<PAGE>

                                 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 June 30, 2001.

                                      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 July 31,
2001 was 22,537,106.

                           Exhibit index on page 32

                                 Page 1 of 38
<PAGE>

                            ARTHROCARE CORPORATION

                                     INDEX

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
<S>                                                                                <C>
PART 1:  Financial Information

  Item 1. Financial Statements (unaudited)

     Condensed Consolidated Balance Sheets as of June 30, 2001
       and December 31, 2000                                                         3

     Condensed Consolidated Statements of Operations for the
       three-month and six-month periods ended June 30, 2001 and June 30,
       2000                                                                          4

     Condensed Consolidated Statements of Cash Flows
       for the six-month periods ended June 30, 2001  and  June 30, 2000             5

     Notes to Condensed Consolidated Financial Statements                           6-10

  Item 2. Management's Discussion and Analysis of Financial Condition and
     Results of Operations                                                         11-31

  Item 3. Quantitative and Qualitative Disclosures About Market Risk                31

PART II:  Other Information

  Item 1. Legal Proceedings                                                         32
  Item 2. Changes in Securities and Use of Proceeds                                 32
  Item 3. Defaults upon Senior Securities                                           32
  Item 4. Submission of Matters to a Vote of Security Holders                       32
  Item 5. Other Information                                                         32
  Item 6. Exhibits and Reports on Form 8-K                                         33-37

SIGNATURES                                                                          38
</TABLE>

                                 Page 2 of 38
<PAGE>

Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

                            ARTHROCARE CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                      June 30,          December 31,
                         ASSETS                                         2001               2001
                                                                  ----------------   -----------------
                                                                    (Unaudited)
<S>                                                                 <C>                 <C>
Current assets:
   Cash and cash equivalents                                          $ 53,970           $ 35,782
   Available-for-sale securities                                        23,508             32,256
   Accounts receivable, net of allowances                               17,999             16,209
   Inventories, net                                                     11,457             13,702
   Deferred tax asset                                                    9,558              9,558
   Prepaid expenses and other current assets                             1,974              1,679
                                                                     ---------          ---------
      Total current assets                                             118,466            109,186

Available-for-sale securities                                           12,625             18,776
Property and equipment, net                                             10,367              9,469
Deferred tax asset                                                       1,584              1,584
Related party receivables                                                1,205              1,205
Other assets                                                                --                242
                                                                     ---------          ---------
      Total assets                                                    $144,247           $140,462
                                                                     =========          =========
   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                   $  6,502           $  3,985
   Accrued liabilities                                                   1,641              1,629
   Accrued compensation                                                  2,028              2,860
   Deferred revenue                                                        376                825
   Capital lease obligations, current portion                               30                 60
                                                                     ---------          ---------
      Total current liabilities                                         10,577              9,359

Capital lease obligations, less current portion                             --                 22
Deferred rent                                                               52                 85
Deferred revenue                                                         1,313              4,651
                                                                     ---------          ---------
      Total liabilities                                                 11,942             14,117
                                                                     =========          =========
Contingencies (Note 7)
Stockholders' equity:
   Common stock                                                             22                 22
   Treasury stock                                                       (2,736)                --
   Additional paid-in capital                                          139,832            137,302
   Accumulated other comprehensive income (loss)                           342               (620)
   Accumulated deficit                                                  (5,155)           (10,359)
                                                                     ---------          ---------
      Total stockholders' equity                                       132,305            126,345
                                                                     ---------          ---------
         Total liabilities and stockholders' equity                   $144,247           $140,462
                                                                     =========          =========
</TABLE>

                                 Page 3 of 38
<PAGE>

                            ARTHROCARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months Ended      Six Months Ended
                                                             ---------------------  ----------------------
                                                             June 30,    June 30,    June 30,    June 30,
                                                               2001        2000        2001        2000
                                                             ---------  ----------  ----------  ----------
<S>                                                          <C>         <C>         <C>         <C>
Revenues:
     Product sales                                            $19,777     $17,156     $37,874     $32,847
     Royalties, fees and other                                  3,799       1,561       4,788       2,042
                                                              -------     -------     -------     -------
           Total revenues                                      23,576      18,717      42,662      34,889

Cost of product sales                                           7,213       6,722      13,868      13,292
                                                              -------     -------     -------     -------
     Gross profit                                              16,363      11,995      28,794      21,597
                                                              -------     -------     -------     -------
Operating expenses:
      Research and development                                  2,018       1,839       3,896       3,596

      Sales and marketing                                       9,104       5,561      16,562      10,457
      General and administrative                                1,288         961       2,330       2,200
                                                              -------     -------     -------     -------
           Total operating expenses                            12,410       8,361      22,788      16,253
                                                              -------     -------     -------     -------

Income from operations                                          3,953       3,634       6,006       5,344
Interest and other income, net                                  1,082       1,103       2,142       2,174
                                                              -------     -------     -------     -------
Income before income tax provision                              5,035       4,737       8,148       7,518
Income tax provision                                            1,813         237       2,944         466
                                                              -------     -------     -------     -------
Net income before cumulative effect of a change in
 accounting principle                                           3,222       4,500       5,204       7,052
Cumulative effect on prior years of the application
 of SAB 101 "Revenue Recognition In Financial Statements"          --          --          --      (4,300)
                                                              -------     -------     -------     -------
Net Income                                                    $ 3,222     $ 4,500     $ 5,204     $ 2,752
                                                              =======     =======     =======     =======

Net income per share - basic:
Net income per share before cumulative effect of a change
 in accounting principle                                      $  0.14     $  0.20     $  0.23     $  0.32

Cumulative effect on prior years of the application of SAB
 101 "Revenue Recognition in Financial Statements"                 --          --          --       (0.19)
                                                              -------     -------     -------     -------
Basic net income per share                                    $  0.14     $  0.20     $  0.23     $  0.13
                                                              =======     =======     =======     =======
Shares used in computing basic net income per share            22,268      21,960      22,312      21,790

