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 April 3, 1999.
 
                                       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
May 7, 1999 was 9,021,007.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<PAGE>
 
                    ARTHROCARE CORPORATION
 
                             INDEX
 
 
 
 
PART 1:  Financial Information
 
     Item 1.  Financial Statements
 
          Condensed Consolidated Balance Sheets as of April 3, 1999
           (unaudited) and January 2, 1999
 
          Condensed Consolidated Statements of Operations (unaudited) for the
             three-months ended April 3, 1999 and April 4, 1998
 
          Condensed Consolidated Statements of Cash Flows (unaudited)
             for the three-months ended April 3, 1999 and April 4, 1998
 
          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.  Quantitative and Qualitiative Disclosures About Market Risk
     Item 3.  Changes in Securities
     Item 4.  Defaults upon Senior Securities
     Item 5.  Submission or Matters to Vote of Security Holders
     Item 6.  Other Information
     Item 7.  Exhibits and Reports on Form 8-K
 
SIGNATURE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                             ARTHROCARE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                     April 3,      January 2,
                                                       1999           1999
                                                   -------------  -------------
                                                   (unaudited)
<S>                                                <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                              $3,553         $2,826
  Available-for-sale securities                           4,577          5,232
  Accounts receivables, net of allowance for bad debt     6,431          5,972
  Inventories                                             7,211          7,069
  Prepaid expenses and other current assets                 402          1,038
                                                   -------------  -------------
       Total current assets                              22,174         22,137
 
Property and equipment, net                               5,220          4,560
Related party receivables                                   575            723
Other assets                                                281            340
                                                   -------------  -------------
     Total assets                                       $28,250        $27,760
                                                   =============  =============
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                       $1,231         $1,797
  Accrued liabilities                                       963          1,734
  Accrued compensation                                    1,660          1,056
  Deferred revenue                                        1,122            517
  Capital lease obligation, current portion                  59             60
                                                   -------------  -------------
          Total current liabilities                       5,035          5,164
 
Capital lease obligation, less current portion              132            151
Deferred rent                                               138            140
                                                   -------------  -------------
          Total liabilities                               5,305          5,455
                                                   -------------  -------------
Stockholders' equity:
  Common stock                                                9              9
  Additional paid in capital                             50,307         49,901
  Notes receivable from stockholders                        (61)           (51)
  Deferred compensation                                     (28)           (68)
  Accumulated other comprehensive income (loss)             (75)           (39)
  Accumulated deficit                                   (27,207)       (27,447)
                                                   -------------  -------------
          Total stockholders' equity                     22,945         22,305
                                                   -------------  -------------
     Total liabilities and stockholders' equity         $28,250        $27,760
                                                   =============  =============
</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
                                                 ---------------------------
                                                   April 3,      April 4,
                                                     1999          1998
                                                 ------------- -------------
<S>                                              <C>           <C>
Revenues:
   Product sales                                       $9,077        $4,871
   License fees and royalty revenue                       625         2,250
                                                 ------------- -------------
      Total revenue:                                    9,702         7,121
Cost of product sales                                   3,876         2,850
                                                 ------------- -------------
Gross profit                                            5,826         4,271
                                                 ------------- -------------
 
Operating expenses:                                     1,024           985
   Research and development                             3,336         2,116
   Sales and marketing                                  1,349         1,211
   General and administrative                    ------------- -------------
        Total operating expenses                        5,709         4,312
                                                 ------------- -------------
Net Income (loss)from operations                          117           (41)
Interest and other income, net                            134           294
                                                 ------------- -------------
Income before taxes                                       251           253
Income tax provision                                       11         --
                                                 ------------- -------------
Net income
                                                         $240          $253
                                                 ============= =============
 
Basic net income per common share
                                                        $0.03         $0.03
Diluted net income per common share              ============= =============
                                                        $0.03         $0.03
                                                 ============= =============
Shares used in computing basic
net income per common share
                                                        8,973         8,889
Shares used in computing diluted                 ============= =============
net income per common share                             9,505         9,244
                                                 ============= =============
 
</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>
                                                            Three months ended:
                                                      --------------------------
                                                       April 3,       April 4,
                                                          1999          1998
                                                      ------------  ------------
<S>                                                   <C>           <C>
Cash flows from operating activities:
   Net income                                                $240          $253
   Adjustments to reconcile net income
    to net cash used in operating activities:
        Depreciation and amortization                         470           167
        Amortization of deferred compensation                  40            40
        Provision for doubtful accounts receivable
          and product returns                                  93            60
        Provision for excess and obsolete inventory           525           100
        Deferred rent                                          (2)           (2)
        Changes in operating assets and liabilities:
          Accounts receivable                                (552)         (592)
          Inventory                                          (666)         (270)
          Prepaid expenses and other current assets           636            (2)
          Accounts payable                                   (566)          434
          Accrued liabilities                                (167)        1,211
          Deferred revenue                                    605            --
          Other assets                                         59            --
                                                      ------------  ------------
   Net cash provided by operating activities                  715         1,399
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment                     (1,130)         (106)
   Purchases of available-for-sale securities                (347)       (9,937)
   Sale or maturities of available-for-sale securities      1,001        12,864
                                                      ------------  ------------
   Net cash provided by (used in) investing activities       (476)        2,821
                                                      ------------  ------------
 
Cash flows from financing activities:
   Issuance of notes receivable to related parties            (11)           --
   Repayment of capital leases                                (19)          (14)
   Repayment of notes receivable from related parties         148            (6)
   Proceeds from exercise of options
      to purchase common stock                                406           173
                                                      ------------  ------------
           Net cash provided by financing activities          524           153
                                                      ------------  ------------
 
Effect of exchange rate on changes in cash                    (36)           --
                                                      ------------  ------------
 
 
Net increase in cash and cash equivalents                     727         4,373
Cash and cash equivalents, beginning of period              2,826         8,188
                                                      ------------  ------------
Cash and cash equivalents, end of period                   $3,553       $12,561
                                                      ============  ============
 
</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 2, 1999 should be read in conjunction with these condensed
consolidated financial statements.  The balance sheet at January 2, 1999
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 Income Per Share:
 
        Basic net income per share is computed using the weighted average
number of shares of common stock.  Diluted net income per share is
computed using the weighted average number of shares of common stock and
common equivalent share outstanding during the period.  Common
equivalent shares consist of stock options.  Common equivalent shares
are excluded from the computation if their effect is anti-dilutive.
 
