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 September 27, 1997

                                       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
November 5, 1997 was 8,832,130.








<PAGE>
Part 1.  Financial Information
Item 1.   Financial Statements

                             ARTHROCARE CORPORATION
                            CONDENSED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                   September 27,  December 28,
                                                   1997           1996
                                                   -------------  -------------
                                                   (unaudited)
<S>                                                <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                             $11,591        $11,359
  Available-for-sale securities                           9,554         12,281
  Accounts receivable, net                                1,492          1,251
  Inventory                                               1,678            759
  Prepaid expenses and other current assets                 289            155
                                                   -------------  -------------
       Total current assets                              24,604         25,805

Property and equipment, net                               1,421          1,484
Related party receivables                                   744            298
Available-for-sale securities                             1,551          5,641
Other assets                                                 63             69
                                                   -------------  -------------
     Total assets                                       $28,383        $33,297
                                                   =============  =============
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                       $1,341         $1,001
  Related party payables                                     26             54
  Accrued liabilities                                     1,820          1,245
  Capital lease obligation, current                          24             37
                                                   -------------  -------------
          Total current liabilities                       3,211          2,337

Capital lease obligation, net of current portion              4             21
Deferred rent                                               159            157
                                                   -------------  -------------
          Total liabilities                               3,374          2,515
                                                   -------------  -------------
Stockholders' equity:
  Common stock                                                9              9
  Additional paid in capital                             48,971         48,862
  Notes receivable from stockholders                        (92)           (92)
  Deferred compensation                                    (268)          (388)
  Accumulated deficit                                   (23,674)       (17,618)
  Unrealized gain on available-for-sale securities           63              9
                                                   -------------  -------------
          Total stockholders' equity                     25,009         30,782
                                                   -------------  -------------
     Total liabilities and stockholders' equity         $28,383        $33,297
                                                   =============  =============
</TABLE>
               The accompanying notes are an integral part of the
                         condensed financial statements
<PAGE>

                             ARTHROCARE CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                            Three Months Ended           Nine Months Ended
                                        ---------------------------  ---------------------------
                                        September 27, September 28,  September 27, September 28,
                                        1997          1996           1997          1996
                                        ------------- -------------  ------------- -------------
<S>                                     <C>           <C>            <C>           <C>
Net sales                                     $3,366        $1,574         $8,459        $4,139
Cost of sales                                  2,201         1,365          5,874         3,666
                                        ------------- -------------  ------------- -------------
Gross margin                                   1,165           209          2,585           473
                                        ------------- -------------  ------------- -------------
Operating expenses:
   Research and development                    1,076           830          2,829         2,644
   Sales and marketing                         1,607         1,056          4,358         2,586
   General and administrative                    713           648          2,531         1,751
                                        ------------- -------------  ------------- -------------
        Total operating expenses               3,396         2,534          9,718         6,981
                                        ------------- -------------  ------------- -------------
Loss from operations                          (2,231)       (2,325)        (7,133)       (6,508)
Interest and other income, net                   331           393          1,077         1,100
                                        ------------- -------------  ------------- -------------
Loss before income tax provision              (1,900)       (1,932)        (6,056)       (5,408)
Income tax provision                           --            --             --                2
                                        ------------- -------------  ------------- -------------
Net loss                                     ($1,900)      ($1,932)       ($6,056)      ($5,410)
                                        ============= =============  ============= =============

Net loss per share                            ($0.22)       ($0.22)        ($0.69)       ($0.67)
                                        ============= =============  ============= =============

Shares used in per share calculation           8,812         8,714          8,801         8,057
                                        ============= =============  ============= =============

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













                             ARTHROCARE CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                         NINE MONTHS ENDED
                                                     ----------------------------
                                                     September 27,  September 28,
                                                     1997           1996
                                                     -------------  -------------
<S>                                                  <C>            <C>
Cash flows from operating activities:
   Net loss                                               ($6,056)       ($5,410)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
        Depreciation and amortization                         457            278
        Write-off of property and equipment                   --             237
        Amortization of deferred compensation                 120            121
        Provision for doubtful accounts                        74             87
        Provision for excess and obsolete inventory           277             64
        Deferred rent                                           2             14
        Changes in operating assets and liabilities:
          Accounts receivable                                (315)        (1,019)
          Related party receivables                           --             (56)
          Inventory                                        (1,196)          (570)
          Prepaid expenses and other current assets           (80)           635
          Accounts payable                                    312           (239)
          Accrued liabilities                                 575            561
          Other assets                                          6            (20)
                                                     -------------  -------------
           Net cash used in operating activities           (5,824)        (5,317)
                                                     -------------  -------------
Cash flows from investing activities:
   Purchases of property and equipment                       (394)          (842)
   Net maturities (purchases) of
        available-for-sale securities                       6,871        (18,465)
                                                     -------------  -------------
           Net cash provided by (used in) investing
               activities                                   6,477        (19,307)
                                                     -------------  -------------
Cash flows from financing activities:
   Repayment of capital leases                                (30)           (20)
   Issuance of notes receivable                              (500)           --
   Proceeds from issuance of Common Stock                     109         31,937
                                                     -------------  -------------
           Net cash provided by (used in) financing
               activities                                    (421)        31,917
                                                     -------------  -------------
Net increase in cash and cash equivalents                     232          7,293
Cash and cash equivalents, beginning of period             11,359          4,774
                                                     -------------  -------------
Cash and cash equivalents, end of period                  $11,591        $12,067
                                                     =============  =============
Supplemental schedule of non-cash investing and
      financing activities:
   Issuance of common stock on conversion of
      preferred stock                                   $     --         $15,704
   Net unrealized gain on
      available-for-sale securities                           $54            $19

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

                             ARTHROCARE CORPORATION
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)

1.  Basis of Presentation

        In the opinion of management, the accompanying unaudited 
condensed financial statements contain all adjustments (all of 
which are normal and recurring in nature) necessary to present 
fairly the financial position, results of operations and cash 
flows of ArthroCare Corporation (the "Company").  Interim results 
of operations are not necessarily indicative of the results to be 
expected for the full year.  The notes to the financial statements 
contained in the Form 10-K for the year ended December 28, 1996 
should be read in conjunction with these condensed financial 
statements.  The balance sheet at December 28, 1996 was derived 
from audited financial statements; however, the financial 
statements in this report do not include all disclosures required 
by generally accepted accounting principles.

