ===========

Net loss per common share and per common 
 share-assuming dilution                             ($0.12)     ($0.23)      ($0.09)      ($0.47)
                                                 =========== ===========  ===========  ===========
Shares used in computing net loss per common
 share and per common share-assuming dilution         8,914       8,806        8,902        8,795
                                                 =========== ===========  ===========  ===========
</TABLE>
               The accompanying notes are an integral part of these
                   condensed consolidated financial statements
<PAGE>













                           ARTHROCARE CORPORATION
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (In thousands)
                               (Unaudited)
<TABLE>
<CAPTION>
                                                           Six Months Ended
                                                      --------------------------
                                                        July 4,       June 28,
                                                          1998          1997
                                                      ------------  ------------
                                                      (unaudited)
<S>                                                   <C>           <C>
Cash flows from operating activities:
   Net loss                                                 ($841)      ($4,156)
   Adjustments to reconcile net loss
    to net cash used in operating activities:
        Depreciation and amortization                         282           304
        Amortization of deferred compensation                  80            79
        Provision for doubtful accounts receivable
          and product returns                                  50            52
        Provision for excess and obsolete inventory           186           149
        Deferred rent                                          (7)            3
        Changes in operating assets and liabilities:
          Accounts Receivable                              (1,633)          (30)
          Related party receivables                           (10)           66
          Inventory                                        (1,911)         (666)
          Prepaid expenses and other current assets          (334)         (171)
          Accounts payable                                    774           163
          Accrued liabilities                                 660           246
          Deferred Revenue                                    875             0
          Other assets                                        (13)            6
                                                      ------------  ------------
           Net cash provided used in
              operating activities                         (1,842)       (3,955)
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment                     (1,035)         (293)
   Purchases of available-for-sale securities             (22,093)       (5,627)
   Sale or maturities of available-for-sale securities     26,550        15,617
                                                      ------------  ------------
           Net cash provided by investing activities        3,422         9,697
                                                      ------------  ------------

Cash flows from financing activities:
   Repayment of capital leases                                (15)          (23)
   Issuance of notes receivable                                 9            --
   Proceeds from exercise of options
      to purchase common stock                                537            65
                                                      ------------  ------------
           Net cash provided by financing activities          531            42
                                                      ------------  ------------

Net increase in cash and cash equivalents                   2,111         5,784
Cash and cash equivalents, beginning of period              8,188        11,359
                                                      ------------  ------------
Cash and cash equivalents, end of period                  $10,299       $17,143
                                                      ============  ============
Supplemental schedule of non-cash investing and
      financing activities:
   Net unrealized loss on
      available-for-sale securities                          ($17)          $40

</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
<PAGE>













































                          ARTHROCARE CORPORATION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.  Basis of Presentation

        In the opinion of management, the accompanying unaudited condensed 
consolidated 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 ArthroCare 
Corporation (the company) 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.  The notes to the 
financial statements contained in the Form 10-K for the year ended 
January 3, 1998 should be read in conjunction with these condensed 
consolidated financial statements.  The balance sheet at January 3, 1998 
was derived from audited financial statements; however, the financial 
statements in this report do not include all disclosures required by 
generally accepted accounting principles.

Computation of Net Loss per Common Share and per Common Share-assuming 
dilution

        The company has adopted the provisions of Statement of Financial 
Accounting Standards (SFAS) No. 128, "Earnings Per Share" and the 
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 
98, effective January 3, 1998 and has restated all prior periods 
accordingly.  Net loss per common share and per common share-assuming 
dilution is computed using the weighted average number of shares of 
common stock outstanding.  Dilutive potential common equivalent shares 
consist of the incremental common shares issuable upon conversion of 
stock options.  The company has excluded stock options from the 
computation of net loss per common share-assuming dilution because all 
such securities are anti-dilutive from all periods presented.

Stock options to purchase 390,790 share of common stock at prices 
ranging from $.20 per share to $24.25 per share were outstanding at July 
4, 1998, but were not included in the computation of net loss per common 
share-assuming dilution because they were antidilutive.  The 
aforementioned stock options could potentially dilute earning per share 
in the future.


3. Interest and other income, net:

In February 1998, the company entered into a license agreement 
under which Boston Scientific Corporation (BSC) will develop and market 
products based on the company's Coblation T technology for myocardial 
revascularization procedures.  Under the agreement, BSC acquires 
exclusive licensing rights to the company's intellectual property in 
this field. BSC will pay license fees, a portion of which will be 
classified as prepaid royalties, to the company upon achievement of 
designated milestones and royalties on sales of resulting products, if 
any. Of this amount, the company received a license fee in the quarter 
ended April 4, 1998, of $3.0 million in partial consideration for the 
license granted.  The company recognized $2.25 million as other income 
in the quarter received.  The remaining $0.75 million will be recognized 
as progress is made toward the next milestone of which $0.125 million 
was recognized in the three-month period ended July 4, 1998. 

In June 1998, the company entered into a license and distribution 
agreement with Xomed whereby Xomed will acquire exclusive, worldwide, 
marketing rights for the company's patented Coblation TM  technology in 
the ear, nose and throat (ENT) market.  Under the terms of the 
agreement, Xomed will pay license fees based upon the achievement of 
certain milestones.  During the three and six-month periods ended July 
4, 1998 the company recognized, $0.25 million of such payments as other 
income. 

4.  Balance sheet detail (in thousands):

<TABLE>
<CAPTION>
                                          July 4,        January 3,
                                            1998               1998
                                        ------------    ------------
                                        (Unaudited)
<S>                                     <C>             <C>
Inventory:
   Raw materials                             $1,510            $921
   Work-in-process                              806             165
   Finished goods                             1,428             933
                                        ------------    ------------
Total                                        $3,744          $2,019
                                        ============    ============

Accrued liabilities:
   Compensation                              $1,351          $1,314
   Deferred license fee                         675            --
   Legal expense                                568              38
   Other                                         55             652
                                        ------------    ------------
Total                                        $2,649          $2,004
                                        ============    ============
</TABLE>


5.  Recent Accounting Pronouncements:

        Effective April 4, 1998 the company adopted SFAS No. 130, 
"Reporting Comprehensive Income" which establishes standards for the 
reporting and display of comprehensive income and its components in a 
full set of general purpose financial statements.  Comprehensive income 
is defined as the change in equity of a business enterprise during a 
period, resulting from transactions and other events and circumstances 
from non-owner sources.  As the components of comprehensive income for 
the company are not material, the additional reporting and display of 
comprehensive income and its components has not been reflected in the 
accompanying condensed consolidated financial statements.

<PAGE>

PART 1. FINANCIAL INFORMATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Overview

Statements in this Management's Discussion and Analysis of 
Financial Condition and Results of Operations which express that the 
company "believes", "anticipates" or "plans to." as well as other 
statements which are not historical fact, are forward-looking statements 
within the meaning of the Private Securities Litigation Reform Act of 
1995. Actual events or results may differ materially as a result of the 
risks and uncertainties described herein and elsewhere including, in 
particular, those factors described under "Business" set forth in Part I 
of the company's Annual Report on Form 10-K for the year ended January 
3, 1998 and "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS".

        Since commencing operations in April 1993, ArthroCare Corporation 
(the company) has primarily engaged in the design, development, clinical 
testing, manufacturing and marketing of its Arthroscopic System. The 
Arthroscopic System uses the company's novel CoblationT technology that 
allows surgeons to operate with increased precision and accuracy with 
minimal damage to surrounding tissue. It is currently being used in 
closed-joint surgery including many types of knee and shoulder 
procedures. The Arthroscopic System consists of a disposable, multi-
electrode bipolar ArthroWand, a radio frequency controller that powers 
the ArthroWand and a cable that connects the ArthroWand to the 
controller. The ArthroWand ablates (removes) soft tissue with minimal 
damage to surrounding healthy tissue and simultaneously achieves 
hemostasis (sealing of small bleeding vessels). 

        In February 1998, the company entered into a license and OEM 
agreement under which Boston Scientific Corporation (BSC) will develop 
and market products based on the company's CoblationT technology for 
myocardial revascularization procedures.  In April 1998, the company 
announced that it is entering the cosmetic surgery market and that it 
has formed a new business unit, called Visage TM, to commercialize its 
technology in this field.  In May 1998, the company announced that it is 
entering the otorhinolaryngology (ear, nose and throat) market and that 
it has formed a new business unit, called ENTec TM, to commercialize the 
technology in this field.  In June 1998, the company entered into a 
license and OEM agreement with Xomed Surgical Products (Xomed). Under 
the terms of this agreement, Xomed will become the exclusive worldwide 
marketer of ArthroCare's patented Coblation TM  technology in the 
otorhinolaryngology market.

        The company received clearance of its 510(k) premarket 
notification from the United States Food and Drug Administration (FDA) 
in March 1995 to market its Model 970 Arthroscopic System in the United 
States for use in arthroscopic surgery of the knee, shoulder, elbow and 
ankle. The company has since received clearance for use in the wrist and 
hip.  In October 1996, the company received clearance of its 510(k) 
premarket notification for the System 2000 Arthroscopic System in the 
United States for use in arthroscopic surgery of the knee, shoulder, 
elbow, ankle, wrist and hip.