Net income per share - diluted:
Net income per share before cumulative effect of a change     $  0.14     $  0.19     $  0.22     $  0.30
 in accounting principle

Cumulative effect on prior years of the application of SAB
 101 "Revenue Recognition in Financial Statements"                 --          --          --       (0.18)
                                                              -------     -------     -------     -------
Diluted net income per share                                  $  0.14     $  0.19     $  0.22     $  0.12
                                                              =======     =======     =======     =======

Shares used in computing diluted net income per share          23,470      24,166      23,480      23,494
</TABLE>

 The accompanying notes are an integral part of these condensed consolidated
                             financial statements

                                 Page 4 of 38
<PAGE>

                            ARTHROCARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                       Six Months Ended
                                                                               --------------------------------
                                                                                June 30,              June 30,
                                                                                  2001                  2000
                                                                               ---------              ---------
<S>                                                                            <C>                    <C>
 Cash flows from operating activities:
      Net income                                                               $   5,204              $   2,752
      Adjustments to reconcile net income to net cash provided by
       operating activities:
           Depreciation and amortization                                           2,705                  1,817
           Amortization of deferred compensation and stock
            compensation expense                                                     257                    500
           Provision for doubtful accounts receivable and product
            returns                                                                  218                    (79)
           Provision for excess and obsolete inventory                               (12)                  (445)
           Deferred rent                                                             (33)                   (23)
           Changes in operating assets and liabilities:
                Accounts receivable                                               (2,704)                (3,120)
                Inventories                                                        2,123                 (5,299)
                Prepaid expenses and other current assets                           (367)                  (159)
                Accounts payable                                                   2,385                    738
                Accrued liabilities                                                 (820)                   730
                Deferred revenue                                                  (3,787)                 5,889
                Other assets                                                         242                     --
                                                                               ---------              ---------
                     Net cash provided by operating activities                     5,411                  3,301
                                                                               ---------              ---------
 Cash flows from investing activities:
      Purchases of property and equipment                                         (3,603)                (2,703)
      Purchases of available-for-sale securities                                  (8,980)               (28,546)
      Sales or maturities of available-for-sale securities                        26,359                 21,924
                                                                               ---------              ---------
                     Net cash  provided by (used in) investing activities         13,776                 (9,325)
                                                                               ---------              ---------

 Cash flows from financing activities:
      Purchase of treasury stock                                                  (2,736)                    --
      Repayment of capital leases                                                    (52)                   (35)
      Repayment of notes receivable from related parties                              --                    273
      Proceeds from exercise of options to purchase common stock                   2,273                  3,612
                                                                               ---------              ---------
                     Net cash provided by (used in) financing activities            (515)                 3,850
                                                                               ---------              ---------

 Effect of exchange rate changes on cash                                            (484)                   (49)
                                                                               ---------              ---------
 Net increase (decrease) in cash and cash equivalents                             18,188                 (2,223)

 Cash and cash equivalents, beginning of period                                   35,782                 47,875
                                                                               ---------              ---------
 Cash and cash equivalents, end of period                                      $  53,970              $  45,652
                                                                               =========              =========
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
                             financial statements


                                 Page 5 of 38
<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 and its
subsidiaries ("ArthroCare," "we," "us" or "our") 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
consolidated financial statements contained in our Form 10-K for the year ended
December 31, 2000 should be read in conjunction with these condensed
consolidated financial statements.  The balance sheet at December 31, 2000 was
derived from our audited consolidated financial statements; however, the
financial statements in this report do not include all disclosures required by
generally accepted accounting principles.

     Our fiscal quarters end on the Saturday closest to the last day of the
month.  For presentation purposes both quarter end dates are shown as June 30.

2.   Revenue Recognition

   We recognize revenue upon shipment of our products to customers, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain. Revenue is reported net of a provision for estimated product
returns. We recognize license fee and milestone revenue from business partners
over the term of the associated agreement unless the fee or milestone is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process.

   We previously recognized non-refundable license fee and milestone revenue
when the fee was received or on completion of certain milestones. During the
quarter ended September 30, 2000, effective January 1, 2000, we adopted SEC
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
(SAB 101) and changed our method of accounting for license fees and milestones
to recognize such revenues over the term of the associated agreement unless the
fee or milestone is in exchange for products delivered or services performed
that represent the culmination of a separate earnings process. Amounts received
prior to revenue recognition are recorded as deferred revenue. The cumulative
effect of the change in accounting principle of $4.3 million (or $0.19 and $0.18
per share basic and diluted, respectively) was reported as a cumulative effect
of a change in accounting principle, retroactive to January 2, 2000. The
cumulative effect of the change in accounting principle includes license fee
revenues and deferred revenues that will be recognized over the lives of the
associated agreements.

                                 Page 6 of 38
<PAGE>

3.   Computation of Net Income Per Share:

     Basic net income per share is computed using the weighted average number of
shares of common stock outstanding during the period.  Diluted net income per
share is computed using the weighted average number of shares of common stock
outstanding and common equivalent shares outstanding during the period.  Common
equivalent shares consist of stock options and are excluded from the computation
if their effect is anti-dilutive.