        The following is a reconciliation of the computation for basic and
diluted EPS (in thousands):
 
                                                        Three months ended
                                                     ------------------------
                                                      April 3,     April 4,
                                                        1999         1998
                                                     -----------  -----------
 
 
Net income                                                 $240         $253
                                                     ===========  ===========
Shares calculation:
   Average basic shares outstanding                       8,973        8,889
 
   Options                                                  532          355
                                                     -----------  -----------
      Total shares used to compute
      diluted earnings per share                          9,505        9,244
                                                     ===========  ===========
 
Earnings per basic share                                  $0.03        $0.03
                                                     ===========  ===========
Earning per diluted share                                 $0.03        $0.03
                                                     ===========  ===========
 
 
 
 
        Options to purchase 316,481 and 70,700 shares of common stock at
prices ranging from $17.25-$24.25 per share were outstanding during the
three months ended April 3, 1999,  and April 4, 1998, respectively, but
were not included in the computation of diluted EPS because either the
option's exercise price was greater than the average market price of the
common shares or inclusion of such options would have been anti-
dilutive.
 
2.  Comprehensive Income
 
Comprehensive income is comprised of net income and other
comprehensive earnings such as foreign currency translation gain/loss
and unrealized gains or losses on available-for-sale marketable
securities.  The company's unrealized gains and losses on available for
sale marketable securities have been insignificant for all periods
presented.  ArthroCare's total comprehensive earnings were as follows
(in thousands):
<TABLE>
<CAPTION>
                                  Three months ended
                                 -------------------
                                 April 3,  April 4,
                                   1999      1998
                                 --------- ---------
<S>                              <C>       <C>
 
Net income                           $240      $253
  Other comprehensive income
  Foreign translation adjustment      (36)       --
                                 --------- ---------
     Comprehensive net income         204       253
                                 ========= =========
</TABLE>
 
 
 
4.  Balance sheet detail (in thousands):
 
<TABLE>
<CAPTION>
 
                                          April 3,        April 4,
                                            1999            1998
                                        ------------    ------------
                                        (Unaudited)
<S>                                     <C>             <C>
Inventory:
   Raw materials                             $2,838          $3,127
   Work-in-process                            1,429           1,852
   Finished goods                             2,944           2,090
                                        ------------    ------------
Total                                        $7,211          $7,069
                                        ============    ============
 
 
 
 
Other accrued liabilities:
   Accrued professional fees                   $134            $150
   Accrued warranty                             290             302
   Other                                        539           1,282
                                        ------------    ------------
Total                                          $963          $1,734
                                        ============    ============
</TABLE>
 
 
 
 
 
 
 
 
 
 
 
 
 
ARTHROCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS (Unaudited)
 
5. Litigation
 
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 the company believes
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.
In addition, the company filed a motion on March 5, 1998 for preliminary
injunction against the Defendants marketing and selling of the VAPR
system. The court denied this motion for preliminary injunction in
December 1998, stating that the defendants have raised questions that
should be more fully addressed by the parties, and then be resolved by a
jury at trial. The jury trial will begin on June 14, 1999 in San
Francisco, California.
 
On February 4, 1999, Xomed Surgical Products ("Xomed") of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999.  In addition, the company filed two
counterclaims against Xomed for damages caused by Xomed's failure to
perform under the contract and for a certain milestone payment owed to
ArthroCare by Xomed.
 
6.  Recent Accounting Pronouncements:
 
        In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments,
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. The company must adopt this standard no later than fiscal
year 2000. To date, the company does not engage in hedging activities.
 
7. Segment Information:
 
        The company is organized into four segments on the basis of
product markets, Arthroscopy, ENTec, Visage and AngioCare.  To date,
substantially all the company's product revenue was related to the
Arthroscopic segment.  During the three-month period ended April 3,
1999, approximately $0.1 million of the company's license revenue was
attributable to the AngioCare segment and $0.5 million was attributable
to the Visage segment.
 
 
8. Subsequent Events:
 
        In April 1999, the company negotiated a $7.0 million line of
credit with a bank which matures in twelve months.  Borrowings under the
line of credit bear interest at the bank's prime rate plus .25%.
Borrowings under this line are secured by the company's assets and are
subject to certain covenants related to financial ratios and profits.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
ArthroCare Corporation (the "company") "believes", "anticipates",
"expects" 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 2, 1999 and "ADDITIONAL
FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set forth below.
 