2.  Computation of Per Share Data

        The per share data is based upon the weighted average number 
of common and common equivalent shares outstanding. Common 
equivalent shares from stock options, warrants and preferred stock 
are excluded from the computation as their effect is anti-
dilutive, except that, pursuant to the Securities and Exchange 
Commission Staff Accounting Bulletin No. 83, common and common 
equivalent shares issued by the Company during the twelve months 
preceding the initial public offering at prices substantially 
below the initial public offering price have been included in the 
calculations as if they were outstanding for all of the periods 
prior to February, 1996 (using the treasury stock method and the 
public offering price per share).

3.  Components of Inventory (in thousands):

                                        September 27,   December 28,
                                        1997            1996
                                        ------------    ------------
                                        (Unaudited)
Inventory:
   Raw materials                               $534            $345
   Work-in-progress                             295              32
   Finished goods                               849             382
                                        ------------    ------------
Total                                        $1,678            $759
                                        ============    ============


4.  Recent Accounting Pronouncements

        In February 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 128 (SFAS 
128), Earnings Per Share, which specifies the computation, 
presentation and disclosure requirements for earnings per share. 
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and 
will be effective for the Company's fiscal year 1997.  SFAS 128 
requires restatement of all prior-period earnings per share data 
presented after the effective date.  SFAS 128 will not have a 
material impact on the Company's earnings per share.

        In June 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 130 (SFAS 
130),  Reporting Comprehensive Income. This statement establishes 
requirements for disclosure of comprehensive income and becomes 
effective for the Company's fiscal year 1998, with 
reclassification of earlier financial statements for comparative 
purposes. Comprehensive income generally represents all changes in 
stockholders' equity except those resulting from investments or 
contributions by stockholders.  The Company is evaluating 
alternative formats for presenting this information, but does not 
expect this pronouncement to materially impact the Company's 
reporting of results of operations.

        In June 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 131 (SFAS 
131), Disclosure about Segments of an Enterprise and Related 
Information.  This statement establishes standards for disclosure 
about operating segments in annual financial statements and 
selected information in interim financial reports.  It also 
establishes standards for related disclosures about products and 
services, geographic areas and major customers.  This statement 
supersedes Statement of Financial Accounting Standards No. 14,  
Financial Reporting for Segments of a Business Enterprise.  The 
new standard becomes effective for the Company's fiscal year 1998, 
and requires that comparative information from earlier years to be 
restated to conform to requirements of this standard.  The Company 
is evaluating the requirements of SFAS 131 and the effects, if 
any, on the Company's current reporting and disclosures.

<PAGE>


PART 1. FINANCIAL INFORMATION

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

Overview

        Since commencing operations in April 1993, ArthroCare 
Corporation (the "Company" or "ArthroCare") has primarily engaged 
in the design, development, clinical testing, manufacturing, and 
sale of its Arthroscopic System. The Arthroscopic System consists 
of a disposable, bipolar ArthroWand, a radio frequency controller 
that powers the ArthroWand and a cable that connects the 
ArthroWand to the controller. The ArthroWand, using its Coblation 
(trademark) technology, removes soft tissue with minimal damage to 
surrounding healthy tissue, and simultaneously achieves hemostasis 
(sealing of small bleeding vessels).

The Company has a limited history of operations. The Company 
received clearance of its 510(k) premarket notification from the 
United States Food & Drug Administration (FDA) in March 1995 to 
market its Arthroscopic System in the United States for use in 
arthroscopic surgery of the knee, shoulder, elbow and ankle. The 
Company has since received clearance for use in the wrist and hip. 
In December 1995, the Company commercially introduced its 
Arthroscopic System through a network of distributors in the 
United States. The Company's arthroscopic strategy includes 
placing controllers that are intended to generate future wand 
revenues. The Company's long-term strategy includes applying its 
proprietary platform technology to a range of other soft tissue 
surgical procedures including the fields of urology, dermatology 
and dentistry. In that regard, the Company has received 510(k) 
clearance for use of its technology in the fields of urology, 
dental surgery,  general dermatology and general surgery. The 
Company has received approval of an investigational device 
exemption (IDE) to conduct a clinical study on a specific 
dermatological indication. Following the completion of the study, 
the Company plans to submit a 510(k) application  to the FDA. 
There can be no assurance that the Company's applications for 
other  systems under development will be cleared by the FDA on a 
timely basis, if at all, or that these products or any of the 
Company's products, if cleared for marketing, will ever achieve 
commercial acceptance. See "Additional Factors that Might Affect 
Future Results -- Uncertainty of New Product Development",
"-- Limited Domestic and International Marketing and Sales Experience" 
and " -- Uncertainty of Approvals; Extensive Governmental 
Regulation."

Statements in this Quarterly Report on Form 10-Q which 
express that the Company "believes", "anticipates" or "plans to..." 
as well as other statements which are not historical fact, are 
forward looking statements within the meaning of the Private 
Securities Litigation Reform Act of 1995.  Actual events or 
results may differ materially as a result of the risks and 
uncertainties described herein including, in particular, those 
factors described under "Additional factors that might affect 
future results" and other risks and uncertainties in the documents 
incorporated herein by reference.