     The following is a reconciliation of the computation for basic and diluted
net income per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              Three Months Ended       Six Months Ended
                                                             --------------------    --------------------
                                                             June 30,    June 30,    June 30,    June 30,
                                                               2001        2000        2001        2000
                                                             --------    --------    --------     -------
<S>                                                          <C>         <C>         <C>         <C>
Net income before cumulative effect of a change in
 accounting principle                                         $ 3,222     $ 4,500     $ 5,204     $ 7,052

Cumulative effect on prior years of the application
 of SAB 101 "Revenue Recognition in Financial
 Statements"                                                       --          --          --      (4,300)
                                                              -------     -------     -------     -------
Net income                                                    $ 3,222     $ 4,500     $ 5,204     $ 2,752
                                                              =======     =======     =======     =======
       Weighted average basic shares outstanding               22,268      21,960      22,312      21,790

       Options and warrants                                     1,202       2,206       1,168       1,704
                                                              -------     -------     -------     -------
Shares used in computing diluted  net income per share         23,470      24,166      23,480      23,494
                                                              =======     =======     =======     =======

Net income per share- basic:
Net income per share before cumulative effect of a
 change in accounting principle                               $  0.14     $  0.20     $  0.23     $  0.32

Cumulative effect on prior years of the application
 of SAB 101 "Revenue Recognition in Financial
 Statements"                                                       --          --          --       (0.19)
                                                              -------     -------     -------     -------
Basic net income per share                                    $  0.14     $  0.20     $  0.23     $  0.13
                                                              =======     =======     =======     =======
Net income per share-diluted:
Net income per share before cumulative effect of a
 change in accounting principle                               $  0.14     $  0.19     $  0.22     $  0.30
                                                              =======     =======     =======     =======
Cumulative effect on prior years of the application
 of SAB 101 "Revenue Recognition in Financial
 Statements"                                                       --          --          --       (0.18)
                                                              -------     -------     -------     -------
Diluted net income per share                                  $  0.14     $  0.19     $  0.22     $  0.12
                                                              =======     =======     =======     =======
</TABLE>


                                 page 7 of 38
<PAGE>

     Options to purchase 1,341,257 and 1,188,193 shares of common stock at
prices ranging from $19.44-$48.56 per share were outstanding during the three
and six-month periods ended June 30, 2001, but were not included in the
computation of diluted earnings per share because the option's exercise price
was greater than the average market price of the common stock during the period.
Options to purchase 78,780 and 193,613 shares of common stock at prices ranging
from $23.00-$46.625 per share were outstanding during the three and six-month
periods ended June 30, 2000, but were not included in the computation of diluted
earnings per share because the option's exercise price was greater than the
average market price of the common stock during the period.


4.   Taxes:

     Our effective tax rate for the three and six-month periods ended June 30,
2001 was 36% and for the three and six-month periods ended June 30, 2000 were
5% and 6% respectively.  The increase in the effective tax rate is attributable
principally to changes in the valuation allowance for deferred tax assets.
Historically we have established deferred tax assets arising from federal net
operating loss carryforwards, federal tax credit carryforwards as well as from
other timing differences.  These deferred tax assets had been offset in total
by a valuation allowance due to the uncertainty surrounding the realization of
such assets.  During the quarter ended September 30, 2000 we decreased the
valuation allowance and recognized a tax benefit relating to the above items
based on management's belief that it is more likely than not that these deferred
tax assets will be realized.  During the periods ended June 30, 2000 our
effective tax rate was reduced by the use of net operating loss carryforwards
generated in prior years.


5.   Comprehensive Income:

     Comprehensive income is comprised of net income and other comprehensive
income such as foreign currency translation gain/loss and unrealized gains or
losses on available-for-sale marketable securities. Our total comprehensive
income is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Three Months Ended               Six Months Ended
                                                 --------------------------        -----------------------
                                                   June 30,        June 30,         June 30,      June 30,
                                                     2001            2000             2001         2000
                                                  --------         --------         --------      --------
<S>                                               <C>              <C>              <C>           <C>
Net income                                        $  3,222         $  4,500         $  5,204      $  2,752
Other comprehensive income:
     Change in realized gains and losses
         on available-for-sale
         marketable securities                       2,688               83            2,480            (2)
      Foreign currency translation adjustment         (332)             (29)          (1,518)          (47)
                                                  ========         ========         ========      ========
          Comprehensive net income                $  5,578         $  4,554         $  6,166      $  2,703
                                                  ========         ========         ========      ========

</TABLE>

                                 Page 8 of 38
<PAGE>

6.   Balance Sheet Detail (in thousands):

                             June 30,          December 31,
                               2001              2000
                             --------           --------
Inventories:
    Raw materials            $  4,535           $  5,915
    Work-in-process             2,696              3,278
    Finished goods              4,226              4,509
                             --------           --------
Total                        $ 11,457           $ 13,702
                             ========           ========

7.   Litigation:

     On July 25, 2001, the company filed a lawsuit against Smith & Nephew, Inc.
("the Defendant") in the United States District Court of Delaware.  The lawsuit
alleges, among other things, that the Defendant has been, and is, currently
infringing three patents issued to the company.  Specifically, the Defendants
use, import, market and sell an electrosurgical system under the name Dyonics
Control RF System which infringes these patents.  The company seeks: (1) a
judgment that the Defendant has infringed these patents, (2) to permanently
enjoin the Defendant from using, importing, marketing and selling the Dyonics
Control RF System: and (3) an aware of damages (including attorney's fees) to
compensate the company for lost profits and Defendant's use of the company's
inventions, the damages to be trebled because of the Defendant's willful
infringement.

8.   Segment Information:

     We have organized our marketing and sales effort into business units based
on product markets. These business units are comprised of the following:
Arthroscopy, Spinal Surgery, ENTec, Visage, AngioCare, General Surgery and
Other. Our reportable segments are Arthroscopy, ENTec Spinal Surgery and Other
Product sales for the three and six month periods ended June 30, 2001 for
Arthroscopy, ENTec, Spinal Surgery, and Other were $16.2 million, $2.0 million,
$1.2 million, $0.4 million and $30.9 million, $3.4 million, $2.4 million, $1.2
million, respectively. Product sales for the three and six month periods ended
June 30, 2000 for Arthroscopy, ENTec, Spinal Surgery, and Other were $13.7
million, $1.0 million, $0.8 million, $1.7 million and $26.6 million, $1.2
million, $0.8 million, $4.2 million, respectively.