ArthroCare develops, manufactures and markets surgical instruments
based on its novel Coblation(TM) technology.  The company has developed a
broad technology platform for operating on soft-tissue that is being
commercialized across a range of surgical applications.  Coblation
technology applies energy to create a plasma- etching effect which
disintegrates tissue at cooler temperatures than traditional
electrosurgical or laser surgical tools, allowing surgeons to operate
with greater precision and less damage to surrounding tissue.
ArthroCare's Coblation Systems replace the multiple surgical tools
traditionally used in soft-tissue surgery procedures with one multi-
purpose, surgical system that consists of a controller unit and a series
of disposable surgical tools that are specialized for particular types
of surgery.  The disposable surgical tool ablates (removes) soft tissue
with minimal damage to surrounding healthy tissue and simultaneously
achieves hemostasis (sealing of small bleeding vessels).  Although the
company's Coblation technology is most commonly used in arthroscopic
procedures, ArthroCare has developed Coblation technology for use in
cosmetic surgery, ear, nose and throat (ENT) surgery, and cardiology.
The company's long-term strategy includes applying its patented
technology to other soft-tissue surgery fields.
 
During the year ended January 2, 1999, the company formed a new
business division, AngioCare(TM), for the purpose of commercializing the
company's technology in the cardiac and interventional cardiology
markets. As part of those efforts, in February 1998, the company entered
into a license and OEM agreement under which Boston Scientific
Corporation ("BSC") will provide input into the development of, obtain
regulatory approval for and market products based on the company's
Coblation technology for myocardial revascularization procedures. The
company believes that there may be additional applications within
cardiology for which the company's technology could be utilized.
 
In April 1998, the company announced that it had entered the
cosmetic surgery market, and that it had formed a new business division
called Visage(TM) to commercialize Coblation technology in this field.  In
January 1999, the company entered into a license and distribution
agreement with Collagen Aesthetics ("Collagen"), which was expanded in
February 1999, under this agreement, Collagen acquired exclusive,
worldwide, marketing rights for the company's Visage line of products
for the dermatology and cosmetic surgery markets.
 
In May 1998, the company announced that it had entered the
otorhinolaryngology (ear, nose and throat) market, and that it had
formed a new business unit called ENTec(TM) to commercialize Coblation
technology in this field.  In June 1998, the company entered into a
license and OEM agreement with Xomed Surgical Products ("Xomed") to market
the Coblation products in the otorhinolaryngology market. This agreement
was terminated by the company in February 1999, following which the
company has been pursuing direct marketing and distribution of the ENTec
product lines.
 
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 Arthroscopic Electrosurgery System
in the United States for use in arthroscopic surgery of the knee,
shoulder, elbow and ankle. The company has since received FDA clearance
for use of this system in the wrist and hip. The company applied the CE
mark for marketing the Visage System in Europe for general dermatology,
cosmetic surgery, skin resurfacing and wrinkle reduction procedures and
has received 510(k) clearance for use in general dermatology procedures
in the United States. The company is pursuing additional clearances that
will allow the system to be marketed in the United States specifically
for skin resurfacing and wrinkle reduction. The company applied the CE
mark for marketing the ENTec System in Europe and has received 510(k)
clearances for use in general head and neck surgical procedures and
functional endoscopic sinus surgery in the United States. In addition,
the company may pursue clearance in other indications.
 
In December 1995, the company first commercially introduced its
Arthroscopic System through a network of distributors in the United
States. The company's strategy includes placing controller units, that
are intended to generate future disposable revenue with arthroscopic
surgeons. The company's long-term strategy includes applying its
patented platform technology to a range of other soft-tissue surgical
procedures including the newly introduced products in the fields of
cosmetic surgery and ear, nose and throat surgery. The company has
received 510(k) clearance for use of its technology in several fields.
There can be no assurance that any of the company's clinical studies in
other fields 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:
 
Product sales for the three-month period ended April 3, 1999
increased by 83.7% to $9.1 million from $4.9 million for the three-month
period ended April 4, 1998.  The increase in product sales was primarily
due to an increase in the number of sales of both controller and
disposable units.  The higher unit volume of sales resulted primarily
from increased activity for newly introduced styles of disposables for
arthroscopy, and controllers and disposables sales for new product
lines. During the second half of fiscal year 1998, the company
introduced new disposable styles, including the Saber(TM) and Covac(TM), that
are designed primarily to be used in arthroscopic knee procedures. Sales
of these disposables accounted for over 15% of total product sales for
the three-month period ended April 3, 1999.
 
The company's strategy in arthroscopy has been, and continues to be, to
increase future disposable sales by increasing the installed base of
controllers through promotional programs. Disposables are consistently
sold at or near list price except for sales to international
distributors and marketing partners, which are currently, and are
expected in the future to be, sold at discounted prices. The company
expects disposable sales to remain the primary component of product
sales in the near future.  Substantially all revenue was derived
domestically during the three-month periods ended April 3, 1999 and
April 4, 1998.
 
The company believes that the majority of its disposables sales
revenue is being generated by the sale of disposables for use in
shoulder procedures. Based on the estimated number of procedures
performed each year, the company believes that knee procedures represent
the largest segment of the arthroscopic market.  In order to achieve
increasing disposable sales over time, the company believes it must
continue to penetrate the market in knee procedures, expand the
physicians education with respect to the Coblation technology, continue
working on articular cartilage applications that and focus product
development efforts specifically for knee applications.
 
During the year ended January 3, 1998, the company introduced its
System 2000 controller designed for more aggressive ablation and
hemostasis compared to its predecessor unit. The company believes
features found in the System 2000, as well as the new disposables, will
increase disposable sales for knee and shoulder procedures. There can be
no assurance that the use of these new products will be adopted by
physicians. In addition, the company has limited sales and marketing
experience and can make no assurance that the current trends in sales
and product acceptance will continue.
 