        In December 1995, the company commercially introduced its 
Arthroscopic System through a network of distributors in the United 
States. In light of the foregoing, the company has a limited history of 
operations. The company's strategy includes placing with arthroscopic 
surgeons, controllers that are intended to generate future wand 
revenues. The company's long-term strategy includes applying its 
patented platform technology to a range of other soft-tissue surgical 
procedures including ear, nose and throat and cosmetic surgical 
procedures. The company has received 510(k) clearance for use of its 
technology in several fields and has received approval of an 
Investigational Device Exemption (IDE) to conduct a clinical study which 
may result in the company submitting a 510(k) application to the FDA.  
There can be no assurance that any of the company's clinical studies 
will lead to 510(k) applications or that the applications will be 
cleared by the FDA on a timely basis, if at all, or that the products, 
if cleared for marketing, will ever achieve commercial acceptance. 

Results of Operations

Revenues

Revenues for the three and six-month periods ended July 4, 1998 
increased to $5.7 million or 100.3% and $10.5 million or 107%, 
respectively, as compared to $2.8 million and $5.1 million for the same 
periods during the prior year.  The increase in revenues of $2.8 million 
and $5.5 million for the three and six-month periods ended July 4, 1998, 
respectively, was primarily due to higher unit volume wand sales.  The 
higher unit volume of wand sales resulted from a larger installed base 
of controllers. Wands continue to be sold at or near list price.   The 
company expects international sales and sales to its marketing partner, 
Xomed, of wands at discounted prices to reduce wand ASP in the future.

The majority of revenues for the three and six-month periods ended 
July 4, 1998 were attributable to wand sales.  The company's strategy 
has been, and continues to be, to increase future wand sales by 
increasing the installed base of controllers through aggressive 
promotional programs. During the three-month period ended July 4, 1998 
the company implemented  an additional controller placement program that 
allows customers to pay a monthly usage fee.  This program did not have 
a significant impact on revenues or gross margins during the three or 
the six-month period ended July 4, 1998; however, the company believes 
that its placement program may have a positive impact on wand sales and 
gross margins in the future.  The company expects wand sales to remain 
the primary component of revenues in the future.

The company believes that, in its ten quarters of product 
shipments, it has penetrated 20% to 25% of hospitals that perform 
arthroscopic procedures in the United States. In addition, the company 
believes that approximately half of the company's wand revenue is being 
generated by wands purchased for use in shoulder procedures. The company 
believes that shoulder procedures are the fastest growing segment of the 
arthroscopic market and knee procedures represent the largest segment of 
the arthroscopic market based on the number of procedures.  In order to 
achieve increasing wand sales over time, the company believes it must 
continue to penetrate the market for knee procedures, expand the 
education of physicans of the Coblation TM technology, continue working 
on articular cartilage applications and base product development focus 
specifically for knee applications.

To that end, during the quarter, the company introduced five new 
wand styles.   The Eliminator, Saber, and Covac wands were designed to 
be used primarily in knee procedures and were introduced near the end of 
the quarter.  The company also developed and introduced new wands for 
small joint procedures and for capsular shrinkage procedures.  In 
November 1997, the company introduced the System 2000 controller 
designed for more aggressive ablation and hemostasis. The company 
believes the features found in the System 2000 as well as these 
additional wands will increase wand sales in the market for knee and 
shoulder procedures. There can be no assurance that the use of these new 
products will be adopted by doctors.  The company has limited sales and 
marketing experience and can make no assurance that current trends in 
sales and product acceptance will continue. 


Cost of Sales

        Cost of sales was $3.1 million, or 55% of sales, and $6.0 million, 
or 57% of sales for the three and six-months ended July 4, 1998, 
respectively.  During the three and six-month periods ended June 28, 
1997 cost of sales was $2.0 million, or 70% of sales and $3.7 million or 
72% of sales, respectively.  The dollar increase in cost of sales in the 
current year quarter and for the six months ended July 4, 1998 is due to 
increased sales of products.  As a percentage of sales, cost of sales 
decreased compared with the previous year periods primarily as a result 
of the fixed and semi-fixed costs being spread over higher wand 
manufacturing volume. In addition, prior to introduction of its new 
controller in November 1997, the company purchased its controllers from 
a subcontract manufacturer at a cost that exceeded the current internal 
cost to manufacture.  In 1998, the company charges expenses related to 
quality control to cost of sales since most of these activities relate 
to on-going manufacturing; previously, these expenses were charged to 
research and development.  

The company implemented an additional controller placement program 
late in the first half of 1998 in which the company maintains title to 
the controllers. This program did not have a significant impact on gross 
margins during the three or the six-month period ending July 4, 1998; 
however, the company believes that its placement program may have a 
positive impact on gross margins in the future, since the cost of the 
controller is amortized over a longer period of time.   The company 
believes the placement program will contribute to the growth of the 
installed base of controllers and generate an increase in the demand for 
disposable wands resulting in a decrease of cost of sales as a 
percentage of sales and an improvement of gross margins.   There can be 
no assurance that the company will be successful in maintaining the mix 
of wands as compared to controller placements or be able to increase 
demand for its disposable wands.




Operating Expenses

Research and development expense increased to $1.2 million and 
$2.1 million for the three and six-month periods ended July 4, 1998, 
respectively, from $0.9 million and $1.8 million, respectively, for the 
same periods during the prior fiscal year.  The increase in spending 
represents a 32% and 22% increase over the three and the six-month 
periods, respectively, of the prior fiscal year. The increases over the 
three and the six-month periods are attributed to the development of new 
wand styles and the product lines associated with launch of two new 
business units which bring the company's technology to the cosmetic 
surgery and ear, nose and throat surgical markets, as well as the costs 
associated with running clinical trials on certain new products. This 
increase was partially offset by the decreased allocation of expenses 
related to quality control, which are being charged to cost of sales in 
1998 as quality activities primarily relate to manufacturing rather than 
research and development.

The company believes that continued investment in its platform 
technology is essential if it is to maintain its competitive position. 
The company expects to continue increasing research and development 
spending through substantial expenditures on new product development, 
regulatory affairs, clinical studies and patents, although not at the 
rate seen in the past year.  The company believes that its ability to 
attract and retain qualified engineers in the future is critical to the 
continued success of the company. 

Sales and marketing expense increased to $2.4 million or 75% and 
$4.5 million or 65%, respectively, during the three and six-month 
periods ended July 4, 1998, as compared to $1.4 million and $2.8 million 
incurred during the same periods of the previous fiscal year. The 
increases are primarily due to higher dealer commissions resulting from 
increased sales, higher staffing, and promotional and trade show 
expenses reflecting an increased level of sales and marketing activity 
as the company introduced two new business units and several new 
arthroscopy products.  Additional sales and marketing expenses were 
incurred during 1998 as the company expanded operations in Europe.

The company anticipates that sales and marketing spending will 
continue to increase due to higher dealer commissions from increased 
sales, the additional cost of penetrating international markets and new 
surgical markets for the company's products, higher promotional, 
demonstration and sample expenses, and additional investments in the 
sales, marketing and support staff necessary to market its current 
products and commercialize future products.  There can be no assurance 
that the company will successfully develop its own marketing and sales 
capabilities and experience or that its distributors and marketing 
partners will commit the necessary resources to effectively market and 
sell the company's current products and future products.

General and administrative expenses were $0.7 million for the 
three-month period ended July 4, 1998, a 23% decrease as compared to 
$0.9 million for the three-month period ended June 28, 1997. The 
decrease in expenses during the second quarter of 1998 compared with the 
second quarter of 1997 is primarily due to the costs associated with 
recruiting and relocating the new President and Chief Executive Officer 
in the prior year period.  General and administrative expense increased 
to $1.9 million or 6% for the six-month period ended July 4, 1998 as 
compared to $1.8 million for the six-month period ended June 28, 1997.  
The $0.1 million increase during 1998 is due to legal expenses related 
to on-going patent litigation brought by the company against certain 
competitors offset by the relocation and recruiting expenses incurred 
during the second quarter of 1997.  The increased legal expense includes 
the accrual of approximately $0.5 million of anticipated and estimable 
legal expenses related to such patent litigation and resulting from a 
number of motions that are currently before the court.   For a 
description of the patent litigation, refer to Part II, Item 1 this 
Quarterly Report on Form 10-Q.  The company expects that general and 
administrative expenses will continue to increase as a result of the 
patent litigation, further expansion of its staff, and business 
development activities. 

Interest and Other Income, net

Net interest and other income increased to $0.7 million and $3.2 
million for the three-month and six-month periods ended July 4, 1998, 
respectively, up from $0.4 million and $0.7 million for the three-month 
and six-month periods ended June 28, 1997 primarily due to milestone 
payments received from BSC and Xomed pursuant to technology licensing 
agreements signed with each party during 1998. 

In February 1998, the company entered into a license agreement 
under which BSC will develop and market products based on the company's 
Coblation T technology for myocardial revascularization procedures. 
Under the agreement, BSC acquired exclusive licensing rights to the 
company's intellectual property in this field. BSC will pay license 
fees, a portion of which will be classified as prepaid royalties, to the 
company upon achievement of designated milestones and royalties on sales 
of resulting products, if any. The first milestone payment of $3.0 
million was received in the first quarter of 1998. The company 
recognized $2.4 million of that payment as other income during the six-
month period ended July 4, 1998. The remaining $0.6 will be recognized 
as progress is made toward future milestones. 