9.   Treasury Stock:

          In April 2001, the Board of Directors authorized the repurchase of up
to 1,000,000 shares of our common stock, subject to certain limitations and
conditions. We repurchased 154,000 shares in the quarter ended June 30, 2001 at
a cost of $2,731,937. The shares will be used to offset the potentially dilutive
effect of employee incentive programs and may be used for other purposes that we
deem appropriate.
                                Page 9 0f 38
<PAGE>

10.  Recent Accounting Pronouncements:

     In July 2001, The Financial Accounting and Standards Board ("FASB) issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets."
SFAS 141 required that all business combinations initiated after June 30, 2001
be accounted for under a single method-the purchase method. Use of the pooling-
of-interests method is no longer permitted. SFAS 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment upon
initial adoption of the Statement and on an annual basis going forward. The
amortization of goodwill will cease upon adoption of SFAS 142. The provisions of
SFAS 142 will be effective for fiscal years beginning after December 15, 2001.
The Company is required to adopt SFAS 142 in the first quarter of fiscal year
2002. The Company believes that the adoption of these standards will have no
impact on its financial statements.

                                 Page 10 of 38
<PAGE>

PART 1. FINANCIAL INFORMATION
================================================================================

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

Overview

     Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which express that ArthroCare Corporation
("ArthroCare" "we," "us," or "our") "believes", "anticipates", "intends",
"estimates", "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 our Annual Report on Form 10-K for the year ended
December 31, 2000 and "Additional factors that might affect future results" set
forth below.

  We are a medical device company that develops, manufactures and markets
products based on our patented Coblation(R) technology. Our products allow
surgeons to operate with a high level of precision and accuracy, limiting damage
to surrounding tissue. Our products operate at lower temperatures than
traditional electrosurgical or laser surgery tools and enable surgeons to
ablate, sculpt, cut, aspirate, coagulate and suction soft-tissue, and to
seal small bleeding vessels. Ablation is the disintegration or removal of
tissue. Our soft-tissue surgery systems consist of a controller unit and an
assortment of sterile, single-use disposable devices that are specialized for
specific types of surgery. We believe our Coblation technology can replace the
multiple surgical tools traditionally used in soft-tissue surgery procedures
with one multi-purpose surgical system.

  Coblation technology is applicable across many soft-tissue surgical markets.
Our systems are used to perform many types of arthroscopic surgery. Our strategy
includes applying our patented Coblation technology to a broad range of soft-
tissue surgical markets, including arthroscopy, spinal surgery, neurosurgery,
cosmetic surgery, ear, nose and throat (ENT) surgery, general surgery and
various cardiology applications. We have formed the following business units for
commercialization of our technology in non-orthopedic markets: ArthroCare
Spine(TM), to commercialize our technology in the spinal and neurosurgery
markets; Visage(R), to commercialize our cosmetic surgery products for use in
various cosmetic surgery procedures; ENTec(R) to commercialize our ENT surgery
products for use in head and neck surgical procedures and AngioCare, to
commercialize our technology in cardiology markets.

                                 Page 11 of 38
<PAGE>

  We have received 510(k) clearance from the United States Food and Drug
Administration, or FDA, to market our Arthroscopic Surgery System for use in
arthroscopic surgery of the knee, shoulder, ankle, elbow, wrist and hip, and our
Arthroscopic System is CE marked. The CE Mark is a requirement to sell our
products in most of Western Europe. Our Cosmetic Surgery System has been cleared
by the FDA and is CE marked for general dermatologic procedures and skin
resurfacing in connection with wrinkle reduction procedures. Our ENT Surgery
System is CE marked, and we have received the CE mark and 510(k) clearances from
the FDA for use of our ENT Surgery System in general head, neck, oral and sinus
surgery procedures, including treatments for snoring, turbinates and submucosal
channelling procedures. Our Spinal Surgery System is CE marked, and we have
received 510(k) clearances in the United States to market this system for spinal
surgery and neurosurgery. We have also received the CE mark and 510(k) clearance
from the FDA to market products based on Coblation technology for use in general
surgery, urology, plastic and reconstructive surgery, and orthopedic surgery.

     We commercially introduced our Arthroscopic Surgery System in December
1995, and have derived a significant portion of our sales from this system. We
are marketing and selling our arthroscopic, ENT and spinal surgery products in
the United States through a network of direct sales representatives and
independent distributors supported by regional managers. We have more than 67
distributors representing more than 415 field sales representatives in the
United States. We have also established distribution capability in Europe,
Australia, New Zealand, China, Korea, Japan, Taiwan, Canada, Mexico, the
Caribbean, Russia, South Africa, the Middle East, Northern Africa and South and
Central America. In addition, we have entered into a license agreement under
which the SciMed division of Boston Scientific Corporation will develop, obtain
regulatory approval for and market products based on Coblation technology for a
specific application within the cardiology market. We have entered into a
distribution agreement with Integra NeuroSciences, a division of Integra
LifeSciences Holding Corporation ("Integra"), for Integra to be our exclusive
sales and distribution partner in certain countries for our products in the
neurosurgical market.

     We have received 510(k) clearance for use of our technology in several
additional fields. We cannot be sure that any of our 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. In addition, we cannot be sure that the
products, if cleared for marketing, will ever achieve commercial acceptance.


Results of Operations

Revenues:

     Product sales for the three-month and six-month periods ended June 30, 2001
were $19.8 million and $37.9 million, an increase of  $2.6 million and $5.0
million, or

                                 Page 12 of 38
<PAGE>

15%, from $17.2 and $32.8 million for the prior year periods. The increase in
product sales for the current three-month period resulted primarily from the
increase in the number of unit shipments of disposable devices and an increase
in the list price. The higher unit volume of sales resulted primarily from
increased demand for newly introduced models of disposable devices and sales of
devices in the ENT and Spinal Surgery markets, and increasing international
sales. We attribute increasing disposable device sales to our strategic plan to
build market share through continued promotional programs of controller
placements, to commercialization of our technology in fields outside of
arthroscopy and by continuing to introduce new products designed to address
surgical procedures that have traditionally been difficult to perform.