License fees and royalty revenue decreased to $0.6 million for the
three-month period ended April 2, 1999 from $2.3 million for the three-
month period April 3, 1998.  The decrease is primarily due to the timing
of licensing payments from business partners. In February 1998, the
company entered into a license agreement under which BSC was granted an
exclusive right to develop and market products based on the company's
Coblation technology for myocardial revascularization procedures. BSC
pays license fees, a portion of which has been classified as prepaid
royalties, to the company upon achievement of designated milestones and
royalties on sales of resulting products, if any. The company received a
license payment from BSC of $3.0 million in February of 1998, of which
$2.3 million was recognized as revenue during the three-month period
ended April 4, 1998.
 
In January 1999, the company entered into a license and
distribution agreement with Collagen, which was broadened by mutual
agreement in February 1999, whereby Collagen acquired exclusive,
worldwide, marketing rights for the company's patented Coblation
technology in the dermatology, cosmetic and plastic surgery markets.
Under the terms of the agreement, Collagen pays license fees based upon
the achievement of certain milestones and royalties on sales of product
to end-users. During the three-month period ended April 3, 1999, the
company recognized $0.5 million of such payments as license fees and
royalty revenue.
 
There can be no assurance that the company will be able to
continue to achieve the milestones required to recognize future license
fees, or that products will be developed, cleared for marketing or
achieve sufficient commercial acceptance so that the company may
continue to receive licensing and royalty revenues from its business
partners.
 
Cost of Product Sales
 
        Cost of product sales for the three-month period ended April 3,
1999 was $3.9 million or 43.3% of product sales, as compared with $2.9
million or 59.2% of product sales for the three-month period ended April
4, 1998.  The absolute dollar increase in cost of sales year-over-year
is attributable to increasing unit sales of  both controllers and
disposables.  The overall decrease in cost of sales as a percentage of
product sales resulted from improved efficiencies in manufacturing,
fixed and semi-fixed costs being spread over higher manufacturing
volumes, and improvements to the manufacturing process.
 
 
 
Operating Expenses
 
Research and development expense was $1.0 million, for the three-
month periods ended April 3, 1999 and April 4, 1998. In general, the
overall spending patterns in research and development remained
consistent as the company continues to focus on introducing new products
in its current product lines as well as development efforts for
potential additional product lines.  The company believes that
investment in a platform technology is essential for it to maintain its
competitive position. The company expects to increase the dollar amount
of research and development spending through substantial expenditures on
new product development, regulatory affairs, clinical studies and
patents.  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 $3.3 million or 36.7% of
product sales during the three-month period ended April 3, 1999, as
compared to $2.1 million or 42.9% of product sales during the same
period of the previous fiscal year. The increase in spending was
primarily due to higher dealer commissions resulting from increased
sales, higher staffing and increased travel associated with higher
levels of sales and marketing activity.  Additional sales and marketing
expenses were incurred during the current year period 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, 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 and future products.
 
General and administrative expense increased to $1.3 million or
14.5% of product sales during the three-month period ended April 3,
1999, as compared to $1.2 million or 24.5% of product sales during the
same period of the previous fiscal year. Overall, the most significant
spending was attributable to legal expenses related to the patent
infringement claims brought by the company against certain competitors.
The company expects that general and administrative expenses will
continue to increase as a result of the patent litigation and additional
business development activities.
 
 
 
 
Interest and Other Income, net
 
Interest and other income, net decreased to $0.1 million during
the three-month period ended April 3, 1999 from $0.3 million for the
three-month period ended April 4, 1998 primarily due to a decrease in
interest income from investments due to the declining balance of cash
and investments.
 
Income Tax Provision
 
        The provision for income taxes was $11,000 for the three-month
period ended April 3, 1999.  The company's tax rate is below the
statutory rate due to the utilization of net operating loss
carryforwards incurred in prior years.  The company is subject to
certain alternative minimum tax requirements for which an estimate is
made based on the anticipated effective tax rate at the end of the
fiscal year.
 
Net Income
 
Net income was $0.3 million for each of the three-month periods
ended April 3, 1999 and April 4, 1998.  Net income for the current
period reflects an increase in product sales primarily offset by
increased spending in sales and marketing.
 
 
Liquidity and Capital Resources
 
On April 3, 1999, the company had $17.1 million in working
capital.   Principal sources of liquidity consisted of $8.1 million in
cash, cash equivalents and available-for-sale securities.  The cash and
cash equivalents are highly liquid with original maturities of ninety
days or less.
 
Net cash provided by operating activities for the three-month
period ended April 3, 1999 was $0.7 million. Cash generated by operating
activities for the three-month period ended April 4, 1998 was $1.4
million.  The decrease in cash provided by operating activities year-
over-year was primarily due to the license fee revenue received from BSC
of $2.3 million in the first quarter of 1998, offset by a reduction in
accrued liabilities.
 
Net accounts receivable increased to $6.4 million as of April 3,
1999 from $6.0 million as of January 2, 1999. The increase in accounts
receivable is mainly attributable to the corresponding increase in
product sales offset by a decrease in the overall number of  days sales
outstanding.
 
Inventories increased slightly to $7.2 million as of April 3, 1999
from $7.1 million at January 2, 1999 due to higher product sales
activity along with the anticipated ramp-up of new product markets. The
company expects future inventory levels to grow as sales volume
increases.
 
Net property and equipment increased to $5.2 million as of April
3, 1999 from $4.6 million on January 2, 1999.  The increase is primarily
attributable to the capitalization of controllers placed under various
promotional programs along with an increase of computer software and
equipment.
 
The company plans to finance its capital needs principally from
cash from product sales, license fees and royalty income, cash, cash
equivalents and related interest.  The company believes the existing
capital resources together with cash generated from licensing and
royalty arrangements and product sales will be sufficient to fund its
operations through fiscal year 1999. The company has negotiated a $7.0
million line of credit that could provide additional working capital.
As of April 3, 1999, the company had committed to capital expenditures
of approximately $0.2 million. The company's future liquidity and
capital requirements will depend on numerous factors including the
company's success of commercializing its products, 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, costs 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.
 