Results of Operations
                             ARTHROCARE CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                              Three Months Ended                      Nine Months Ended
                                  --------------------------------------  -------------------------------------
                                  September 27,   September 28,     %     September 27,  September 28,     %
                                  1997       %    1996       %     Chg    1997       %   1996       %     Chg
                                  -------- ------ -------- ------ ------  -------- ----- -------- ------ ------
<S>                               <C>      <C>    <C>      <C>    <C>     <C>      <C>   <C>      <C>    <C>
Net sales                          $3,400    100%  $1,574    100%   116%   $8,493   100%  $4,139    100%   105%
Cost of sales                       2,300     68%   1,365     87%    68%    5,973    70%   3,666     89%    63%
                                  --------        --------                --------       --------
Gross margin                        1,100     32%     209     13%   426%    2,520    30%     473     11%   433%
                                  --------        --------                --------       --------
Operating expenses:
   Research and development           850     25%     830     53%     2%    2,603    31%   2,644     64%    -2%
   Sales and marketing              1,500     44%   1,056     67%    42%    4,251    50%   2,586     62%    64%
   General and administrative         950     28%     648     41%    47%    2,768    33%   1,751     42%    58%
                                  --------        --------                --------       --------
        Total operating expenses    3,300     97%   2,534    161%    30%    9,622   114%   6,981    168%    38%
                                  --------        --------                --------       --------
Loss from operations               (2,200)   -65%  (2,325)  -148%    -5%   (7,102)  -84%  (6,508)  -157%     9%
Interest and other income, net        325     10%     393     25%   -17%    1,071    13%   1,100     26%    -3%
                                  --------        --------                --------       --------
Loss before income tax provision   (1,875)   -55%  (1,932)  -123%    -3%   (6,031)  -71%  (5,408)  -131%    12%
Income tax provision                   --      0%      --      0%   n/m        --     0%       2      0%   n/m
                                  --------        --------                --------       --------
Net loss                          ($1,875)   -55% ($1,932)  -123%    -3%  ($6,031)  -71% ($5,410)  -131%    11%
                                  ========        ========                ========       ========
</TABLE>

Revenues

        For the three month period ended September 27, 1997, 
revenues were $3.4 million as compared to $1.6 million for the 
three month period ended September 28, 1996.  The $1.8 million 
increase was primarily due to higher unit volume wand sales 
resulting from a larger installed base of controllers.  Higher 
unit volume controller sales also contributed to the increase.  
The increase wand sales were partially offset by lower controller 
average selling price (ASP) as compared to the year ago quarter.  

Revenues for the nine month period ended September 27, 1997 
were $8.5 million as compared to $4.1 million for the nine month 
period ended September 28, 1996.  The $4.3 million increase was 
due primarily to higher unit volume wand sales resulting from a 
larger installed base of controllers. Higher controller unit 
volume sales and slightly higher wand ASP also contributed to the 
increase.  The increased revenues in the 1997 period were 
partially offset by decreased controller revenues resulting from 
initial dealer stocking orders in the first two quarters of 1996 
that did not recur in the 1997 period.   

The Company's strategy in arthroscopy is to increase the 
installed base of controllers by offering aggressive promotional 
programs which bundle a discounted controller with a minimum wand 
purchase and first year wand purchase commitment. This strategy 
has had an adverse impact on controller revenue, controller ASP 
and gross margins, partially offsetting the positive impact of 
increased wand sales.

During the third quarter of 1997, the installed base of 
controllers increased by over 300 units to a total installed base 
of more than 1,250 units.  This installed base of controllers 
generated sales of more than 25,000 wands during the third quarter 
of 1997.    

Overall, wands were sold at or near list price during the 
third quarter and for the first nine months of 1997. The wand ASP 
was higher in the three month period ended September 27, 1997 than 
in the three month period ended September 28, 1996 due to the 
large number of wands sold to dealers at discounts in the prior 
year quarter as dealers stocked initial inventory.  The same was 
true for the nine month period ended September 27, 1997 as 
compared to the nine month period ended September 28, 1996.  The 
Company expects international sales of wands at discounted prices 
to reduce wand ASP in the future.

During the three and nine month periods ended September 27, 
1997, controller ASP was adversely impacted by promotional 
programs which offer discounted controller prices when packaged 
with volume wand purchases or purchase commitments. In the three 
and nine month periods ended September 28, 1996, the controller 
ASP was higher as dealers were purchasing their demonstration 
controllers and the current controller promotional programs were 
not being offered.  The Company expects to continue these 
promotional programs as a strategy to increase controller 
placements which could result in increased wand sales.


Wands and controllers as percentage of total revenues:

                  Three Months Ended           Nine Months Ended
              ---------------------------  ---------------------------
              September 27, September 28,  September 27, September 28,
              1997          1996           1997          1996
              ------------- -------------  ------------- -------------
Wands                   89%           84%            91%           73%

Controllers             11%           16%             9%           27%


The revenue mix between wands and controllers in the three 
month period ended September 27, 1997 was approximately 89% wands 
and 11% controllers.  During the three month period ended 
September 28, 1996 the approximate mix of wands and controllers 
was 84% wands and 16% controllers.  During the nine month period 
ended September 27, 1997 the revenue mix was approximately 91% 
wands and 9% controllers.  During the nine month period ended 
September 28, 1996, the revenue mix was approximately 73% wands 
and 27% controllers.  The increasing wand percentages in both 
periods compared with the year ago periods were due to increased 
wand sales and continued promotional pricing of controllers. This 
trend was slightly offset in the nine month period ended September 
27, 1997 by initial stocking orders shipped to international 
dealers during the second quarter of 1997. The Company expects 
wand sales to remain the primary component of revenues in the 
future.

During the three and nine month periods ended September 27, 
1997, revenues were heavily weighted towards sales to doctors and 
hospitals.  The three and nine month periods ended September 28, 
1996 were the Company's first full periods of shipments, and 
revenues were heavily weighted towards sales to dealers as they 
bought initial stocking inventory.  The Company expects sales to 
doctors and hospitals to remain high as a percentage of overall 
sales in the future.

The Company believes that, in its first seven quarters of 
product shipments, it has penetrated over 3% of the arthroscopic 
surgical tools market in the United States and that 
approximately 60% of the Company's wand revenue is being generated 
by wands purchased for use in shoulder procedures. The Company 
believes that shoulder procedures are the fastest growing segment 
of the arthroscopic market, and knee procedures represent the 
largest segment of arthroscopic surgery in terms of the absolute 
number of procedures. In the quarter ended September 27, 1997, the 
Company estimates that approximately $1.2 million in wand revenues 
were generated by knee procedures. In order to achieve increasing 
wand sales over time, the Company must further penetrate the 
market for knee procedures. The Company has introduced additional 
wand styles including its new dome wands designed to be used in 
both knee and shoulder arthroscopic procedures. These are intended 
to increase wand sales in both markets. There can be no assurance 
that those wand styles will be adopted by doctors.