     We cannot assure you that we will be able to continue to market our
products due to the effects of physician adoption of new technology, FDA
clearance, new business growth or reimbursements.

     International product sales for the three-month and six-month periods ended
June 30, 2001 were 22% and 16% of total product sales, compared to 15% and 13%,
of product sales, for the same periods of the prior year.

     Based upon the estimated number of arthroscopic procedures performed each
year, we believe that knee procedures represent the largest segment of the
arthroscopic market, while shoulder procedures, in units, represent the fastest
growing segment.  To achieve increasing disposable device sales in arthroscopy
over time, we believe we must continue to penetrate the market in knee
procedures, expand physicians' education with respect to Coblation technology
and continue to work on new product development efforts specifically for knee
applications.  We believe that, in our five years of product shipments, we have
penetrated 30% to 35% of the hospitals that perform arthroscopic procedures in
the United States.  We believe that approximately 50% of our arthroscopy
disposable device revenue is being generated by the sale of disposables for use
in knee procedures.

  License fees and royalty income were $3.8 and $4.8 million for the three-month
and six-month periods ended June 30, 2001, as compared to $1.6 and $2.0 million
for the three-month and six-month periods ended June 30, 2000. Effective January
1, 2001 we implemented SAB 101, which relates to timing of recognition of
certain up-front license fees and milestone payments. The difference in
royalties, fees and other revenue in the current three-month period compared to
the same period in the prior year is primarily due to the cancellation of an
agreement with our former cosmetic surgery distributor resulting in a
recognition of $3.2 million in fees which previously had been deferred.

    We cannot assure you that our products will be developed, cleared for
marketing and achieve sufficient commercial acceptance, so that we may continue
to receive licensing and royalty revenues from our business partners.

                                 page 13 of 38
<PAGE>

Cost of Product Sales

     Cost of product sales for the three-month and six-month periods ended June
30, 2001 were $7.2 million and $13.9 million or 37% of product revenues, as
compared with $6.7 and $13.3 million or 39% and 40% of product revenues for the
three-month and six-month periods ended June 30, 2000, respectively. The
decrease in cost of product sales as a percentage of product sales for the
three-month and six-month periods ended June 30, 2001 as compared to the prior
year periods is attributable to increased manufacturing efficiency for
established product lines, increased production volume and the sale of products
at higher average selling prices.

     We cannot be sure that gross margins will remain at current levels or show
improvement in the future due to the distribution channels used, product mix,
and fluctuation in manufacturing production levels as new products are
introduced. We believe our gross margin will depend upon the mix of disposable
device sales versus controller sales and/or placements, the various distribution
channels utilized to sell our products in all commercialized fields and the
fluctuation of average selling prices. There can be no assurance that we will be
successful in maintaining the mix of disposable devices to controllers or in
increasing demand for our disposable devices. In addition, inefficiencies in
manufacturing new products and the distribution channels utilized to sell those
products may adversely impact gross margin.


Operating Expenses

     Research and development expenses were $2.0 and $3.9 million for the three-
month and six-month periods ended June 30, 2001, as compared to $1.8 and $3.6
million for the same periods of the previous fiscal year. In general, overall
spending in research and development for the three-month and six-month periods
increased as we continued to develop new products in our currently
commercialized markets, continued our development efforts for potential
additional products and continued to maintain and develop our patent position.
The increases are mainly attributable to increasing salaries and related
compensation expenses, as we continued to increase headcount in order to support
our increasing research and development efforts along with increasing prototype
and material costs offset by a reduction of reimbursable expenses in conjunction
with research and development efforts on behalf of business partners and a
reduction of the expenses associated with the non-cash charges incurred by the
company for non-employee stock options. We believe continued investment in
Coblation technology is essential for us to maintain our competitive position.

     We expect to increase the dollar amount of research and development
spending through continued expenditures on new product development, regulatory
affairs, clinical studies and patents, but anticipate such expenses will not
increase significantly as a percentage of product sales.

                                 page 14 of 38
<PAGE>

     Sales and marketing expenses were $9.1 and $16.6 million, or 46% and 44% of
product sales, during the three-month and six-month periods ended June 30, 2001,
as compared to $5.6 and $10.5 million, or 32%, of product sales, during the same
periods of the previous fiscal year. The increase in spending for the current
three-month and six-month periods was primarily due to increased staffing and
related expenditures due to the hiring of an internal sales force, higher
commissions resulting from increased sales as well as increased trade-show and
related activities, including travel and promotional materials.

     We anticipate that sales and marketing spending will continue to increase
in absolute dollars due to the expansion of our distribution and sales force
capabilities to address the ENT and spinal surgery markets, higher 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 our
current products and commercialize future products.

     General and administrative expenses were $1.3 and $2.3 million, or 7% and
6% of product sales, during the three-month and six-month periods ended June 30,
2001, as compared to $1.0 and $2.2 million, or 6% and 7%, of product sales
during the same periods of the previous fiscal year.  The spending for the
current three-month and six-month periods ended June 30, 2001 is consistent with
our expectations.

     We expect general and administrative expenses to decrease slightly as a
percentage of product sales but increase in absolute dollar values due to
increase business development activities.

Interest and Other Income, net

     Interest and other income, net remained flat at $1.1 and $2.2 million for
the three-month and six-month periods ended June 30, 2001 and June 30, 2000.

Income Tax Provision

     The provision for income taxes was $1.8 and $2.9 million for the three-
month and six-month periods ended June 30, 2001 compared to $237,000 and
$466,000 for the three-month and six-month periods ended June 30, 2000. Our
effective tax rate for the three and six-month periods ended June 30, 2001 was
36% and for the three and six-month periods ended June 30, 2000 were 5% and 6%
respectively. The increase in the effective tax rate is attributed principally
to changes in the valuation allowance for deferred tax assets. Historically, we
have established deferred tax assets arising from federal net operating loss
carryforwards, federal tax credit carryforwards as well as from other timing
differences. These deferred tax assets had been offset in total by a valuation
allowance due to the uncertainty surrounding the realization of such assets.
During the quarter ended September 30, 2000 we decreased the valuation allowance
and recognized a tax

                                 Page 15 of 38
<PAGE>

benefit relating to the above items based on management's belief that it is more
likely than not that these deferred tax assets will be realized. During the
quarter and six month period ended June 30, 2000 our effective tax rate was
reduced by the use of net operating loss carryforwards generated in prior years.
We believe that our tax rate in the near future will be approximately 36%.