        In June 1998, the company entered into a license and distribution 
agreement with Xomed whereby Xomed will acquire exclusive, worldwide, 
marketing rights for the company's patented Coblation TM technology in 
the ear, nose and throat (ENT) market.  Under the terms of the 
agreement, Xomed will pay license fees based upon the achievement of 
certain milestones.  During the three and six-month periods ended July 
4, 1998 the company recognized, $0.25 million of such payments as other 
income.  Excluding the aforementioned milestone payments, net interest 
and other income would have been $0.3 million and $0.6 million, a $0.1 
million and $0.2 million decrease for the three and six-month periods 
ended July 4, 1998, respectively.  The decrease in interest income is 
attributable to the decrease in cash balances and henceforth the 
interest earned year over year. 





Net Loss

Net loss was $1.1 million and $0.8 million for the three and the 
six-months ended July 4, 1998, respectively, compared to a loss of $2.0 
million and $4.1 million in the three and the six-month periods ended 
June 28, 1997, respectively. Net loss decreased over the prior year 
period primarily due to the milestone payments received from BSC and 
Xomed, which were recognized as other income and an improvement in 
operating margins. See Interest and Other Income, net discussion above. 
Excluding the payments detailed above, the company would have reported a 
loss of  $1.5 million or $0.5 million less than in the comparable three-
month period ended June 28, 1997.  For the six-month period ending July 
4, 1998, excluding the milestone payments and the accrual of $0.5 
million patent litigation expense recorded in fiscal 1998, net loss 
would have been $3.0 million or $1.1 million less than the prior year.  
This decrease is primarily due to increased revenues, gross margin 
improvement, and increases in operating expenses at rates lower than the 
increase in revenue. 

The company expects net losses to continue in the future. However, 
the company believes that net losses will continue to decrease as sales 
increase faster than operating expenses and gross margin continues to 
improve. There can be no assurance the company will be successful in its 
efforts to increase sales and gross margin or reduce the rate of growth 
of operating expenses.


Liquidity and Capital Resources

On July 4, 1998, the company had $17.7 million in working capital.   
Principal sources of liquidity consisted of $17.5 million in cash, cash 
equivalents, and available-for-sale securities, which include long-term 
available-for-sale securities. The cash and cash equivalents are highly 
liquid with original maturities of ninety days or less. 

Net cash used in operating activities decreased to $1.8 million 
for the six-month period ended July 4, 1998 from $4.0 million for the 
six-month period ended June 28, 1997.  The decrease in the current year 
period is due primarily to the milestone payments received from BSC and 
Xomed in the current year period and the reduction of operating loss 
excluding the legal accrual. See Interest and Other Income, net and 
Operating Expenses, general and administrative discussions above. 

Net accounts receivable increased to $3.8 million as of  July 4, 
1998 from $2.2 million as of January 3, 1998. The increase in accounts 
receivable is due to a corresponding increase in sales as well as timing 
of sales during the quarter.

Inventories increased to $3.7 million as of July 4, 1998 compared 
to $2.0 million at January 3, 1998 due to higher product sales activity 
along with the ramp-up for two new product markets. The company expects 
future inventory levels to grow both in absolute value and as a 
percentage of total assets as sales volume increases.

Net property and equipment increased to $2.2 million as of July 4, 
1998 from $1.4 million on January 3, 1998.  The increase is primarily 
attributable to the capitalization of controllers placed subject to the 
newly implemented leasing program along with an increase of computer 
software and equipment for new hires and an additional facility.

The company plans to finance its capital needs principally from 
cash from product sales, cash, cash equivalents, and available-for-sale 
securities, which include long-term available-for-sale securities and 
related interest.  The company believes the existing capital resources 
together with cash generated from licensing arrangements will be 
sufficient to fund its operations at least through fiscal year 1999. The 
company currently has no commitments for any credit facilities such as 
revolving credit agreements or lines of credit that could provide 
additional working capital.  The company's future liquidity and capital 
requirements will depend on numerous factors including the company's 
success of commercializing the Arthroscopic System, development and 
commercialization of products in fields other than arthroscopy, the 
ability of the company's suppliers to continue to meet the demands of 
the company at current prices, the cost associated with the company's 
ongoing patent litigation, obtaining and enforcing patents important to 
the company's business, the status of regulatory approvals and 
competition. There can be no assurance that the company will not be 
required to raise additional capital or that such capital will be 
available on acceptable terms, if at all.

The company relies on computers and computer software to run its 
business as do its vendors, suppliers and customers. These computers and 
computer software may not be able to properly recognize the dates 
commencing in the year 2000.  The company has not completed an 
assessment of the impact this may have on its business and does not have 
a reasonable basis to conclude whether the impact of the year 2000 will 
or will not materially effect future financial results.  To date the 
company has not found any material impact which may result from the 
failure of its computers and computer software or that of its vendors, 
suppliers, and customers. However, the company plans to make an 
assessment of this issue during 1998 and, if appropriate, develop an 
action plan to correct it.

        In June 1997, the Financial Accounting Standards Board issued SFAS 
No. 131, Disclosure about Segments of an Enterprise and Related 
Information.  This statement establishes standards for disclosure about 
operating segments in annual financial statements and selected 
information in interim financial reports.  It also establishes standards 
for related disclosures about products and services, geographic areas 
and major customers.  This statement supersedes SFAS No. 14,  Financial 
Reporting for Segments of a Business Enterprise.  The new standard 
becomes effective for the year ended January 2, 1999 for the company and 
requires that comparative information from earlier years be restated to 
conform to requirements of this standard.  The company is evaluating the 
requirements of SFAS No. 131 and the effects, if any, on the company's 
current reporting and disclosures.




ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

ArthroCare became a public company in February 1996.  Included 
here are risk factors as updated from the company's Annual Report on 
Form 10-K for the year ended January 3, 1998 filed April 3, 1998.  The 
following factors represent current challenges to the company that 
create risk and uncertainty. Failure to adequately overcome any of the 
following challenges, either singularly or in combination, could have a 
material adverse effect on the company's results of operations, 
business, or financial position.


Early Stage of Commercialization of Current Non-Arthroscopic Products; 
Uncertainties Associated with Current Non-Arthroscopic Products.

In April 1998, the company announced the creation of its new 
business division, Visage TM, created for the purpose of commercializing 
the company's Cosmetic Surgery System ("CSS") for use in dermatology and 
cosmetic surgery procedures, in May 1998, the company announced the 
creation of its second new business division, ENTec TM, created for the 
purpose of commercializing the company's  ENT (Ear, Nose and Throat) 
Surgery System ("ESS") for use in head and neck surgical procedures.  
With respect to CSS, the company has obtained ISO 9001 certification and 
has received CE mark certification for marketing of CSS in Europe for 
skin resurfacing and wrinkle removal procedures and has received 510(k) 
clearances for use of CSS in general dermatology procedures in the 
United States.  The company is pursuing additional clearances that will 
allow CSS to be marketed in the United States specifically for wrinkle 
removal.  With respect to ESS, the company has applied for ISO 9001 and 
CE mark certification for marketing of ESS in Europe and has received 
510(k) clearances for use of ESS in general head and neck surgical 
procedures in the United States. In addition, the company has received 
clearances that will allow ESS to be marketed in the United States for 
certain specific indications while it is pursuing additional clearances 
for certain other indications.  Both of these products have only 
recently been commercially introduced and to date, the company has sold 
only a small number of units, and these have been utilized by a limited 
number of doctors.  No assurance can be given that the company will be 
able to manufacture CSS or ESS in commercial quantities at acceptable 
costs, or that it will be able to market such products successfully.  If 
CSS and ESS are not commercially successful, the company's business, 
financial condition and results of operations would be materially 
adversely affected.

A significant investment in additional preclinical and clinical 
testing, regulatory and sales and marketing activities will be necessary 
in order for the company to commercialize CSS and ESS.  There can be no 
assurance that CSS or ESS will generate sufficient or sustainable 
revenues to enable to the company to be profitable.  Furthermore, 
although the company believes that these products offer certain 
advantages, there can be no assurance that these advantages will be 
realized, or if realized, that these products will result in any 
meaningful benefits to current or future collaborative partners or 
patients.

Development and commercialization of CSS and ESS are subject to 
the risks of failure inherent in the development of new medical devices.  
These risks include the possibility that the company will experience 
delays in testing or marketing, that such testing or marketing will 
result in unplanned expenditures or in expenditures above those 
anticipated by the company, that CSS or ESS will not be proven safe or 
effective, that such products will not be easy to use or cost-effective, 
that third parties will develop and market superior or equivalent 
products, that such products will fail to receive necessary regulatory 
approvals, that such products will be difficult or uneconomical to 
manufacture on a commercial scale, that proprietary rights of third 
parties will preclude the company or its collaborative partners from 
marketing such products and that such products will not achieve market 
acceptance.  As a result of these risks, there can be no assurance that 
research  and development efforts conducted by the company or its 
collaborative partners will result  in any commercially viable products.  
If required regulatory approvals are not obtained for CSS or ESS, or any 
approved products are not commercially successful, there will be a 
material adverse effect on company's business, financial condition and 
results of operations  

Dependence Upon Collaborative Arrangements

  In order to successfully develop and commercialize certain 
products, the company may enter into collaborative or licensing 
arrangements with medical device companies and other entities to fund 
and complete its research and development activities, preclinical and 
clinical testing and manufacturing, to seek and obtain regulatory and to 
achieve successful commercialization of future products.  The company 
has recently entered into collaborative arrangements with BSC and Xomed.  
See "Management's Discussion and Analysis of Financial Condition and 
Results of Operations- Overview" for a discussion of these arrangements.