The Company has limited sales and marketing experience and 
can make no assurance that current trends in sales and product 
acceptance will continue. See "Additional Factors that Might 
Affect Future Results -- Uncertainty of Market Acceptance" and
"-- Limited Domestic and International Marketing and Sales 
Experience."


Cost of Sales

        Cost of sales was $2.2 million, or 65% of sales for the 
three months ended September 27, 1997.  During the three month 
period ended September 28, 1996, cost of sales was $1.4 million or 
87% of sales.  Cost of sales for the nine month period ended 
September 27, 1997 was $5.9 million or 69% of sales.  During the 
nine month period ended September 28, 1996, cost of sales was $3.7 
million or 89% of sales.   As a percentage of sales, cost of sales 
decreased as the fixed and semi-fixed costs were spread over 
higher wand manufacturing volume resulting in improved 
manufacturing efficiency.  Improvements to the manufacturing 
process also reduced costs by improving efficiency.  The $0.8 
million and $2.2 million year over year cost of sales increases 
for the three and nine month periods, respectively, were due to 
higher volume wand and controller shipments.

The improved gross margin includes the effect of the 
controller promotional programs during the quarter. The Company 
believes that if its promotional programs maintain the same or 
higher number of wands bundled with a discounted controller, and 
if the demand for the disposable wands increases over a growing 
installed base of controllers, then the cost of sales will 
continue to decrease as a percentage of revenue and gross margins 
will continue to increase. However, there can be no assurance the 
Company will be successful in maintaining the mix of wands to 
discounted controllers in its promotional programs or increasing 
demand for its disposable wands. See "Additional Factors that 
Might Affect Future Results -- History of Losses; Fluctuations in 
Operating Results; Substantial Losses Expected to Continue."

Operating Expenses

        Research and development expense, which includes 
expenditures for regulatory compliance and quality assurance, was 
$1.1 million in the three months ended September 27, 1997, higher 
than the $0.8 million for the three month period ended September 
28, 1996 due to an increase in staffing and related increased 
spending on parts and supplies in the current period. The increase 
was partially offset by lower spending on outside services as more 
research and development, regulatory affairs and clinical studies 
were performed by in-house staff. The $0.2 million increase to 
$2.8 million for the nine month period ended September 27, 1997 
from $2.6 million for the nine month period ended September 28, 
1996 was also due to an increase in staffing partially offset by a 
decrease in spending on outside services.

The Company believes that continued investment in its 
platform technology is essential if it is to maintain its 
competitive position. On July 9, 1997 the Company announced the 
appointment of Dr. Hira V. Thapliyal, the Company's co-founder, as 
its Chief Technology Officer.  As Dr. Thapliyal focuses his 
attention in this area, the Company expects to continue to make 
substantial expenditures on new product development, regulatory 
affairs, clinical studies, and to increase research and 
development spending and headcount. See "Additional Factors that 
Might Affect Future Results -- Competition."

Sales and marketing expense increased substantially to $1.6 
million in the three month period ended September 27, 1997 from 
$1.1 million in the three month period ended September 28, 1996. 
During the nine month period ended September 27, 1997 sales and 
marketing expense was $4.4 million as compared to $2.6 million for 
the nine month period ended September 28, 1996. The increases were 
primarily due to higher dealer commissions resulting from 
increased sales and higher promotional, staffing and trade show 
expenses due to a higher level of sales and marketing activity. 

The Company currently anticipates that sales and marketing 
spending will continue to increase due to dealer commissions, 
promotional, demonstration and sample expenses, and additional 
investment in sales, marketing and support staff necessary to 
market its products.

General and administrative expense increased  to $0.7 
million for the three month period ended September 27, 1997 from 
$0.6 million for the three month period ended September 28, 1996 
due to increased staffing. Higher expenditures also include the 
cost of business development activities, insurance and expense 
necessary to expand the corporate infrastructure.  General and 
administrative expense increased for the nine month period ended 
September 27, 1997 to $2.5 million from $1.8 million for the nine 
month period ended September 28, 1996 for similar reasons.  The 
Company expects that general and administrative expense will 
continue to increase as the Company further expands its staffing, 
business development activities and other support operations.

Interest and Other Income

Net interest and other income decreased to $0.3 million for 
the three month period ended September 27, 1997 from $0.4 million 
in the three month period ended September 28, 1996 due to 
investments being converted to cash for use in the business over 
time.  During the nine month period ended September 27, 1997 and 
the nine month period ended September 28, 1996, interest and other 
income was $1.1 million. The Company expects that interest income 
will decrease as investments are reduced to meet the cash needs of 
the business.

Net Loss

Net loss was $1.9 million for the three month period ended 
September 27, 1997 compared to $1.9 million in the three month 
period ended September 28, 1996. The higher operating expenses 
and, lower interest income which resulted from increased business 
activities associated with supporting a higher revenue, were 
offset by an improved gross margin.  

Net loss for the nine months ended September 27, 1997 were 
$6.1 million as compared to $5.4 million for the nine month period 
ended September 28, 1996. The increased loss is due to 
substantially the same reasons as for the three month period 
except that the higher operating expense was only partially offset 
by an improved gross margin. 

Liquidity and Capital Resources

At September 27, 1997, the Company had $21.4 million in 
working capital and its principal sources of liquidity consisted 
of $22.7 million in cash, cash equivalents, and available-for-sale 
securities which include long-term available-for-sale securities. 
The cash and cash equivalents are highly liquid with original 
maturities of ninety days or less. The available-for-sale 
securities consist mainly of preferred stock, corporate notes,  
commercial paper, corporate bonds and U.S. government securities.