Net Income

     Net income of $3.2 and $5.2 million, or $0.14 and $0.22 per diluted share
for the three and six-month periods ended June 30, 2001 compares with $4.5 and
$7.1 million, or $0.19 and $0.30 per diluted share, in the same periods of the
previous year before the cumulative effect of a change in accounting principle.
The cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition In Financial Statements" was $4.3 million.

     Although we have experienced substantial revenue growth since inception and
have been profitable on a quarterly basis since the quarter ended April 3, 1999,
due to our short operating history and numerous other factors, we cannot be sure
that we can sustain revenue growth or profitability.

Liquidity and Capital Resources

     On June 30, 2001, we had $107.9 million in working capital.  The principal
sources of liquidity consisted of $77.5 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. In addition, we had $12.6
million in long-term available-for-sale securities.

     Net cash provided by operating activities for the six-month period ended
June 30, 2001 was $5.4 million, as compared to $3.3 million for the six-month
period ended June 30, 2000.  The increase in cash provided by operating
activities is primarily due to an increase in depreciation and amortization,
accounts payable and a reduction in inventory, partially offset by an increase
in accounts receivable, and deferred revenue.

     Net accounts receivable increased to $18.0 million as of June 30, 2001 from
$16.2 million as of December 31, 2000.  The increase in accounts receivable is
mainly attributable to the increase in product shipments offset by collections
during the quarter.

     Inventories decreased to $11.5 million as of June 30, 2001 from $13.7
million as of December 31, 2000, due to increased sales and the timing of
receipts of raw materials

                                 Page 16 of 38
<PAGE>

pursuant to various purchase commitments. Future inventory levels may grow to
support sales volume increases, as a result of our expansion into the markets of
spinal surgery, neurosurgery, ear, nose and throat surgery and cosmetic surgery.

     Net cash provided by investing activities for the six-month ended June 30,
2001 was $13.8 million compared to ($9.3) million for the six-month period ended
June 30, 2000. The increase in cash provided by investing activities is
primarily due to the timing of purchases and sales or maturities of available
for sale securities.

    Net property and equipment increased to $10.4 million as of June 30, 2001
from $9.5 million as of December 31, 2000.  The increase is primarily
attributable to the capitalization of controllers placed under various
promotional programs along with an increase of computer software and equipment.

     As of June 30, 2001, we had committed to capital expenditures of
approximately $400,000. Our future liquidity and capital requirements will
depend on numerous factors, including our success in commercializing our
products, development and commercialization of products in fields other than
arthroscopy, the ability of our suppliers to continue to meet our demands at
current prices, obtaining and enforcing patents important to our business, the
status of regulatory approvals and competition.


ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

     We became a public company in February 1996.  Included here are risk
factors as updated from our Annual Report on Form 10-K, filed March 30, 2001 for
the year ended December 30, 2000. The following factors represent current
challenges to us 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 our results of operations, business, or
financial position.

We Are Dependent Upon Our Arthroscopic System

  We commercially introduced our Arthroscopic System in December 1995. Since our
Arthroscopic System accounted for 88% of our product sales in 2000 and 82% in
the first two quarters of 2001, we are highly dependent on its sales. We have
only recently begun to market our spinal surgery, neurosurgery, ENT surgery,
cosmetic surgery and general surgery products and to date, we have sold only a
small number of units. We cannot assure you that we will be able to continue to
manufacture arthroscopy products in commercial quantities at acceptable costs,
or that we will be able to continue to market our products successfully.

  To achieve increasing disposable device sales over time, we believe we must
continue to penetrate the market in knee procedures, expand physicians'
education with respect to Coblation technology and continue working on new
product development efforts specifically for knee applications. Furthermore, in
order to maintain and increase current market penetration we must be aggressive
in increasing our installed base of controllers to generate increased disposable
device revenue. To date, we have priced our arthroscopic controllers at
substantial discounts in order to stimulate demand for our disposable devices.

                                 Page 17 of 38
<PAGE>

  We believe that surgeons will not use our 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. There are only
a few independently published clinical reports and limited long-term clinical
follow-up to support the marketing efforts for our Arthroscopic System. We
believe that continued recommendations and endorsements by influential
arthroscopic surgeons are essential for market acceptance of our Arthroscopic
System. If our Coblation technology does not continue to receive endorsement by
influential surgeons or long-term data does not support our current claims of
efficacy, our business, financial condition, results of operations and future
growth prospects could be materially adversely affected.

Commercial Success of Our Non-Arthroscopic Products Is Uncertain

  We have developed several applications for our Coblation technology in spinal
and neurosurgery, ENT surgery, cosmetic surgery and general surgery.
Additionally we have established a program to explore the application of our
Coblation technology in various areas within cardiology. Our products for these
non-arthroscopic indications are in various stages of commercialization and
development, and we may be required to undertake time-consuming and costly
commercialization, development and additional regulatory approval activities.
If we do not receive future clearances we may be unable to market these and
other products for specific indications and our business, financial condition,
results of operations and future growth prospects could be materially adversely
affected. We cannot assure you that product development will ever be
successfully completed, that regulatory clearances or approvals, if applied for,
will be granted by the FDA or foreign regulatory authorities on a timely basis,
if at all, or that the products will ever achieve commercial acceptance.