Year 2000
 
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 assigned a Task Force to
handle the significant uncertainty that exists concerning the potential
effects associated with Year 2000 compliance. The Task Force has
formulated and begun to implement a plan to address Year 2000 compliance
including the formulation of contingency plans. To date, the company has
not found a material impact that may result from the failure of its
computers and computer software or that of its vendors, suppliers, and
customers, to recognize dates. The company has completed an upgrade of
its information technology system including its financial system, order
processing, manufacturing and inventory system which included Year 2000
compliance. To date the company has spent approximately $250,000
upgrading its computer technology. The company has not yet undertaken
the steps to quantify the effects of noncompliance of its customers,
suppliers and/or its service providers. The company's goal is to
complete all phases of its review and be Year 2000 compliant by
December, 1999.
 
Any Year 2000 compliance problem with either the company, its
suppliers, its service providers or its customers could result in a
material adverse effect on the company's financial condition and
operating results. There can be no assurance that further assessment of
the company's suppliers, data processing systems or contingency plans
will address all issues of Year 2000 compliance.
 
 
Recent Accounting Pronouncements
 
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments,
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. The company must adopt this standard no later than fiscal
year 2000. To date, the company does not engage in hedging activities.
 
 
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 2, 1999 filed April 2, 1999.  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 Non-Arthroscopic Products;
Uncertainties Associated with Non-Arthroscopic Products.
 
In April 1998, the company announced the creation of its new
business division, Visage, created for the purpose of commercializing
the company's Coblation technology  for use in dermatology and cosmetic
surgery procedures.   In May 1998, the company announced the creation of
its new business division, ENTec, created for the purpose of
commercializing the company's Coblation technology for use in head and
neck surgical procedures. The company applied the CE mark for marketing
of the Visage product line in Europe for general dermatology, cosmetic
surgery, skin resurfacing and wrinkle reduction procedures and has
received 510(k) clearances for use of Visage product line in general
dermatology procedures in the United States.  The company is pursuing
additional clearances that will allow the Visage product line to be
marketed in the United States specifically for skin resurfacing and
wrinkle reduction. The company has applied the CE mark certification for
marketing the ENTec line of Coblation-based products in Europe and has
received 510(k) clearances for use of this system in general head and
neck surgical procedures, as well as endoscopic sinus surgery in the
United States. In addition, the company may pursue additional clearances
for certain other indications.  Both of these product lines have only
recently been commercially introduced and to date, the company has sold
only a small number of units, which have been utilized by a limited
number of doctors.  No assurance can be given that the company will be
able to market the Visage or ENTec product lines successfully.  If the
Visage or ENTec product lines are not commercially successful, the
company's business, financial condition and results of operations could
be materially adversely affected.
 
A significant investment in additional preclinical and clinical
testing, regulatory and sales and marketing activities may be necessary
in order for the company to commercialize the Visage, ENTec and
AngioCare product lines.  There can be no assurance that the Visage,
ENTec or AngioCare product lines will generate sufficient or sustainable
revenues to enable 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 the Visage, ENTec and
AngioCare product lines 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 the Visage, ENTec and AngioCare product lines 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
the Visage, ENTec and AngioCare product lines or any approved products
are not commercially successful, there may be a material adverse effect
on 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 three-month period ended April 3, 1999, had
reported 40 months of sales. Since the Arthroscopic System accounts for
substantially all of the company's product sales, the company is highly
dependent on its sales. The company's Visage, ENTec and AngioCare
product lines have only recently become available, and to date, the
company has sold only a small number of units. No assurance can be given
that the company will be able to manufacture the Visage, ENTec and
AngioCare product lines in commercial quantities at acceptable costs, or
that it will be able to market such products successfully. 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 FDA or foreign
regulatory authorities on a timely basis, if at all, or that the
potential products will ever achieve commercial acceptance.
 
Currently, the majority of the company's sales are from its
Arthroscopic System in the United States. The company has established
distribution capability in Europe, Australia, New Zealand, Korea, Japan,
Taiwan, Canada, Mexico, Caribbean, Russia, South Africa, the Middle
East, Northern Africa and South and Central America. Before the
Arthroscopic System can be sold in some of these regions, the company
will have to obtain additional international regulatory approvals. If
such regulatory approval is obtained, there can be no assurance that the
company will be able to establish a successful distribution capability
in these or in other geographic regions or for other than the
arthroscopic product line.
 
Dependence Upon Collaborative Arrangements
 
In order to successfully develop and commercialize certain
products, the company may enter into collaborative or licensing
arrangements with other medical device companies and other entities to
fund and complete its research and development activities, pre-clinical
and clinical testing and manufacturing, to seek and obtain regulatory
approval and to achieve successful commercialization of future products.
The company has recently entered into collaborative arrangements with
BSC, and Collagen. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations- Overview" for a
discussion of these arrangements.
 
The company's participation in 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 meet 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 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
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.
 
 
Uncertainty of Market Acceptance
 
Despite the benefits of the company's Coblation technology,
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.
Only a few, independently published clinical reports exist to support
the company's marketing efforts for its products and technology.  The
company believes that continued recommendations and endorsements by
influential physicians are essential for market acceptance of its
products and technology. If Coblation technology does not continue to
receive broad-based physician acceptance and endorsement by influential
physicians, the company's business, financial condition and results of
operations could be materially adversely affected.
 