The Company's cash used in operating activities increased to 
$5.8 million for the nine month period ended September 27, 1997 
from $5.3 million for the nine month period ended September 28, 
1996 due to increased inventory and accounts receivable levels in 
the 1997 period.  This was offset by increased trade accounts 
payable levels. 

Accounts receivable of $1.5 million as of September 27, 1997 
were slightly higher than the December 28, 1996 balance of $1.3 
million due to higher sales at an improved rate of collections 
from customers.  The Company expects accounts receivable to 
increase in the future in line with growing sales and longer terms 
on international sales. 

Inventories increased to $1.7 million as of September 27, 
1997 compared to $759,000 as of December 28, 1996 due to the 
higher level of manufacturing activity in support of higher sales 
and new product introductions.  The Company expects future 
inventory levels to grow in absolute value.

As of September 27, 1997, net property and equipment of $1.4 
million was relatively unchanged from $1.5 million at December 28, 
1996.  In the remainder of 1997, the Company has planned but has 
not committed to approximately $88,000 in capital expenditures 
consisting primarily of computers, computer networking equipment 
and molds.

The Company plans to finance its capital needs principally 
from cash, cash equivalents, and available-for-sale securities 
which include long-term available-for-sale securities and related 
interest, existing capital resources and to the extent available, 
lines of credit. The Company currently has no commitments for any 
credit facilities such as revolving credit agreements or lines of 
credit that could provide additional working capital. The Company 
believes that its current cash, cash equivalents and available-
for-sale securities, together with interest thereon and the 
Company's existing capital resources, will be sufficient to fund 
its operations at least through fiscal 1998. The Company's future 
liquidity and capital requirements will depend on numerous factors 
including the Company's success of commercializing the 
Arthroscopic System, the ability of the Company's suppliers to 
continue to meet the demands of the Company by providing 
sufficient quantities at current prices, obtaining and enforcing 
patents important to the Company's business, the status of 
regulatory approvals, and competition. There can be no assurance 
that the Company will not be required to raise additional capital 
or that such capital will be available on acceptable terms, if at 
all.

        In February 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 128 (SFAS 
128), "Earnings Per Share," which specifies the computation, 
presentation and disclosure requirements for earnings per share. 
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 and 
will be effective for the Company's fiscal year 1997.  SFAS 128 
requires restatement of all prior-period earnings per share data 
presented after the effective date.  SFAS 128 will not have a 
material impact on the Company's earnings per share.

        In June 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 130 (SFAS 
130),  Reporting Comprehensive Income. This statement establishes 
requirements for disclosure of comprehensive income and becomes 
effective for the Company's fiscal year 1998, with 
reclassification of earlier financial statements for comparative 
purposes. Comprehensive income generally represents all changes in 
stockholders' equity except those resulting from investments or 
contributions by stockholders.  The Company is evaluating 
alternative formats for presenting this information, but does not 
expect this pronouncement to materially impact the Company's 
reporting of results of operations.

        In June 1997, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 131 (SFAS 
131), Disclosure about Segments of an Enterprise and Related 
Information.  This statement establishes standards for disclosure 
about operating segments in annual financial statements and 
selected information in interim financial reports.  It also 
establishes standards for related disclosures about products and 
services, geographic areas and major customers.  This statement 
supersedes Statement of Financial Accounting Standards No. 14,  
Financial Reporting for Segments of a Business Enterprise.  The 
new standard becomes effective for the Company's fiscal year 1998, 
and requires that comparative information from earlier years to be 
restated to conform to requirements of this standard.  The Company 
is evaluating the requirements of SFAS 131 and the effects, if 
any, on the Company's current reporting and disclosures.



ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

ArthroCare became a public company in February 1996.  
Included here are risk factors as updated from the Company's 
Annual Report on Form 10-K filed March 28, 1997.  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 materially adverse effect on the Company's results of 
operations, business, or financial position.

Dependence Upon Arthroscopic System

The Company commercially introduced the Arthroscopic System 
in December 1995 and by the quarter ended September 27, 1997, had 
reported 22 months of sales.  The Arthroscopic System is the 
Company's only commercial product and will account for 
substantially all of the Company's revenue for the foreseeable 
future.  As such, the Company is highly dependent on its 
Arthroscopic System.  Currently, the majority of the Company's 
sales come from the United States. The Company has established 
distribution capability in Europe, Australia, Korea, Japan, Canada 
and parts of South and Central America.  Before the Arthroscopic 
System can be sold outside these regions, the Company will have to 
obtain additional foreign regulatory approvals and establish 
additional distribution capability in other geographic regions.  
If such regulatory approval is obtained, there can be no assurance 
that the Company will be able to establish a successful 
distribution capability.

Uncertainty of Market Acceptance

Physicians will not use the Company's products unless they 
determine, based on experience, clinical data and other factors, 
that these systems are an attractive alternative to conventional 
means of tissue ablation.  The Arthroscopic System was introduced 
in December 1995 and no independent published clinical reports 
exist to support the Company's marketing efforts, which may have 
an adverse effect on its ability to obtain physician acceptance.  
The Company believes that continued recommendations and 
endorsements by influential physicians are essential for market 
acceptance of its products.  If the Arthroscopic System does not 
continue to receive broad-based physician acceptance and 
endorsement by influential physicians, the Company's business, 
financial condition and results of operations would be materially 
adversely affected.

Limited Operating History

The Company has a limited history of operations that, to 
date, has consisted primarily of research and development, product 
engineering, obtaining FDA clearance of its Arthroscopic System, 
developing a network of distributors in the United States to 
market the Arthroscopic System and 22 months of product sales.  
The Company has started to realize revenues from the sale of its 
products, but continues to generate operating losses and 
anticipates generating losses in the future.  Whether the Company 
can successfully manage the transition to a larger-scale 
commercial enterprise will depend upon increasing sales of 
disposable ArthroWands from its distribution network, obtaining 
additional foreign regulatory approvals for the Arthroscopic 
System, obtaining domestic and foreign regulatory approvals for 
potential new products and maintaining its financial and 
management systems, procedures and controls.