 The company's dependence on collaborative and licensing 
arrangements with third parties subjects it to a number of risks.  
Agreements with collaborative partners typically allow such partners 
significant discretion in electing whether to pursue any of the planned 
activities.  The company cannot control the amount and timing of 
resources its collaborative partners may devote to the products and 
there can be no assurance that such partners will perform their 
obligations as expected. Business combinations or significant changes in 
a corporate partner's business strategy may adversely affect such 
partners ability to complete its obligations under the arrangements.  If 
any collaborative partner were to terminate or breach its agreement with 
the company, or otherwise fail to complete its obligations in a timely 
manner, such conduct could have a material adverse effect on the 
company's business, financial condition and results of operations.  To 
the extent that the company is not able to establish further 
collaborative arrangements or that any or all of the company's existing 
collaborative arrangements are terminated, the company would be required 
to seek new collaborative arrangements or to undertake product 
development and commercialization at its own expense, which could 
significantly increase the company's capital requirements, place 
additional strain on its human resource requirements and limit the 
number of products which the company would be able to develop and 
commercialize.  In addition, there can be no assurance that existing and 
future collaborative partners will not pursue alternative technologies 
or develop alternative products either on their own or in collaboration 
with others, including the company's competitors.  There can also be no 
assurance that disputes will not arise in the future with respect to the 
ownership of rights to any technology or products developed with any 
collaborative partner.  Lengthy negotiations with potential new 
collaborative partners or disagreements between established 
collaborative partners and the company could lead to delays or 
termination in the research, development or commercialization of certain 
products or result in litigation or arbitration, which would be time 
consuming and expensive.  Failure by any collaborative partner to 
develop or commercialize successfully any product candidate to which it 
has obtained rights from the company or the decision by a collaborative 
partner to pursue alternative technologies or commercialize or develop 
alternative products, either on their own or in collaboration with 
others, could have a material adverse effect on the company's business, 
financial condition and results of operations.

Dependence Upon Arthroscopic System

The company commercially introduced the Arthroscopic System in 
December 1995 and by the quarter ended July 4, 1998, had reported 31 
months of sales.  The Arthroscopic System is the company's first 
commercial product and will account for a substantial portion of the 
company's revenue for the near future.  As such, the company is highly 
dependent on its Arthroscopic System.  Additionally, the company's 
potential products for non-arthroscopic indications are in various 
stages of development, and the company may be required to undertake 
time-consuming and costly development activities and seek regulatory 
approval of these devices.  There can be no assurance that product 
development will ever be successfully completed, that regulatory 
approval, if applied for, will be granted by the United States Food and 
Drug Administration (FDA) on a timely basis, if at all, or that new 
products will ever achieve commercial acceptance. Failure by the company 
to develop, obtain necessary regulatory approval for or to successfully 
market new products could have a material adverse effect on the 
company's business, financial condition and results of operations.

Currently, the majority of the company's sales come from the 
United States. The company has established distribution capability in 
Europe, Australia, Korea, Japan, Canada and parts of South and Central 
America.  Before the Arthroscopic System can be sold outside these 
regions, the company will have to obtain additional international 
regulatory approvals and establish additional distribution capability in 
other geographic regions.  If such regulatory approval is obtained, 
there can be no assurance that the company will be able to establish a 
successful distribution capability.

Uncertainty of Market Acceptance

Physicians will not use the company's products unless they 
determine, based on experience, clinical data and other factors, that 
these systems are an attractive alternative to conventional means of 
tissue ablation.  No independent published clinical reports exist to 
support the company's marketing efforts for any of its products, which 
may have an adverse effect on its ability to obtain physician 
acceptance.  The company believes that continued recommendations and 
endorsements by influential physicians are essential for market 
acceptance of its products.  If the Arthroscopic System does not 
continue to receive broad-based physician acceptance and endorsement by 
influential physicians, the company's business, financial condition and 
results of operations would be materially adversely affected. Similarly, 
if CSS, ESS or the company's potential new products do not receive 
broad-based physicians acceptance and endorsement by influential 
physicians, the company's business, financial condition and results of 
operations would be materially adversely affected.

Limited Operating History

The company's operations to date, have consisted of more than two 
years of sales of its Arthroscopic System and very limited sales of CSS 
and ESS. In addition the company has incurred expenses related to 
research and development, product engineering, applying for and 
obtaining FDA clearance of its products and potential new products, 
developing a network of distributors in the United States and 
internationally  and assembling a direct sales force to market its 
products. The company continues to generate operating losses and 
anticipates generating losses in the future.  Whether the company can 
successfully manage the transition to a larger-scale commercial 
enterprise will depend upon increasing sales of disposable ArthroWands 
from its distribution network, successful commercialization of CSS, ESS 
and the company's technology in additional surgical markets, obtaining 
additional international regulatory approvals for the company's 
products, obtaining domestic and international regulatory approvals for 
its current and potential new products and maintaining its financial and 
management systems, procedures and controls.

Limited Domestic and International Marketing and Sales Experience

The company has shipped over 2,500 Arthroscopic System controller 
units, more than 220,000 ArthroWands, and a limited number of CSS and 
ESS units through the end of the second quarter of 1998. The company is 
marketing and selling CSS domestically through a direct sales force and 
internationally through its subsidiary, ArthroCare Europe AB.  The 
company currently has very limited experience in directly marketing and 
selling its products and is in the process of assembling a marketing and 
sales staff for CSS.  There can be no assurance that the company will 
successfully develop its own marketing and sales capabilities or 
experience for CSS.  

The company is marketing and selling its Arthroscopic System in 
the United States and internationally through a network of independent 
orthopedic distributors. These distributors sell orthopedic arthroscopy 
and ENT devices for a number of other manufacturers.  Xomed is the 
exclusive and worldwide distributor for ESS. There can be no assurance 
that these distributors will commit the necessary resources to 
effectively market and sell the company's Arthroscopic System or ESS, or 
that they will be successful in closing sales with doctors and 
hospitals.  The company has offered its controller to these distributors 
at substantial discounts and may be required to continue to offer such 
discounts on its controller to generate demand for its wands. The 
inability to sell sufficient quantities of wands would have a material 
adverse effect on the company's business, financial condition and 
results of operations.

The company has signed distribution agreements with independent 
distributors to sell and market the Arthroscopic Systems in Europe, 
Australia, Mexico, Brazil, Argentina, Canada, Taiwan, South Africa, 
Israel, Japan and Korea. In other international markets, the company 
intends to collaborate with one or more marketing partners to establish 
marketing and distribution channels for the Arthroscopic System and to 
assist with regulatory requirements in such distributors' jurisdictions.  
However, regulatory requirements vary by region, and compliance with 
such regulations may be costly and time-consuming. Accordingly, the 
distribution, pricing and marketing structure to be established by the 
company may vary from country to country.  In June 1998, the company 
entered into a license agreement with Xomed whereby Xomed has the 
exclusive worldwide distribution rights for ESS.   For a description of 
additional risks and uncertainties relating to Xomed's exclusive 
worldwide distribution rights for ESS, see "ADDITIONAL FACTORS THAT 
MIGHT AFFECT FUTURE RESULTS - Dependence on Collaborative Arrangements" 
on pages 17 and 18 of this Quarterly Report on Form 10-Q.

No assurance can be given that the company will successfully sell 
CSS directly, successfully sell its Arthroscopic System through its 
distributors in Europe, Australia, Mexico, Brazil, Argentina, Canada, 
Taiwan, South Africa, Israel, Japan or Korea, successfully sell ESS 
through Xomed, that the company will secure marketing partners for other 
international markets, successfully sell its products in international 
markets or that any of its international distributors and marketing 
partners will commit the necessary resources to obtain additional 
necessary international regulatory approvals on behalf of the company 
and successfully sell the Arthroscopic System or other products in 
international markets.

Limited Manufacturing Experience

The company's manufacturing operations consist of an in-house 
assembly operation for the manufacturing of ArthroWands, and a separate 
in-house operation for the manufacturing of the System 2000 controllers. 
The company's products are manufactured from several components, some of 
which are supplied to the company by third parties. Manufacture of the 
System 2000 controller, of which an earlier version was manufactured by 
a third party, was brought in-house in 1997 for the purposes of 
maintaining process control, managing availability, and leveraging fixed 
costs.