Limited Domestic and International Marketing and Sales Experience
 
The company has shipped over 4,600 controller units and more than
385,000 disposables through the quarter ended April 3, 1999. The company
is marketing and selling its Arthroscopic and ENTec product lines in the
United States and internationally through a network of independent
distributors and its subsidiary, ArthroCare Europe AB. These
distributors sell orthopedic arthroscopy and ENT devices for a number of
other manufacturers. 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 its ENTec division.  There
can be no assurance that the company will successfully develop its own
marketing and sales capabilities or experience for the ENTec products.
In addition, there can be no assurance that these distributors will
commit the necessary resources to effectively market and sell the
company's Arthroscopic or ENTec product lines, or that they will be
successful in closing sales with doctors and hospitals.  Collagen is the
exclusive and worldwide distributor for the Visage product line.  The
inability to sell sufficient quantities of the cosmetic surgery products
could have a material adverse effect on the company's business,
financial condition and results of operations.
 
The company has established distribution capability in Europe,
Australia, New Zealand, Korea, Japan, Taiwan, Canada, Mexico, the
Caribbean, Russia, South Africa, the Middle East, Northern Africa and
South and Central America. Before the Arthroscopic System can be sold in
some of these regions, the company will have to obtain additional
international regulatory approvals. If such regulatory approval is
obtained, there can be no assurance that the company will be able to
establish a successful distribution capability in these or in other
geographic regions.  In January 1999, the company entered into a license
agreement with Collagen whereby Collagen has the exclusive worldwide
distribution rights for Visage.   For a description of additional risks
and uncertainties relating to Collagen's exclusive worldwide
distribution rights for Visage, see "Additional Factors That Might
Affect  Future Results - Dependence on Collaborative Arrangements" on
page 20 of this Quarterly Report on Form 10-Q.
 
No assurance can be given that the company will successfully its
products directly, or through its distributors or its business partners,
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
its products in international markets.
 
Limited Manufacturing Experience
 
The company's manufacturing operations consist of an in-house
assembly operation for the manufacture of disposables, and a separate
in-house operation for the manufacture of controllers. The company's
products are manufactured from several components, some of which are
supplied to the company by third parties. Manufacture of the
controllers, of which an earlier version was manufactured by a third
party, was brought in-house in late 1997 for purposes of maintaining
process control, managing availability, and leveraging fixed costs.
 
In April 1998, the company started manufacturing its System 5000
controllers for its Visage product line and only a small number of this
model of controllers have been manufactured and sold. In the same time
period, the company began to manufacture limited numbers of disposables
for the ENTec and Visage product lines.  As a result, the company has
limited experience manufacturing ENTec and Visage product lines in
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.
 
The company and its component suppliers are required to operate in
conformance with FDA Quality System Regulation (QSR) 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. In addition,
the company must conform to the Medical Device Directive (MDD) for sale
in Europe. There can be no assurance that the company or its component
suppliers will remain in compliance with the QSR, ISO 9001 or MDD
standards. Any failure by the company or its component suppliers to
remain in compliance with the QSR, ISO 9001 or MDD standards could have
a material adverse effect on the company's business, financial condition
and results of operations.
 
In addition, the disposables are sterilized by a single
subcontractor.  There can be no assurance that an alternate sterilizer
can be identified and qualified for sterilizing the disposables. The
company's inability to secure an alternative sterilizer, if required,
would limit its ability to manufacture the company's disposables and
could have a material adverse effect on the company's business,
financial condition and results of operations.
 
History of Losses; Fluctuations in Operating Results
 
The company has experienced significant operating losses since
inception and, as of April 3, 1999, had an accumulated deficit of $27.2
million. Results of operations may fluctuate significantly from quarter
to quarter due to the timing of expenditures, absence of a backlog of
orders, timing of the receipt of orders, and promotional programs for
the company's products.  The company's revenues and profitability will
be critically dependent on whether or not it can successfully continue
to market its Coblation based technology product lines. 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 18 issued United States patents,
more than 50 pending United States patent applications, 8 issued
international patents and over 40 international patent applications
corresponding to eighteen of the United States filings.  The initial
U.S. patent is currently set to expire in 2008, three issued U.S.
patents are currently expected to expire between 2008 and 2012 and the
other 14 U.S. 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 disposable
tools, as well as the use of Coblation technology in specific surgical
procedures.
 
The issued patents cover, among other things, systems and methods
for applying radio frequency energy to tissue in the presence of
electrically conductive fluid such as isotonic saline; disposables
having an electrode array and a means to supply current independently to
individual electrodes; and systems and methods for employing radio
frequency energy in arthroscopy, urology, gynecology, ENT, cosmetic
surgery and cardiac procedures (e.g. transmyocardial revascularization
of the heart). The pending patent applications include coverage for the
fundamental tissue ablation and cutting technology as well as methods
and apparatus for specific 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 substantial
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 I 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 all 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, 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's Coblation technology is beginning to replace older tissue
removal technology, such as laser systems, conventional electrosurgical
systems, manual instruments and power shavers, in certain arthroscopic
procedures. Consequently, the company competes indirectly with the
providers of such tissue removal systems because the company must
convert customers to its Coblation technology. Many of these competitors
have significantly greater financial, manufacturing, marketing,
distribution and technical resources than the company. Smith & Nephew
Endoscopy (which owns Acufex Microsurgical, Inc. and Dyonics, Inc.),
Conmed Corporation (including its Linvatec unit) and Stryker Corporation
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. There can be no assurance
that the company can effectively convince surgeons and physicians to
adopt the company's Coblation technology. 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.
 