Limited Domestic and International Marketing and Sales Experience

The Company has shipped over 1,200 Arthroscopic System 
controller units and more than 111,000 ArthroWands through the end 
of the third quarter of 1997.  The Company is marketing and 
selling its Arthroscopic System in the United States through a 
network of independent orthopedic distributors.  These 
distributors sell orthopedic arthroscopy devices for a number of 
other manufacturers, and there can be no assurance that they will 
commit the necessary resources to effectively market and sell the 
Company's Arthroscopic System, or that they will be successful in 
closing sales with doctors and hospitals.  The Company has offered 
its controller to these independent distributors at substantial 
discounts and may be required to continue to offer such discounts 
on its controller to generate demand for its ArthroWands.  The 
inability to sell sufficient quantities of ArthroWands would have 
a material adverse effect on the Company's business, financial 
condition and results of operations.

The Company has signed distribution agreements with 
independent distributors to sell and market the Arthroscopic 
Systems in Europe, Australia, Mexico, Brazil, Argentina, Canada, 
Japan and Korea. In other international markets, the Company 
intends to collaborate with one or more marketing partners to 
establish marketing and distribution channels for the Arthroscopic 
System and to assist with regulatory requirements in such 
distributors' jurisdictions.  However, regulatory requirements 
vary by region, and compliance with such regulations may be costly 
and time-consuming.  Accordingly, the distribution, pricing and 
marketing structure to be established by the Company may vary from 
country to country.

No assurance can be given that the Company will successfully 
sell its product through its distributors in Europe, Australia, 
Mexico, Brazil, Argentina, Canada, Japan  or Korea, that the 
Company will secure marketing partners for other international 
markets, successfully sell its Arthroscopic System in foreign 
markets or that any of its foreign distributors and marketing 
partners will commit the necessary resources to obtain additional 
necessary foreign regulatory approvals on behalf of the Company 
and successfully sell the Arthroscopic System in foreign markets.

Limited Manufacturing Experience

The Company's manufacturing operations consist of an in-
house assembly operation for the manufacturing of ArthroWands.  
The Company has manufactured and sold over 111,000 ArthroWands 
through the end of the third quarter of 1997. As a result, the 
Company has limited experience manufacturing the ArthroWands in 
the volumes necessary for the Company to achieve additional 
commercial sales, and there can be no assurance that reliable, 
high-volume manufacturing can be achieved at commercially 
reasonable cost.  In April 1995, the Company filed an application 
with the State of California for a license to manufacture medical 
devices.  In September 1995, the State of California required the 
Company to cease shipping products until a manufacturing license 
was obtained, and the FDA, following a Good Manufacturing 
Practices ("GMP") audit, instructed the Company to correct certain 
record-keeping practices and enter into a written contract with 
the third party that sterilizes the ArthroWand.  There can be no 
assurance that the Company will not encounter any further 
manufacturing difficulties, or that any of its contract 
manufacturers will not experience similar difficulties, including 
problems involving production yields, quality control and 
assurance, supplies of components or shortages of qualified 
personnel.

In October 1995, the Company discovered that the ArthroWand 
packaging was subject to cracking due to a flawed design of the 
packaging tray and undertook a voluntary product recall of the 61 
ArthroWands affected.  The Company completed execution of its 
corrective action and received written confirmation from the FDA 
that the recall has been closed.  There can be no assurances that 
there will be no further product recalls or required redesign of 
the Company's packaging or products.

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

The Company has experienced significant operating losses 
since inception and, as of September 27, 1997, had an accumulated 
deficit of $23.7 million.  The Company expects to generate 
additional losses due to increased operating expenditures 
primarily attributable to the expansion of marketing and sales 
activities, increased research and development, and activities to 
support regulatory applications.  Results of operations may 
fluctuate significantly from quarter to quarter due to the timing 
of such expenditures, absence of a backlog of orders, timing of 
the receipt of orders, promotional discounts of the Company's 
products, re-use of the Company's disposable products, in addition 
to those detailed above.  The Company's revenues and profitability 
will be critically dependent on whether it can successfully 
continue to market its Arthroscopic System.  In addition, the 
Company's gross margins may be adversely affected due to the 
necessity to promote and sell its product at significantly reduced 
prices.  There can be no assurance that significant profitability 
will ever be achieved.

Patents and Proprietary Rights

The Company's ability to compete effectively will depend in 
part on its ability to develop and maintain proprietary aspects of 
its platform technology.  The Company owns six issued United 
States patents, over 20 pending United States patent applications 
and international patent applications in Europe (covering 16 
separate countries), Japan, Canada, Australia and New Zealand 
corresponding to four of the United States filings relating to its 
multi-electrode and Coblation (trademark) technology.  The initial 
patent is currently set to expire in 2008, three issued patents 
are currently expected to expire between 2008 and 2012 and the 
other two patents are expected to expire between 2014 and 2016.  
The Company believes that the issued patents cover the core 
technology used in the Company's Arthroscopic System.  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.  The defense and prosecution of intellectual property 
suits, USPTO interference proceedings and related legal and 
administrative proceeds are both costly and time-consuming.  
Litigation may be necessary to enforce patents issued to the 
Company, to protect trade secrets or know-how owned by the Company 
or to determine the enforceability, scope and validity of the 
proprietary rights of others.  Any litigation or interference 
proceedings will result in substantial expense to the Company and 
significant diversion of effort by the Company's technical and 
management personnel.  An adverse determination in litigation or 
interference proceedings to which the Company may become a party 
could subject the Company to significant liabilities to third 
parties, require disputed rights to be licensed from third parties 
or require the Company to cease using such technology.  Although 
patent and intellectual property disputes in the medical device 
area have often been settled through licensing or similar 
arrangements, costs associated with such arrangements may be 
substantial and could include ongoing royalties.  Furthermore, 
there can be no assurance that necessary licenses would be 
available to the Company on satisfactory terms, if at all.  
Adverse determinations in a judicial or administrative proceeding 
or failure to obtain necessary licenses could prevent the Company 
from manufacturing and selling its products, which would have a 
material adverse effect on the Company's business, financial 
condition and results of operations.