In December 1997, the company started manufacturing and selling 
its System 2000 controllers. As a result, the company has limited 
experience manufacturing controllers in the volumes necessary for the 
company to achieve additional commercial sales, and there can be no 
assurance that reliable, high-volume manufacturing can be achieved at a 
commercially reasonable cost.  In addition, there can be no assurance 
that the company or its suppliers will not encounter any manufacturing 
difficulties, including problems involving regulatory compliance, 
product recalls, production yields, quality control and assurance, 
supplies of components or shortages of qualified personnel.   

In April 1998, the company started manufacturing its System 5000 
controllers for cosmetic surgery and only a small number of this model 
controllers has been manufactured and sold.  In the same time period, 
the company began to manufacture limited numbers of disposable wands for 
ENT and cosmetic surgery applications.  As a result, the company has 
limited experience manufacturing its current products for ENT and 
cosmetic surgery in the volumes necessary for the company to achieve 
commercial sales, and there can be no assurance that reliable, high-
volume manufacturing for these products can be achieved at a 
commercially reasonable cost.   In addition, there can be no assurance 
that the company or its suppliers will not encounter any manufacturing 
difficulties, including problems involving regulatory compliance, 
product recalls, production yields, quality control and assurance, 
supplies of components or shortages of qualified personnel.

The company and its component suppliers are required to operate in 
conformance with Quality System Regulation (QS Regulations) 
requirements, in order to produce products for sale in the United 
States, and ISO 9001 standards, in order to produce products for sale in 
Europe.  There can be no assurance that the company or its component 
suppliers will remain in compliance with QS Regulations or ISO 9001 
standards.  Any failure by the company or its component suppliers to 
remain in compliance with QS Regulation or ISO 9001 standards could have 
a material adverse effect on the company's business, financial condition 
and results of operations.  

The cable used to connect the disposable wands to the controllers 
for CSS and ESS are manufactured by a single contract manufacturer.  In 
addition, the ArthroWand is sterilized by a single subcontractor and the 
connector housings at each end of the cable in the Arthroscopic System 
are supplied from a single source.  There can be no assurance that an 
alternate contract manufacturer, sterilizer or connector housing 
supplier could be established if necessary or that available inventories 
would be adequate to meet the company's product needs during any 
prolonged interruption of supply.   The company's inability to secure an 
alternative contract manufacturer or sterilizer, if required, would 
limit its ability to manufacture the company's Arthroscopic System, CSS 
and/or ESS and would have a material adverse effect on the company's 
business, financial condition and results of operations.

In connection with regulatory inspections of the company's 
manufacturing facility in Sunnyvale, California, the FDA issued the 
company FDA Form 483, which detailed specific areas where the FDA 
observed that the company's operations were not in full compliance with 
some areas of QS Regulations.  The company has responded to the FDA and 
has implemented corrective changes and believes that it is in good 
standing with the FDA.

History of Losses; Fluctuations in Operating Results; Losses Expected to 
Continue

The company has experienced significant operating losses since 
inception and, as of July 4, 1998, had an accumulated deficit of $26.1 
million.  The company expects to generate additional losses due to 
increased operating expenditures primarily attributable to the expansion 
of marketing and sales activities, the launch of additional product 
lines (including CSS and ESS), increased research and development and 
activities to support regulatory applications.  Results of operations 
may fluctuate significantly from quarter to quarter due to the timing of 
such expenditures, absence of a backlog of orders, timing of the receipt 
of orders, promotional programs for the company's products.  The 
company's revenues and profitability will be critically dependent on 
whether it can successfully continue to market its soft-tissue surgery 
systems. In addition, the company's gross margins may be adversely 
affected due to the necessity to promote and sell its products at 
significantly reduced prices.  There can be no assurance that 
significant profitability will ever be achieved.

Patents and Proprietary Rights

The company's ability to compete effectively depends in part on 
developing and maintaining the proprietary aspects of its platform 
Coblation technology. The company owns eleven issued United States 
patents, more than 40 pending United States patent applications and 
international patent applications in Europe (covering 16 separate 
countries), Japan, Canada, Australia and New Zealand corresponding to 
eight of the United States filings relating to its Coblation technology. 
The initial patent is currently set to expire in 2008, three issued 
patents are currently expected to expire between 2008 and 2012 and the 
other seven patents are expected to expire between 2014 and 2016. The 
company believes that the issued patents cover both the core technology 
used in the company's soft-tissue surgery systems, including both 
multielectrode and single-electrode configurations of its wand tools, as 
well as the use of Coblation technology in specific surgical procedures.

There can be no assurance that the patents that have been issued 
to the company or any patents which may be issued as a result of the 
company's United States or international patent applications will 
provide any competitive advantages for the company's products or that 
they will not be successfully challenged, invalidated or circumvented in 
the future.  In addition, there can be no assurance that competitors, 
many of which have substantial resources and have made significant 
investments in competing technologies, will not seek to apply for and 
obtain patents that will prevent, limit or interfere with the company's 
ability to make, use and sell its products either in the United States 
or in international markets.

A number of medical device and other companies, universities and 
research institutions have filed patent applications or have issued 
patents relating to monopolar and/or bipolar electrosurgical methods and 
apparatus.  If third-party patents or patent applications contain claims 
infringed by the company's technology and such claims are ultimately 
determined to be valid, there can be no assurance that the company would 
be able to obtain licenses to those patents at a reasonable cost, if at 
all, or be able to develop or obtain alternative technology, either of 
which would have a material adverse effect on the company's business, 
financial condition and results of operations.  There can be no 
assurance that the company will not be obligated to defend itself in 
court against allegations of infringement of third-party patents.

In addition to patents, the company relies on trade secrets and 
proprietary know-how, which it seeks to protect, in part, through 
confidentiality and proprietary information agreements.  The company 
requires its key employees and consultants to execute confidentiality 
agreements upon the commencement of an employment or consulting 
relationship with the company.  These agreements generally provide that 
all confidential information, developed or made known to the individual 
by the company during the course of the individual's relationship with 
the company, is to be kept confidential and not disclosed to third 
parties.  These agreements also generally provide that inventions 
conceived by the individual in the course of rendering services to the 
company shall be the exclusive property of the company.  There can be no 
assurance that such agreements will not be breached, that the company 
would have adequate remedies for any breach or that the company's trade 
secrets will not otherwise become known to or be independently developed 
by competitors.




Patent Litigation

The medical device industry has been characterized by extensive 
litigation regarding patents and other intellectual property rights, and 
companies in the medical device industry have employed intellectual 
property litigation to gain a competitive advantage.  There can be no 
assurance that the company will not become subject to patent 
infringement claims or litigation or interference proceedings declared 
by the United States Patent and Trademark Office ("USPTO") to determine 
the priority of inventions.  On February 13, 1998 the company filed a 
lawsuit (the "Lawsuit") against Ethicon, Inc., Mitek Surgical Products, 
a division of Ethicon, Inc. and GyneCare, Inc. alleging among other 
things, infringement of several of the company's patents.  See Part II, 
Item 1 of this Quarterly Report on Form 10-Q.  The defense and 
prosecution of the Lawsuit and intellectual property suits generally, 
USPTO interference proceedings and related legal and administrative 
proceedings are both costly and time-consuming.  The company believes 
that the Lawsuit is necessary and if others violate the proprietary 
rights of the company, further litigation may be necessary to enforce 
patents issued to the company, to protect trade secrets or know-how 
owned by the company or to determine the enforceability, scope and 
validity of the proprietary rights of others.  Any litigation or 
interference proceedings will result in substantial expense to the 
company and significant diversion of effort by the company's technical 
and management personnel.  An adverse determination in the Lawsuit or 
other litigation or interference proceedings to which the company may 
become a party could subject the company to significant liabilities to 
third parties, require disputed rights to be licensed from third parties 
or require the company to cease using such technology.  Although patent 
and intellectual property disputes in the medical device area have often 
been settled through licensing or similar arrangements, costs associated 
with such arrangements may be substantial and could include ongoing 
royalties.  Furthermore, there can be no assurance that necessary 
licenses would be available to the company on satisfactory terms, if at 
all. Adverse determinations in a judicial or administrative proceeding 
or failure to obtain necessary licenses could prevent the company from 
manufacturing and selling its products, which would have a material 
adverse effect on the company's business, financial condition and 
results of operations.


Competition

The arthroscopic medical device industry is intensely competitive. 
The company competes with providers of laser systems, electrosurgical 
systems, manual instruments and power shavers. Many of these competitors 
have significantly greater financial, manufacturing, marketing, 
distribution and technical resources than the company. There can be no 
assurance that the company can effectively compete against such 
competitors. In addition, there can be no assurance that these or other 
companies will not succeed in developing technologies and products that 
are more effective than the company's or that would render the company's 
technology or products obsolete or uncompetitive.