The ENT medical device industry is rapidly becoming more
competitive. The company recently cancelled its exclusive license and
distribution agreement with Xomed Surgical Products, 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 page 20 of this Annual Report on Form 10-Q). However,
other large companies, such as Smith & Nephew, Stryker Corporation and
Conmed Corporation, each have shares of the market for manual
instruments, such as microdebriders for endoscopic sinus surgery. In
ENT, the company faces competition from large laser companies, such as
ESC Medical Systems of Tel Aviv, Israel, which develops and markets
lasers for certain ENT applications, such as laser-assisted uvuloplasty
(LAUP). 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 Medical Technologies 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 Inc.
and Ellman International, Inc. both manufacture and sell a variety of
medical devices that use conventional RF technology for tissue
desiccation, cutting and/or coagulation in turbinate surgery, the
treatment of snoring and other ENT procedures.
 
The company has entered into an exclusive license and distribution
agreement with Collagen, which is currently one of the largest company's
focused on the cosmetic surgery market. The cosmetic surgery industry
includes a number of large and well established companies that provide
devices for rejuvenating 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 carbon dioxide 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, Israel. ESC recently merged with Laser Industries,
Ltd., already one of the largest medical laser manufacturers in the
world. The combined entity 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
resurfacing and others. 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 other surgical
fields that the company may enter. 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, 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.
 
If human clinical trials of a device are required and if the
device presents a "significant risk," the manufacturer or the
distributor of the device is required to file an IDE application prior
to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and,
possibly, mechanical testing. Sponsors of clinical trials are permitted
to sell investigational devices distributed in the course of the study,
provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. The clinical trials must be
conducted under the auspices of an independent Institutional Review
Board ("IRB") established pursuant to FDA regulations, and with
appropriate informed consent of the patient.
 
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 PMA application. 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 FDA has not called for PMAs,
the manufacturer or distributor may seek clearance from 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 FDA. 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. No law or regulation specifies the
time limit by which FDA must respond to a 510(k) notification. 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. An 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 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 Visage in general
dermatology procedures and is pursuing additional clearances that will
allow Visage to be marketed in the United States specifically for skin
resurfacing and wrinkle reduction. With respect to ENTec, the company
has received clearance of 510(k) premarket notifications to market the
ENTec product line in general head and neck surgical procedures, as well
as endoscopic sinus surgery. 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. A PMA application must be supported by extensive data,
including, in many instances, preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of
the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a
substantive review, the FDA will "file" the application. Under the FDC
Act, the FDA has 180 days to review a PMA application, although the
review of such an application more often occurs over a protracted time
period, and generally takes approximately two years or more from the
date of filing to complete.
 
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 to ensure
compliance with the FDA's Good Manufacturing Practice (GMP) or QS
Regulations requirements prior to approval of an application. 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 will 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 inspections by both the FDA and
the CDHS for compliance with the FDA's QSR requirements 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. Further, the company and
the third party manufacturers of its products are required to comply
with various FDA requirements for design, safety, advertising and
labeling. There can be no assurance that the company or its component
suppliers will not encounter any manufacturing difficulties, or that the
company any of its subcontractors or component suppliers will not
experience similar 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 Visage in Europe,
Australia and Canada and to market ENTec 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/EN46001 certification and the CE mark. ISO 9001/EN46001
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/EN46001
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, day-surgery
facilities, 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 and ENT procedures performed using devices that have
received FDA approval has generally been available in the United States.
Generally, cosmetic procedures are not reimbursed. 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.
 
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 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) applications, 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 $7.0 million per
occurrence and $7.0 million 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
the Visage and ENTec product lines 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.
 
Year 2000
 
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 assigned a Task Force to
handle the significant uncertainty that exists concerning the potential
effects associated with Year 2000 compliance. The Task Force has
formulated and begun to implement a plan to address Year 2000 compliance
including the formulation of contingency plans. To date, the company has
not found a material impact that may result from the failure of its
computers and computer software or that of its vendors, suppliers, and
customers, to recognize dates. The company has completed an upgrade of
its information technology system including its financial system, order
processing, manufacturing and inventory system which included Year 2000
compliance. To date the company has spent approximately $250,000
upgrading its computer technology. The company has not yet undertaken
the steps to quantify the effects of noncompliance of its customers,
suppliers and/or its service providers. The company's goal is to
complete all phases of its review and be Year 2000 compliant by
December, 1999.
 
Any Year 2000 compliance problem with either the company, its
suppliers, its service providers or its customers could result in a
material adverse effect on the company's financial condition and
operating results. There can be no assurance that further assessment of
the company's suppliers, data processing systems or contingency plans
will address all issues of Year 2000 compliance.
 
 
Significant Influence by Directors, Executive Officers and Affiliated
Entities
 
As of April 4, 1999, the company's directors, executive officers
and entities affiliated with them, in the aggregate, beneficially own
approximately 27% of the company's outstanding 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 small-cap medical device 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 percent 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 percent 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
percent 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 the company believes
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.
In addition, the company filed a motion on March 5, 1998 for preliminary
injunction against the Defendants marketing and selling of the VAPR
system. The court denied this motion for preliminary injunction in
December 1998, stating that the defendants have raised questions that
should be more fully addressed by the parties, and then be resolved by a
jury at trial. The jury trial will begin on June 14, 1999 in San
Francisco, California.
 
On February 4, 1999, Xomed Surgical Products (Xomed) of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999.  In addition, the company filed two
counterclaims against Xomed for damages caused by Xomed's failure to
perform under the contract and for a certain milestone payment owed to
ArthroCare by Xomed.
 