Competition

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

Smith & Nephew Endoscopy, Inc. (which owns Acufex 
Microsurgical, Inc. and Dyonics, Inc.), Bristol-Meyers Squibb 
Company (including its Linvatec division) and Stryker Corp. each 
have large shares of the market for manual instruments, power 
shavers and arthroscopes.  These companies offer broad product 
lines, which they may offer as a single package; have 
substantially greater resources and name recognition than the 
Company; and frequently offer significant discounts as a 
competitive tactic.  In addition, Pfizer Inc. (including its 
Valley Labs division) and Bristol-Meyers Squibb Company each have 
large shares of the market for electrosurgical systems, and 
Trimedyne, Inc. and Stryker Corp. each have large shares of the 
market for laser systems.  The Company expects that competition 
from these and other well-established competitors will increase as 
will competition from start-up and development stage medical 
device companies such as Gyrus Medical Ltd., a company based in 
the United Kingdom, Electroscope Inc., a company based in Boulder, 
Colorado and Oratec Interventions, Inc., a company based in Menlo 
Park, California.  The Company is aware that Mitek (a division of 
Johnson & Johnson) is marketing a bipolar electrosurgical tool 
developed by Gyrus Medical Ltd. Such competition could have a 
material adverse effect on the Company's business, financial 
conditions and results of operations.


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, recordkeeping, 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.  Medical 
devices are classified into one of three classes, Class I, II or 
III, on the basis of the controls deemed by the FDA to be 
necessary to reasonably ensure their safety and effectiveness.  
Class I devices are subject to general controls (e.g., labeling, 
premarket notification for non-exempt devices and adherence to 
GMPs or QS Regulations for most devices).  Class II devices are 
subject to general controls and to special controls (e.g., 
performance standards, postmarket surveillance, patient 
registries, and FDA guidelines).  Generally, Class III devices are 
those that must receive premarket approval by the FDA to ensure 
their safety and effectiveness (e.g., life-sustaining, 
life-supporting and implantable devices, or new devices that have 
not been found substantially equivalent to legally marketed 
devices), and generally require clinical testing to ensure safety 
and effectiveness and FDA approval prior to marketing and 
distribution.  The FDA also has the authority to require clinical 
testing of Class I and Class II devices.  A PMA application must 
be filed if the proposed device is not substantially equivalent to 
a legally marketed Class I or Class II predicate device or if it 
is a Class III device for which the FDA has called for such 
applications.

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 investigational 
device exemption ("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.  If the FDA does not object to the IDE 
application within 30 days from filing of the application, human 
clinical trials may begin as defined in the IDE.  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.

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 the FDA has not called for PMAs, the manufacturer or 
distributor may seek clearance from the FDA to market the device 
by filing a 510(k) notification.  The 510(k) notification will 
need to be supported by appropriate data establishing the claim of 
substantial equivalence to the satisfaction of the FDA.  The FDA 
recently has been requiring a more rigorous demonstration of 
substantial equivalence.

Following submission of the 510(k) notification, the 
manufacturer or distributor may not place the device into 
commercial distribution until an order is issued by the FDA.  No 
law or regulation specifies the time limit by which the FDA must 
respond to a 510(k) notification.  At this time, the FDA typically 
responds to the submission of a 510(k) notification within 150 to 
200 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 received clearance of 510(k) premarket notifications 
to market products based upon its proprietary core technology to 
treat certain urological, dermatological, and periodontal 
conditions and for general 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 one year 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.  During the review period, an 
advisory committee likely will be convened to review and evaluate 
the application and provide recommendations to the FDA as to 
whether the device should be approved.  In addition, the FDA will 
inspect the manufacturing facility to ensure compliance with the 
FDA's 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 GMP or QS Regulations and other applicable regulations.  
These regulations require that the Company maintain its documents 
in a prescribed manner with respect to manufacturing, testing and 
control activities.  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.  In 
April 1995, the Company filed an application with the State of 
California for a license to manufacture medical devices.  In 
September 1995, the State of California required the Company to 
cease shipping products until a manufacturing license was 
obtained, and the FDA, following a GMP audit, instructed the 
Company to correct certain record-keeping practices and enter into 
a written contract with the third party that sterilizes the 
ArthroWand.  There can be no assurance that the Company will not 
encounter any further manufacturing difficulties, or that any of 
its contract manufacturers will not experience similar 
difficulties, including problems involving production yields, 
quality control and assurance, supplies of components or shortages 
of qualified personnel.

The Company is required to provide information to the FDA on 
death or serious injuries alleged to have been associated with the 
use of its medical devices, as well as product malfunctions that 
would likely cause or contribute to death or serious injury if the 
malfunction were to recur.  In addition, the FDA prohibits a 
cleared or approved device from being marketed for uncleared or 
unapproved applications.  If the FDA believes that a company is 
not in compliance with the law, it can institute proceedings to 
detain or seize products, issue a recall, enjoin future violations 
and assess civil and criminal penalties against the Company, its 
officers and its employees.  Failure to comply with the regulatory 
requirements could have a material adverse effect on the Company's 
business, financial condition and results of operations.

The advertising of most FDA-regulated products is subject to 
both FDA and Federal Trade Commission jurisdiction.  The Company 
also is subject to regulation by the Occupational Safety and 
Health Administration and by other governmental entities.

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, Mexico, Canada and Europe 
but has not obtained any other international regulatory approvals 
permitting sales of its products outside of the United States.  
The Company 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.

In Europe, the Company and its third party manufacturers 
have received ISO 9001 certification and the CE mark for its 
Arthroscopic System.  ISO 9001 certification standards for quality 
operations have been developed to ensure that companies know, on a 
worldwide basis, the standards of quality to which they will be 
held.  The European Union has promulgated rules that require that 
medical products receive by mid-1998 the CE mark, an international 
symbol of quality and compliance with applicable European medical 
device directives.  Failure to maintain the CE mark will prohibit 
the Company from selling its products in Europe.  ISO 9001 
certification is one of the CE mark requirements.  There can be no 
assurance that the Company will be successful in maintaining 
certification requirements.