Smith & Nephew Endoscopy, Inc. (which owns Acufex Microsurgical, 
Inc. and Dyonics, Inc.), Conmed Corporation (including its Linvatec 
unit) and Stryker Corp. each have large shares of the market for manual 
instruments, power shavers and arthroscopes. These companies offer broad 
product lines, which they may offer as a single package; have 
substantially greater resources and name recognition than the company; 
and frequently offer significant discounts as a competitive tactic. In 
addition, United States Surgical Corporation (including its Valley Labs 
unit) and Conmed Corporation each have large shares of the market for 
electrosurgical systems, and Trimedyne, Inc. and Coherent, Inc. each 
have large shares of the market for laser systems. The company expects 
that competition from these and other well-established competitors will 
increase as will competition from start-up and development stage medical 
device companies such as Gyrus Medical Ltd., a company based in the 
United Kingdom, and Oratec Interventions, Inc., a company based in Menlo 
Park, California. The company is aware that Johnson & Johnson (including 
its Ethicon unit) is marketing a bipolar electrosurgical tool developed 
by Gyrus Medical Ltd.  In order to successfully compete in the 
arthroscopic medical device industry, the company anticipates that it 
may have to continue to offer substantial discounts on its controller in 
order to increase demand for the disposable ArthroWand, and that such 
competition could have a material adverse effect on the company's 
business, financial condition and results of operations.  Furthermore, 
certain of the company's competitors, including Ethicon utilize 
purchasing contracts that link discounts on the purchase of one product 
to purchases of other products in their broad product lines.  Many of 
the hospitals in the United States have purchasing contracts with such 
competitors of the company.  Accordingly, customers may be dissuaded 
from purchasing the company's products rather than the products of such 
competitors to the extent the purchase would cause them to lose 
discounts on products that they regulary purchase from such competitors.

The ENT medical device industry is rapidly becoming more 
competitive.  The company  has an exclusive license and distribution 
agreement with Xomed, which is currently the largest company focused 
solely on the ENT market, see "ADDITIONAL FACTORS THAT MIGHT AFFECT 
FUTURE RESULTS - Dependence on Collaborative Arrangements" on pages 17 
and 18 of this Quarterly Report on Form 10-Q.  However, other large 
companies, such as Smith & Nephew, Stryker Corp. and Conmed Corporation 
(including its Linvatec unit) each have shares of the market for manual 
instruments, such as microdebriders for endoscopic sinus surgery.  The 
company expects that competition from these and other well-established 
competitors will increase as will competition from start-up and small 
cap medical device companies, such as Somnus Medical Technologies, a 
company based in Sunnyvale, California, Elmed Inc. of Addison, Illinois 
and Ellman International, Inc. of Hewlett, New York.  Somnus 
manufactures and sells medical devices that utilize RF technology for 
the treatment of upper airway disorders, such as snoring, enlarged 
turbinates, and obstructive sleep apnea.  Elmed and Ellman both 
manufacture and sell a variety of medical devices that use conventional 
RF technology for tissue dessication, cutting and/or coagulation in 
turbinate surgery, the treatment of snoring and other ENT procedures.

The cosmetic surgery industry includes a number of  large and well 
established companies that provide devices for rejuvenating facial skin, 
hair removal, scar removal, the treatment of vascular and pigmented 
lesions and other applications,  including companies that manufacture 
and sell dermabrasion equipment or chemical peels, and companies that 
manufacture and sell CO2 and Er:YAG lasers.  In skin resurfacing, the 
company will directly compete with much larger companies that 
manufacture lasers for medical use,  such as Coherent Medical Group of 
Santa Clara, California and ESC Medical Systems of Tel Aviv, Isreal.  
ESC recently merged with Laser Industries, Ltd, already one of the 
largest medical laser manufacturers in the world.  The combined company 
develops and markets lasers for a broad range of cosmetic applications 
including the non-invasive treatment of varicose veins and other benign 
vascular lesions, hair removal, skin rejuvenation, laser assisted 
uvuloplasty (LAUP).  In addition, other large companies manufacture and 
sell medical devices that use RF energy for certain applications in 
dermatology and cosmetic surgery.  One such company is Conmed 
Corporation, which currently sells medical devices for 
electrodessication, fulguration and coagulation in office based 
dermatology procedures.

The company has received 510(k) premarket notifications for 
clearance to market tissue ablation products to treat certain 
urological, periodontal, dermatological, ear/nose/throat and general 
surgical conditions and has filed 510(k) premarket notification for 
clearance to market products for gynecological conditions; the FDA has 
indicated that the 510(k) submission for certain gynecological 
conditions must be supported by data from clinical trials. These fields 
are intensely competitive and no assurance can be given that these 
potential products, if approved, would be successfully marketed.

Uncertainty of Approvals; Extensive Governmental Regulation

United States

The company's products are regulated in the United States as 
medical devices by the FDA under the Federal Food, Drug, and Cosmetic 
Act (FDC Act) and require premarket clearance or approval by the FDA 
prior to commercialization. In addition, certain material changes or 
modifications to medical devices also are subject to FDA review and 
clearance or approval. Pursuant to the FDC Act, the FDA regulates the 
research, testing, design, manufacture, safety, labeling, storage, 
record keeping, advertising, distribution and production of medical 
devices in the United States. Noncompliance with applicable requirements 
can result in warning letters, fines, injunctions, civil penalties, 
recall or seizure of products, total or partial suspension of 
production, failure of the government to grant premarket clearance or 
premarket approval for devices, and criminal prosecution. Failure to 
comply with the regulatory requirements could have a material adverse 
effect on the company's business, financial condition and results of 
operations.

Generally, before a new device can be introduced into the market 
in the United States, the manufacturer or distributor must obtain FDA 
clearance of a 510(k) notification or approval of a premarket approval 
application (PMA). If a medical device manufacturer or distributor can 
establish that a device is "substantially equivalent" to a legally 
marketed Class I or Class II device, or to a Class III device for which 
the FDA has not called for PMAs, the manufacturer or distributor may 
seek clearance from the FDA to market the device by filing a 510(k) 
notification. The 510(k) notification will need to be supported by 
appropriate data establishing the claim of substantial equivalence to 
the satisfaction of the FDA. The FDA recently has been requiring a more 
rigorous demonstration of substantial equivalence.  Following submission 
of the 510(k) notification, the manufacturer or distributor may not 
place the device into commercial distribution until an order is issued 
by the FDA.  At this time, the FDA typically responds to the submission 
of a 510(k) notification within 90 to 120 days, but it may take longer. 
The FDA order may declare that the device is substantially equivalent to 
another legally marketed device and allow the proposed device to be 
marketed in the United States. The FDA, however, may determine that the 
proposed device is not substantially equivalent or require further 
information, including clinical data, to make a determination regarding 
substantial equivalence. Such determination or request for additional 
information could be costly and delay market introduction of the 
products that are the subject of the 510(k) notification.

The company has received clearance of 510(k) premarket 
notifications to market its Arthroscopic System for surgery of the knee, 
shoulder, elbow, wrist, hip and ankle joints. In addition, the company 
has received 510(k) premarket notifications to market CSS in general 
dermatology procedures and is pursuing additional clearances that will 
allow CSS to be marketed in the United States specifically for wrinkle 
removal. With respect to ESS, the company has received clearance of 
510(k) premarket notifications to market ESS in general head and neck 
surgical procedures, and has received labeling approval that will allow 
ESS to be marketed in the United States for certain specific indications 
while it is pursuing additional clearances for certain other 
indications.  There can be no assurance that the company will be able to 
obtain necessary clearances or approvals to market any other products on 
a timely basis, if at all, and delays in receipt or failure to receive 
such clearances or approvals, the loss of previously received clearances 
or approvals, or failure to comply with existing or future regulatory 
requirements could have a material adverse effect on the company's 
business, financial condition and results of operations.

If a manufacturer or distributor of medical devices cannot 
establish that a proposed device is substantially equivalent to a 
legally marketed device, the manufacturer or distributor must seek 
premarket approval of the proposed device through submission of a PMA 
application. The PMA application approval process can be expensive, 
uncertain and lengthy. A number of devices for which premarket approval 
has been sought have never been approved for marketing. The review time 
is often significantly extended by the FDA, which may require more 
information or clarification of information already provided in the 
submission. In addition, the FDA will inspect the manufacturing facility 
prior to approval to ensure compliance with the FDA's QS Regulations.  
If granted, the approval of the PMA application may include significant 
limitations on the indicated uses for which a product may be marketed.

If necessary, the company may file a PMA application with the FDA 
for approval to sell its potential products commercially in the United 
States when it has developed such products. There can be no assurance 
that the company will be able to obtain necessary PMA application 
approvals to market such products on a timely basis, if at all, and 
delays in receipt or failure to receive such approvals, the loss of 
previously received approvals, or failure to comply with existing or 
future regulatory requirements could have a material adverse effect on 
the company's business, financial condition and results of operations.

The company is also required to register as a medical device 
manufacturer with the FDA and state agencies, such as the California 
Department of Health Services (CDHS) and to list its products with the 
FDA. As such, the company is subject to periodic inspections by both the 
FDA and the CDHS for compliance with the FDA's QS Regulations and other 
applicable regulations. These regulations require that the company 
maintain its documents in a prescribed manner with respect to 
manufacturing, testing and control activities.  There can be no 
assurance that the company will not encounter any manufacturing 
difficulties, or that they will not experience difficulties, including 
problems involving regulatory compliance, product recalls, production 
yields, quality control and assurance, supplies of components or 
shortages of qualified personnel.

Regulations regarding the manufacture and sale of the company's 
products are subject to change. The company cannot predict the effect, 
if any, that such changes might have on its business, financial 
condition or results of operations.