  We may have to make a significant investment in additional preclinical and
clinical testing, regulatory, physician training and sales and marketing
activities to further develop and commercialize our spinal surgery,
neurosurgery, ENT surgery, cosmetic surgery, general surgery and cardiology
product lines. Although we believe that these products offer certain advantages,
we cannot assure you that these advantages will be realized, or if realized,
that these products will result in any meaningful benefits to physicians or
patients.

  Development and commercialization of our current and future non-arthroscopic
products are subject to the risks of failure inherent in the development of new
medical devices. These risks include the following:

  .  such products may not be easy to use, may require extensive training or
     may not be cost-effective;

  .  delays in testing or marketing;


                                 Page 18 of 38
<PAGE>

  .  unplanned expenditures or expenditures in excess of those anticipated by
     us;

  .  third parties may develop and market superior or equivalent products;

  .  such products may not receive necessary regulatory clearances or approvals;

  .  such products may be difficult or uneconomical to manufacture for
     commercial sale; and

  .  proprietary rights of third parties may preclude us and our collaborative
     partners from marketing such products.

  In addition, the success of our non-arthroscopic products will depend on their
adoption as alternatives to conventional means of tissue ablation. Clinical
experience and follow-up data for our non-arthroscopic indications are limited,
and we have sold only a small number of units to date. We believe that
recommendations and endorsement of influential physicians are essential for
market acceptance of our products.

  For information regarding the status of our regulatory approvals for our
products, see the information under the heading "Government Regulation" in our
Form 10-K for the year ended December 30, 2000.

We Have Limited Marketing and Sales Experience

  We currently have limited experience in marketing and selling our products and
have only recently established, or are in the process of establishing, our own
direct sales force for the spinal surgery, ENT and cosmetic surgery markets.  To
the extent that we have entered into distribution arrangements for the sale of
our products, we are and will be dependent upon the efforts of third parties. We
are marketing and selling our arthroscopic surgery, spinal surgery,
neurosurgery, ENT surgery and general surgery product lines in the United States
through a network of independent distributors supported by regional sales
managers and a direct sales force. These distributors sell arthroscopy, spinal
surgery, neurosurgery, ENT surgery and general surgery devices for a number of
other manufacturers.  We cannot assure you that these distributors will commit
the necessary resources to effectively market and sell our arthroscopic surgery,
spinal surgery, neurosurgery, ENT surgery or general surgery product lines, or
that these distributors or our direct sales force will be successful in selling
our products.

  We have recently established a marketing presence in various countries and we
cannot assure you that these newly established operations will be successful. In
order to successfully market our products internationally, we will need to
address many issues

                                 Page 19 of 38
<PAGE>

with which we have little or no experience, including the securing of necessary
regulatory approvals in international markets and the potential reuse of our
disposable devices by our customers. Even if we are able to successfully deal
with these issues, we cannot assure you that we will be able to establish
successful distribution capabilities internationally or receive favorable
pricing for our products. In addition, we may face currency exchange risks as
part of our international expansion. To the extent our marketing and sales
efforts are unsuccessful, our business, financial condition, results of
operations and future growth prospects may be materially adversely affected.


We Have Risks Associated with Manufacturing

  To be successful, we must manufacture our products in commercial quantities in
compliance with regulatory requirements at acceptable costs. Our manufacturing
operations consist of an in-house assembly operation for the manufacture of
disposable devices and controllers. We currently produce more than 65 models of
disposable devices utilizing different functionalities, including suction and
fluid management. As we increase the number of product designs for our
disposable devices, the complexity of our manufacturing processes will increase.
We manufacture three different controller models. Although the manufacturing
processes for the controllers designed to date are substantially the same, we
cannot be certain that we will be able to continue to manufacture these
controllers without additional expense and capabilities. We could also encounter
difficulties in manufacturing our current or future products which could reduce
yields, result in supply disruptions and adversely affect our gross margins. If
we have delays in manufacturing, we will not have adequate finished inventory to
meet our needs. If our quality assurance programs do not continue to meet the
demands of the complexity and capacity of the products we manufacture, we may
experience product returns.


We Are Dependent on Key Suppliers

  We depend on several sole source suppliers for some of our product components,
including four components that we include in substantially all of our disposable
devices. If the supply of materials from a sole source supplier were
interrupted, replacement or alternative sources might not be readily obtainable
due to the regulatory requirements applicable to our manufacturing operations.
In addition, a new or supplemental filing with applicable regulatory authorities
may require clearance prior to our marketing a product containing new material.
This clearance process may take a substantial period of time and we cannot
assure you that we would be able to obtain the necessary regulatory approval for
the new material to be used in our products on a timely basis, if at all. This
could create supply disruptions that would materially adversely affect our
business, financial condition, results of operations and future growth
prospects.

  In addition, we use a single subcontractor, using two facilities, to sterilize
the disposable devices. We cannot assure you that we can identify and qualify an
alternate

                                 Page 20 of 38
<PAGE>

sterilizer. Our inability to secure an alternative sterilizer, if required,
would limit our ability to manufacture disposable devices and could have a
material adverse effect on our business, financial condition, results of
operations and future growth prospects.

We Face Intense Competition

     The markets for our current and potential products are intensely
competitive. These markets include arthroscopy, spinal surgery, neurosurgery,
ENT surgery, cosmetic surgery, general surgery and cardiology. We cannot assure
you that other companies will not succeed in developing technologies and
products that are more effective than ours or that would render our technology
or products obsolete or uncompetitive in these markets.