 
 
 
 
Item 2.  Quantitative and Qualitative Disclosures About Market
Risk
 
        The company has an investment portfolio of fixed income
securities that are classified as "available-for-sale securities."
These securities, like all fixed income instruments, are subject to
interest rate risk and will fall in value if market interest rates
increase.  ArthroCare attempts to limit this exposure by investing
primarily in short-term securities.
 
Item 3.  Changes in Securities
 
None
 
Item 4.  Defaults upon Senior Securities
 
None
 
Item 5.  Submission of Matters to a Vote of Security Holders
 
None
 
Item 6.  Other Information
 
None
 
Item 7.  Exhibits and Reports on Form 8 - K
 
 
a)  Exhibits
 
3.2  (1) Certificate of Incorporation of the Registrant.
 
 
3.3  (7) Amended Restated 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) 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.
 
10.10 (1) Employment Letter Agreement, dated October 21, 1994, between the
          Registrant and Allan  Weinstein and amendment thereto.
 
10.11 (1) Purchase Assistance Promissory Note, dated January 19, 1995, between
          Registrant and Allan Weinstein.
 
10.12 (1) Mortgage Assistance Promissory Note Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.
 
10.13 (1) Restricted Stock Purchase and Security Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.
 
10.14 (1) Employment Letter Agreement, dated July 18, 1995, between the
          Registrant and Robert T. Hagan.
 
10.15 (1) Restricted Stock Purchase and Security Agreement, dated August 1,
          1995, between the Registrant and Robert T. Hagan.
 
10.16 (1) + Radiation Services Agreement, dated September 13, 1995, between
          the Registrant and SteriGenics International.
 
10.17 (1) Amended and Restated Stockholder Rights Agreement, dated October 16,
          1995, between the Registrant and certain holders of the Registrant's
          securities.
 
10.18 (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.
 
10.19 (2) Preferred Stock Rights Agreement, dated November 14, 1996, between
          the Registrant and Norwest Bank Minnesota, N.A.
 
10.19 A  (7) Amended Preferred Shares Rights Agreement, dated October 2, 1998,
          between the Registrant and Norwest Bank Minnesota, N.A.
 
10.20 (10) + Exclusive Distributor Agreement, between the
          Registrant and Arthrex, Gmbh. amended October 1, 1998.
 
10.21 (4) Employment Letter Agreement, dated June 20, 1997, between the
          Registrant and Michael A. Baker.
 
10.22 (5) + Exclusive Distributor Agreement, dated August 21, 1997, between the
          Registrant and Kobayashi Pharmaceutical Company, Ltd.
 
10.23 (6) + License Agreement dated February 9, 1998, between the Registrant
          and Boston Scientific Corporation.
 
10.24 (6) + Development and Supply Agreement dated February 9, 1998, between
          the Registrant and Boston Scientific Corporation.
 
10.25 (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.
 
10.26 (8) + Term sheet for License and Distribution Agreement between Xomed
          Surgical Products and the Registrant dated June 25, 1998.
 
10.27 (9) ++ License Agrement dated February 9, 1999 between the
          Registrant and Collagen Aesthetics.
 
10.28 (9) Change of Control Agreement between the Registrant and the CEO.
 
10.29 (9) The form of "VP Continutiy Agreement" between the Registrant
          and its Vice presidents.
 
10.30 (10) Employment Letter Agreement, between the Registrant
           and John R. Tighe dated January 26, 1999.
 
10.31 (10) Employment Letter Agreement, between the Registrant
           and Christine E. Hanni amended May 19, 1999.
 
10.32 (9)  Employment Letter Agreement, between the Registrant
           and Bruce Prothro amended May 19, 1999.
 
 
27.1    Financial Data Schedule.
 
(1)     Incorporated herein by reference to 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 Registrant's Quarterly
        Report on Form 10-Q for the period ended March 29, 1997.
 
(4)     Incorporated herein by reference to the Registrant's Quarterly
        Report on Form 10-Q for the period ended June 28, 1997.
 
(5)     Incorporated herein by reference to the Registrant's Quarterly
        Report on Form 10-Q for the period ended September 27, 1997.
 
(6)     Incorporated herein by reference to the Registrant's Annual
        Report on Form 10-K  for the year ended January 3, 1998.
 
(7)     Incorporated herein by reference to Exhibit 1 previously filed with the
        Registration statement on Form 8-A/A (Registration No. 000-27422).
 
(8)     Incorporated herein by reference to the Registrant's Quarterly
        Report on Form 10-Q for the period ended July 4, 1998.
 
(9)     Incorporated herein by reference to the same numberd exhibit
        Registrant's Annual Report on Form 10-K for the year ended
        January 2, 1999.
 
(10)    Incorporated herein by reference to the Registrant's Quarterly
        Report on Form 10-Q for the period ended April 3, 1999.
 
 
 
 
 
 
+       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: April 18, 1999
 
/s/ CHRISTINE E. HANNI
Christine E. Hanni
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer
and Accounting Officer)
 
Date: April 18, 1999
 
/s/  MICHAEL A. BAKER
Michael A. Baker
President, Chief Executive
Officer and Director
(Principal Executive Officer)
 
 
 
<PAGE>
 
 
                                    EXHIBIT INDEX
 
Exhibit
Number                          Exhibit Description
 
10.20  ++ Exclusive Distributor Agreement, between the
          Registrant and Arthrex, Gmbh. amended October 1, 1998.
 
10.30     Employment Letter Agreement, between the Registrant
          and John R. Tighe dated January 26, 1999.
 
10.31     Employment Letter Agreement, between the Registrant
          and Christine E. Hanni amended May 19, 1999.
 
10.32     Employment Letter Agreement, between the Registrant
          and Bruce Prothro amended May 19, 1999.
 
24.1      Power of Attorney.
27.1      Financial Data Schedule.