International

International sales of the company's products are subject to the 
regulatory agency product registration requirements of each country. The 
regulatory review process varies from country to country. The company 
has obtained regulatory clearance to market the Arthroscopic System in 
Australia, Europe, Canada and Mexico, to market CSS in Europe and Canada 
and is currently seeking approval for ESS in Europe but has not obtained 
any other international regulatory approvals permitting sales of its 
products outside of the United States. The company is seeking and 
intends to seek regulatory approvals in certain other international 
markets. There can be no assurance, however, that such approvals will be 
obtained on a timely basis or at all.

For European distribution, the company has received ISO 9001 
certification and the CE mark. ISO 9001 certification standards for 
quality operations have been developed to ensure that companies know, on 
a worldwide basis, the standards of quality to which they will be held. 
The European Union has promulgated rules requiring medical products to 
receive the CE mark, an international symbol of quality and compliance 
with applicable European medical device directives. Failure to maintain 
the CE mark will prohibit the company from selling its products in 
Europe. ISO 9001 certification in conjunction with demonstrated 
performance to the medical device directive is one of the alternatives 
available to meet the CE mark requirements. There can be no assurance 
that the company will be successful in maintaining certification 
requirements.


Uncertainty Relating to Third-Party Reimbursement

In the United States, health care providers, such as hospitals and 
physicians, that purchase medical devices, such as the company's 
products, generally rely on third-party payors, principally federal 
Medicare, state Medicaid and private health insurance plans, to 
reimburse all or part of the cost of the procedure in which the medical 
device is being used. Reimbursement for arthroscopic, cosmetic and ENT 
procedures performed using devices that have received FDA approval has 
generally been available in the United States.  In addition, certain 
health care providers are moving toward a managed care system in which 
such providers contract to provide comprehensive health care for a fixed 
cost per person. Managed care providers are attempting to control the 
cost of health care by authorizing fewer elective surgical procedures, 
such as certain knee and shoulder, ankle, wrist, elbow and hip 
arthroscopic procedures.

The company is unable to predict what changes will be made in the 
reimbursement methods used by third-party health care payors. The 
company anticipates that in a prospective payment system, such as the 
diagnosis related group (DRG) system utilized by Medicare, and in many 
managed care systems used by private health care payors, the cost of the 
company's products will be incorporated into the overall cost of the 
procedure and that there will be no separate, additional reimbursement 
for the company's products. The company anticipates that hospital 
administrators and physicians will justify the use of the company's 
products by the apparent cost savings and clinical benefits that the 
company believes will be derived from the use of its products. However, 
there can be no assurance that this will be the case. Furthermore, the 
company could be adversely affected by changes in reimbursement policies 
of governmental or private health care payors, particularly to the 
extent any such changes affect reimbursement for procedures in which the 
company's products are used.  Failure by physicians, hospitals and other 
users of the company's products to obtain sufficient reimbursement from 
health care payors for procedures in which the company's products are 
used or adverse changes in governmental and private third-party payors, 
policies toward reimbursement for such procedures would have a material 
adverse effect on the company's business, financial condition and 
results of operations.

If the company obtains the necessary international regulatory 
approvals , market acceptance of the company's products in international 
markets would be dependent, in part, upon the availability of 
reimbursement within prevailing health care payment systems. 
Reimbursement and health care payment systems in international markets 
vary significantly by country, and include both government-sponsored 
health care and private insurance. The company intends to seek 
international reimbursement approvals, although there can be no 
assurance that any such approvals will be obtained in a timely manner, 
if at all.

Uncertainty of New Product Development

The company has undertaken preliminary animal studies and 
development for the use of its Coblation technology with its controller 
in several fields.  The company has received 510(k) clearance for use of 
its technology in certain of these fields.  The company has received 
approval of an Investigational Device Exemption (IDE) to conduct a 
clinical study on a specific indication.  Following the completion of 
this study, the company may submit a 510(k) application to the FDA.

Each of the company's  potential products that may result from 
these investigations are in early stages of development, and the company 
may be required to undertake time-consuming and costly development 
activities and seek regulatory approval of these devices.  There can be 
no assurance that product development will ever be successfully 
completed, that PMA or 510(k) application, if applied for, will be 
granted by the FDA on a timely basis, if at all, or that the products 
will ever achieve commercial acceptance.  Failure by the company to 
develop, obtain necessary regulatory approval for or to successfully 
market new products could have a material adverse effect on the 
company's business, financial condition and results of operations.

Product Liability Risk; Limited Insurance Coverage

The development, manufacture and sale of medical products entail 
significant risk of product liability claims. The company's current 
product liability insurance coverage limits are $7,000,000 per 
occurrence and $7,000,000 in the aggregate.  There can be no assurance 
that such coverage limits are adequate to protect the company from any 
liabilities it might incur in connection with the development, 
manufacture and sale of its products.  In addition, the company may 
require increased product liability coverage if any potential products 
are successfully commercialized.  Product liability insurance is 
expensive and in the future may not be available to the company on 
acceptable terms, if at all.  The company has been selling its 
Arthroscopic System since December 1995 and recently commenced sales of 
CSS and ESS and has not experienced any product liability claims to 
date.  However, a successful product liability claim or series of claims 
brought against the company in excess of its insurance coverage could 
have a material adverse effect on the company's business, financial 
condition and results of operations.

Dependence on Key Personnel and Key Consultants

The company is dependent upon a number of key management and 
technical personnel.  The loss of the services of one or more key 
employees or consultants could have a material adverse effect on the 
company.  The company's success will also depend on its ability to 
attract and retain additional highly qualified management and technical 
personnel.  The company faces intense competition for qualified 
personnel, many of whom are often subject to competing employment 
offers, and there can be no assurance that the company will be able to 
attract and retain such personnel.  Furthermore, the company's 
scientific advisory board members all are otherwise employed on a 
full-time basis.  As a result, the scientific advisory board members are 
not available to devote their full time or attention to the company's 
affairs.

Control by Directors, Executive Officers and Affiliated Entities

The company's directors, executive officers and entities 
affiliated with them, in the aggregate, beneficially own approximately 
45% of the company's common stock.  These stockholders, if acting 
together, will have significant influence over all matters requiring 
approval by the stockholders of the company, including the election of 
directors and the approval of mergers or other business combination 
transactions.

Potential Volatility of Stock Price

The stock markets have experienced price and volume fluctuations 
that have particularly affected medical technology companies, resulting 
in changes in the market prices of the stocks of many companies that may 
not have been directly related to the operating performance of those 
companies.  Such broad market fluctuations may adversely affect the 
market price of the company's common stock.  In addition, the market 
price of the company's common stock may be highly volatile.  Factors 
such as variations in the company's financial results, comments by 
security analysts, announcements of technological innovations or new 
products by the company or its competitors, changing government 
regulations and developments with respect to FDA submissions, patents, 
proprietary rights or litigation may have a significant adverse effect 
on the market price of the common stock.

Anti-Takeover Effect of Stockholder Rights Plan and Certain Charter and 
Bylaw Provisions

In November 1996, the company's Board of Directors adopted a 
Stockholder Rights Plan.  The Stockholder Rights Plan provides for a 
dividend distribution of one Preferred Shares Purchase Right (a Right) 
on each outstanding share of the company's common stock.  Each Right 
entitles shareholders to buy 1/1000th of a share of the company's Series 
A participating preferred stock at an exercise price of $50.00.  The 
Rights will become exercisable following the tenth day after a person or 
group announces acquisition of 15% or more of the company's common 
stock, or announces commencement of a tender offer, the consummation of 
which would result in ownership by the person or group of 15% or more of 
the company's common stock.  The company will be entitled to redeem the 
Rights at $0.01 per Right at any time on or before the tenth day 
following acquisition by a person or group of 15% or more of the 
company's common stock.

The Stockholder Rights Plan and certain provisions of the 
company's Certificate of Incorporation and Bylaws may have the effect of 
making it more difficult for a third party to acquire, or of 
discouraging a third party from attempting to acquire control of the 
company.  This could limit the price that certain investors might be 
willing to pay in the future for shares of the company's common stock.  
Certain provisions of the company's Certificate of Incorporation and 
Bylaws allow the company to issue preferred stock without any vote or 
further action by the stockholders, eliminate the right of stockholders 
to act by written consent without a meeting, specify procedures for 
director nominations by stockholders and submission of other proposals 
for consideration at stockholder meetings, and eliminate cumulative 
voting in the election of directors.  Certain provisions of Delaware law 
applicable to the company could also delay or make more difficult a 
merger, tender offer or proxy contest involving the company, including 
Section 203, which prohibits a Delaware corporation from engaging in any 
business combination with any interested stockholder for a period of 
three years unless certain conditions are met.  The Stockholder Rights 
Plan, the possible issuance of preferred stock, the procedures required 
for director nominations and stockholder proposals and Delaware law 
could have the effect of delaying, deferring or preventing a change in 
control of the company, including without limitation, discouraging a 
proxy contest or making more difficult the acquisition of a substantial 
block of the company's common stock.  These provisions could also limit 
the price that investors might be willing to pay in the future for 
shares of the company's common stock.