Uncertainty Relating to Third-Party Reimbursement

In the United States, health care providers, such as 
hospitals and physicians, that purchase medical devices, such as 
the Company's Arthroscopic System and potential products, 
generally rely on third-party payers, 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.  In addition, certain health care 
providers are moving toward a managed care system in which such 
providers contract to provide comprehensive health care for a 
fixed cost per person.  Managed care providers are attempting to 
control the cost of health care by authorizing fewer elective 
surgical procedures, such as certain knee, shoulder, ankle, wrist, 
elbow and hip arthroscopic procedures.
The Company is unable to predict what changes will be made 
in the reimbursement methods used by third-party health care 
payers.  Furthermore, the Company could be adversely affected by 
changes in reimbursement policies of governmental or private 
health care payers, 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 payers for procedures in which the Company's 
products are used or adverse changes in governmental and private 
third-party payers, 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 foreign 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.

Dependence on Single Contract Manufacturers and Sole Source 
Suppliers

The Company subcontracts the manufacturing of its Model 970 
controllers to a single contract manufacturer.  The agreement 
between the Company and the contract manufacturer requires the 
Company to purchase all of its controllers from the contract 
manufacturer through July 1998.  The Company and its contract 
manufacturer are required to operate in conformance with QS 
Regulation requirements, in order to produce products for sale in 
the United States, and ISO 9001 standards, in order to produce 
products for sale in Europe. There can be no assurance that the 
contract manufacturer will remain in compliance with QS 
Regulations or ISO 9001 standards.  Any failure by the Company or 
its contract manufacturer to remain in compliance with QS 
Regulation or ISO 9001 standards could have a material adverse 
effect on the Company's business, financial condition and results 
of operations. The Company is investigating alternative 
manufacturing for future controllers. In addition, the ArthroWand 
is sterilized by a single subcontractor, and the connector 
housings at each end of the cable are available only from a single 
source.  There can be no assurance that an alternate contract 
manufacturer, sterilizer or connector housing supplier could be 
established if necessary or that available inventories would be 
adequate to meet the Company's product needs during any prolonged 
interruption of supply.  A reduction or stoppage in supply of the 
sole-source component, or the Company's inability to secure an 
alternative contract manufacturer or sterilizer, if required, 
would limit its ability to manufacture the Arthroscopic System and 
would have a material adverse effect on the Company's business, 
financial condition and results of operations.  

Although the Company believes that its contract 
manufacturer, subcontractors and suppliers are in compliance with 
applicable regulations, there can be no assurance that the FDA, or 
a state, local or foreign regulator, will not take action against 
a contract manufacturer, subcontractor or supplier found to be 
violating such regulations.

Uncertainty of New Product Development

The Company has undertaken preliminary animal studies and 
development for the use of its ablation technology with its 
controller in urology, dermatology and periodontics. The Company 
has received 510(k) clearance for use of its technology in the 
fields of urology, dental surgery,  general dermatology and 
general surgery. The Company has received approval of an IDE to 
conduct a clinical study on a specific dermatological indication. 
Following the completion of the study, the Company plans to submit 
a 510(k) application  to the FDA. 

Each of these products are at an early stage of development, 
and the Company will 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 PMAs or 510(k)s, 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 
$5,000,000 per occurrence and $5,000,000 in the aggregate.  There 
can be no assurance that such coverage limits are adequate to 
protect the Company from any liabilities it might incur in 
connection with the development, manufacture and sale of its 
Arthroscopic System and potential 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 product since December 1995 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.

A significant portion of the Company's research and 
development is performed by Philip E. Eggers, a director of the 
Company, pursuant to a consulting agreement between the Company 
and Eggers & Associates Inc. ("E&A"), a corporation wholly owned 
by Mr. Eggers.  Mr. Eggers is not employed by the Company on a 
full-time basis and, as a result, may not be available to devote 
his full time or attention to the Company's affairs.

Control by Directors, Executive Officers and Affiliated Entities

The Company's directors, executive officers and entities 
affiliated with them, in the aggregate, beneficially own 
approximately 45% of the Company's 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 medical technology 
companies, resulting in changes in the market prices of the stocks 
of many companies that may not have been directly related to the 
operating performance of those companies.  Such broad market 
fluctuations may adversely affect the market price of the 
Company's common stock.  In addition, the market price of the 
Company's common stock may be highly volatile.  Factors such as 
variations in the Company's financial results, comments by 
security analysts, announcements of technological innovations or 
new products by the Company or its competitors, changing 
government regulations and developments with respect to FDA 
submissions, patents, proprietary rights or litigation may have a 
significant adverse effect on the market price of the common 
stock.

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

In November 1996, the Company's Board of Directors adopted a 
Stockholder Rights Plan.  The Stockholder Rights Plan provides for 
a dividend distribution of one Preferred Shares Purchase Right (a 
"Right") on each outstanding share of the Company's common stock.  
Each Right entitles shareholders to buy 1/1000th of a share of the 
Company's Series A participating preferred stock at an exercise 
price of $50.00.  The Rights will become exercisable following the 
tenth day after a person or group announces acquisition of 15 
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.

<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

ITEM 5.  OTHER INFORMATION

         None


ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K

        a)  Exhibits

    (1) 3.2     Certificate of Incorporation of the Registrant.

    (1) 3.3     Bylaws of the Registrant.

    (1) 4.1     Specimen Common Stock Certificate.

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

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

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

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

    (1)10.5     Form of Exclusive Distribution Agreement.

    (1)10.6     Form of Exclusive Sales Representative Agreement.

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

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

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

    (1)10.10    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.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

       11.1     Computation of Net Loss per Share.

       27.1     Financial Data Schedule.

-------------------------

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

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

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

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


+     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: November 10, 1997


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


<PAGE>



                                  EXHIBIT INDEX




Exhibit
Number                        Exhibit Description
--------                     -------------------

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

11.1            Computation of Net Loss per Share.

27.1            Financial Data Schedule.


-------------------------

++    Confidential treatment requested.