Lack of Dividends

The company has not paid any dividends and does not anticipate 
paying any dividends in the foreseeable future

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

On February 13, 1998, the company filed a lawsuit against Ethicon, Inc. 
Mitek Surgical Products, a division of Ethicon, Inc. and GyneCare, Inc. 
("the Defendants") in the United States District Court for the Northern 
District of California.   The lawsuit alleges, among other things, that 
the Defendants have been and are currently infringing four patents 
issued to the company in December 1997.  Specifically, the Defendants 
use, market and sell two separate electrosurgical systems under the 
names of "VAPR" and "VersaPoint" which infringe these patents.  The 
company seeks: (1) a judgment that the Defendants have infringed these 
patents; (2) to preliminarily and permanently restrain and enjoin the 
Defendants from marketing and selling the VAPR and VersaPoint systems; 
and (3) an award of damages (including attorneys' fees) to compensate 
the company for lost profits, the damages to be trebled because of the 
Defendants' willful infringement.  In addition, the company filed a 
motion on March 5, 1998 for preliminary injunction against the 
Defendants marketing and selling of the VAPR system.  On June 15, 1998, 
the court held a claim construction hearing ("Markman hearing") to 
determine the meaning of the claims of the patents in suit as a matter 
of law.  On July 6, 1998, the court issued a Memorandum Decision and 
Order in which all of the claims were construed in ArthroCare's favor.

Item 2.  Changes in Securities

None

Item 3.  Defaults upon Senior Securities

None

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

With respect to stockholder proposals not included in the 
company's proxy statement for the 1999 Annual Meeting of Stockholders, 
the persons named in management's proxy for the 1999 Annual Meeting of 
Stockholders will be entitled to exercise the discretionary voting power 
conferred by such proxy under the circumstances` specified in Rule 14a-
4(c ) under the Securities Exchange Act of 1934, as amended, including 
with respect to proposals received by the company within forty-five (45) 
days of the date of mailing of the proxy statement for the 1999 Annual 
Meeting of Stockholders.

Item 5.  Other Information

The annual meeting of stockholders was held May 21, 1998.  
Matters voted on at that meeting were (i) the election of six directors, 
(ii) the approval of an amendment to the company's Incentive Stock Plan 
to increase the number of shares of Common Stock reserved for issuance 
thereunder by 750,000 shares and (iii) the ratification of the 
appointment of PricewaterhouseCoopers LLP as the Company's independent 
auditors for the fiscal year ending January 2, 1999.  Tabulation for 
each proposal and individual directors were as follows:

PROPOSAL I.  ELECTION OF DIRECTORS

                                                                VOTES
           NOMINEE                VOTES                        WITHHELD
----------------------------   ----------                     ---------
Michael A. Baker                7,764,068                       166,061
Hira V. Thapliyal               7,764,068                       166,061
Philip E. Eggers                7,763,918                       166,211
Annette J. Campbell-White       7,763,879                       166,250
C.  Raymond Larkin Jr.          7,763,379                       166,750
John S. Lewis                   7,762,729                       167,400
Robert R. Momsen                7,762,879                       167,250

PROPOSAL II.  APPROVAL OF AMENDMENT TO INCENTIVE STOCK PLAN

                                                              VOTES   
                                                            ---------
        FOR                                                 5,718,221
        AGAINST                                               691,029
        BROKER NON-VOTE                                        19,876

PROPOSAL III.  RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP


                                                              VOTES   
                                                            ---------
        FOR                                                 7,884,860
        AGAINST                                                16,250
        BROKER NON-VOTE                                        17,885

Item 6.  Exhibits and Reports on Form 8 - K

a)  Exhibits

3.2  (1) Certificate of Incorporation of the Registrant.


3.3  (1) Bylaws of the Registrant.

4.1  (1) Specimen Common Stock Certificate.

10.1 (1) Form of Indemnification Agreement between the Registrant and each of
         its directors and officers.

10.2 (1) Incentive Stock Plan and form of Stock Option Agreement thereunder.

10.3 (1) Director Option Plan and form of Director Stock Option Agreement
         thereunder.

10.4 (1) Employee Stock Purchase Plan and forms of agreements thereunder.

10.5 (1) Form of Exclusive Distribution Agreement.

10.6 (1) Form of Exclusive Sales Representative Agreement.

10.7 (1) Consulting Agreement, dated May 10, 1993, between the Registrant and
         Philip E. Eggers, and amendment thereto.

10.8 (1) Consulting Agreement, dated May 20, 1993, between the Registrant and
         Eggers &  Associates, Inc., and amendment thereto.

10.9 (1)+ Development and Supply Agreement, dated March 1, 1994, between the
         Registrant and SeaMed Corporation.

10.10 (1) Lease Agreement, dated September 15, 1994, between Registrant and The
          Arrillaga Foundation and the Perry Foundation for  the Registrant's
          facility located at 595 North Pastoria Avenue, Sunnyvale, California
          94086.

10.11 (1) Employment Letter Agreement, dated October 21, 1994, between the
          Registrant and Allan  Weinstein and amendment thereto.

10.12 (1) Purchase Assistance Promissory Note, dated January 19, 1995, between
          Registrant and Allan Weinstein.

10.13 (1) Sublease Agreement, dated February 1, 1995, between Registrant and
          Guided Medical Systems, Inc. for the Registrant's  former facility at
          453 Ravendale Drive, Mountain View, California 94043.

10.14 (1) Mortgage Assistance Promissory Note Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.

10.15 (1) Restricted Stock Purchase and Security Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.

10.16 (1) Employment Letter Agreement, dated July 18, 1995, between the
          Registrant and Robert T. Hagan.

10.17 (1) Restricted Stock Purchase and Security Agreement, dated August 1,
          1995, between the Registrant and Robert T. Hagan.


10.18 (1) Employment Letter Agreement, dated September 3, 1995, between the
          Registrant and A. Larry Tannenbaum.

10.19 (1) + Radiation Services Agreement, dated September 13, 1995, between
          the Registrant and SteriGenics International.


10.20 (1) Amended and Restated Stockholder Rights Agreement, dated October 16,
          1995, between the Registrant and certain holders of the Registrant's
          securities.

10.21 (1) Contribution Agreement, dated March 31, 1995, by and among Philip E.
          Eggers, Robert S. Garvie, Anthony J. Manlove, Hira  V. Thapliyal and
          the Registrant.

10.22 (2) Preferred Stock Rights Agreement, dated November 14, 1996, between
          the Registrant and Norwest Bank Minnesota, N.A.

10.23 (3) + Exclusive Distributor Agreement, dated April 15, 1997, between the
          Registrant and Arthrex, Gmbh.

10.24 (4) Employment Letter Agreement, dated June 20, 1997, between the
          Registrant and Michael A. Baker. 

10.25 (5) + Exclusive Distributor Agreement, dated August 21, 1997, between the
          Registrant and Kobayashi Pharmaceutical Company, Ltd.

10.26 (6) + License Agreement dated February 9, 1998, between the Registrant
          and Boston Scientific Corporation.

10.27 (6) + Development and Supply Agreement dated February 9, 1998, between
          the Registrant and Boston Scientific Corporation.

10.28 (6) Lease Agreement dated March 25, 1998 between the Registrant and Aetna
          Life Insurance company for the Registrant's facility located at 840
          Del Rey Avenue, Sunnyvale, California 94086.

10.29  ++ Term sheet for License and Distribution Agreement between Xomed
          Surgical Products and the Registrant dated June 25, 1998.


27.1    Financial Data Schedule.

(1)     Incorporated herein by reference to the same-numbered exhibit
        previously filed with the Registrant's Registration Statement on 
        Form S-1 (Registration No. 33-80453).

(2)     Incorporated herein by reference to Exhibit 5 previously filed 
        with the Registrant's Registration Statement on Form 8-A
        (Registration No. 000-27422).

(3)     Incorporated herein by reference to the same-numbered exhibit 
        previously filed with the Registrant's Quarterly Report on Form 
        10-Q for the period ended March 29, 1997.

(4)     Incorporated herein by reference to the same-numbered exhibit 
        previously filed with the Registrant's Quarterly Report on Form 
        10-Q for the period ended June 28, 1997.

(5)     Incorporated herein by reference to the same numbered exhibit 
        previously filed with the Registrant's Quarterly Report on Form 
        10-Q for the period ended September 27, 1997.

(6)     Incorporated herein by reference to the same numbered exhibit 
        previously filed with the Registrant's Annual Report on Form 10-K 
        for the year ended January 3, 1998.

+       Confidential treatment granted.

++      Confidential treatment requested.

b)  Reports on Form 8-K
None




























<PAGE>



                            SIGNATURE

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.


ARTHROCARE CORPORATION
a Delaware corporation

Date: August 18, 1998

/s/ CHRISTINE E. HANNI  
Christine E. Hanni
Vice President of Finance, 
Chief Financial Officer and 
Assistant Secretary
(Principal Financial Officer 
and Accounting Officer)

Date: August 18, 1998

/s/  MICHAEL A. BAKER   
Michael A. Baker
President, Chief Executive 
Officer and Director 
(Principal Executive Officer)



<PAGE>

























                                    EXHIBIT INDEX

Exhibit
Number                          Exhibit Description             

10.29  Term sheet for License and Distribution Agreement between Xomed
       Surgical Products and the Registrant dated June 25, 1998.


27.1   Financial Data Schedule.