     In arthroscopy, we compete against companies such as Johnson & Johnson,
Smith & Nephew, Inc., Conmed Corporation, Stryker Corp. and Oratec
Interventions, Inc., which market products to remove or shrink tissue.
Specifically, Johnson & Johnson and Stryker are currently marketing worldwide
bipolar electrosurgical systems for tissue ablation and shrinkage based upon
technology licensed by us. We are also aware of additional competitors that may
commercialize products using technology similar to ours. In spinal surgery, we
compete against companies which market products to remove tissue and treat
spinal disorders. In addition, Oratec is currently marketing a percutaneous
thermal heating product for treating certain types of contained herniated discs.
In ENT surgery, we compete against companies that offer manual instruments, such
as Smith & Nephew, Inc., Stryker Corp., Conmed Corporation, and Xomed Surgical
Products, Inc., which was acquired by Medtronic, Inc. In addition, we compete
with companies that develop and market lasers for various ENT surgery
applications, including ESC Medical Systems Ltd. Smaller companies, including
Somnus Medical Technologies Inc., Elmed Inc. and Ellman International, Inc.,
also sell medical devices for the treatment of various ENT disorders, including
snoring and obstructive sleep apnea. In cosmetic surgery, we compete against
companies such as Coherent Medical Group, and ESC Medical Systems Ltd., which
market lasers for use in this field. In addition, other large companies
manufacture and sell medical devices that use radio frequency energy for certain
applications in dermatology and cosmetic surgery. In cardiology, we may compete
with companies that use lasers to treat cardiovascular disease. Other approaches
to alleviating cardiovascular disease, including drugs or other surgical
approaches, are also potentially competitive with our products.

    Many of our competitors have significantly greater financial,
manufacturing, marketing, distribution and technical resources than we do. Some
of these companies offer broad product lines that they may offer as a single
package and frequently offer significant discounts as a competitive tactic. For
example, in order to compete successfully, we anticipate that we may have to
continue to offer substantial discounts on our controllers in order to increase
demand for our disposable devices, and that this competition could have a
material adverse effect on our business, financial condition, results of
operations and future growth prospects. Furthermore, some of our competitors
utilize purchasing contracts that link discounts on the purchase of one product
to

                                 Page 21 of 38
<PAGE>

purchases of other products in their broad product lines. Many of the hospitals
in the United States have purchasing contracts with our competitors.
Accordingly, customers may be dissuaded from purchasing our products rather than
the products of these competitors to the extent the purchase would cause them to
lose discounts on products.


We Face Uncertainty Over Reimbursement

     Failure by physicians, hospitals and other users of our products to obtain
sufficient reimbursement from health care payors for procedures in which our
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 our business, financial condition, results of operations and
future growth prospects. Reimbursement for arthroscopic, spinal surgery,
neurosurgery and ENT surgery procedures performed using devices that have
received FDA clearance has generally been available in the United States.
Typically, cosmetic surgery procedures are not reimbursed.

  We are unable to predict what changes will be made in the reimbursement
methods used by third-party health care payors. In addition, some health care
providers are moving toward a managed care system in which 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. We anticipate that in a prospective payment
system, such as the diagnosis related group system utilized by Medicare, and in
many managed care systems used by private health care payors, the cost of our
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for our products.

  If we obtain the necessary international regulatory approvals, market
acceptance of our 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. We intend to seek international reimbursement approvals,
although we cannot assure you that any such approvals will be obtained in a
timely manner, if at all.

Our Business Depends on Attracting and Retaining Collaborators and Licensors

  In order to successfully develop and commercialize certain products, we may
enter into collaborative or licensing arrangements with medical device companies
and other entities to fund and complete our research and development activities,
pre-clinical and clinical testing, manufacturing, regulatory approval activities
and to achieve successful commercialization of future products. We have entered
into a license agreement under which Boston Scientific Corporation will help
develop, obtain regulatory approval for and market products based on our
Coblation technology for myocardial revascularization procedures. In addition,
we have entered into a distribution agreement with Integra

                                 Page 22 of 38
<PAGE>

Neurosciences to market and sell our Coblation-based products for neurosurgery.
See the information under the heading "Collaborative Arrangements" in our From
10-K for the year ended December 30, 2000 for a discussion of these
arrangements.

  Our participation in collaborative and licensing arrangements with third
parties subjects us to a number of risks. Collaborative partners typically have
significant discretion in electing whether to pursue any of the planned
activities. We cannot control the amount and timing of resources our
collaborative partners may devote to our products, and we cannot assure you that
our partners will perform their obligations as expected. Business combinations
or significant changes in a corporate partner's business strategy may adversely
affect that partner's ability to meet its obligations under the arrangements. If
a collaborative partner were to terminate or breach its agreement with us, or
otherwise fail to complete its obligations in a timely manner, our business,
financial condition, results of operations and prospects would be materially
adversely affected. To the extent that we are not able to establish further
collaborative arrangements or that any or all of our existing collaborative
arrangements are terminated, we would be required to seek new collaborative
arrangements or to undertake commercialization at our own expense, which could
significantly increase our capital requirements, place additional strain on our
human resource requirements and limit the number of products which we would be
able to develop and commercialize. In addition, we cannot assure you that our
existing and future collaborative partners will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including our competitors.

  We cannot assure you 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 us
could lead to delays in or termination of the research, development or
commercialization of certain products or result in litigation or arbitration
that would be time consuming and expensive. Failure by any collaborative partner
to commercialize successfully any product to which it has obtained rights from
us, or the decision by a collaborative partner to pursue alternative
technologies or commercialize or develop alternative products, either on its own
or in collaboration with others, could have a material adverse effect on our
business, financial condition, results of operations and future growth
prospects.


Our Operating Results Will Fluctuate

  We only achieved profitability in 1999 and, as of June 30, 2001, we had an
accumulated deficit of $5.2 million. Results of operations may fluctuate
significantly from quarter to quarter due to many factors, including the
following:

 . the introduction of new product lines;

                                 Page 23 of 38
<PAGE>

 . increased penetration in existing applications;

 . product returns;

 . achievement of research and development milestones;

 . the amount and timing of receipt and recognition of license fees;

 . manufacturing or supply disruptions;

 . timing of expenditures;

 . absence of a backlog of orders;

 . receipt of necessary regulatory approvals;

 . the level of market acceptance for our products;

 . timing of the receipt of orders and product shipments; and

 . promotional programs for our products.

  We cannot assure you that future quarterly fluctuations will not adversely
affect our business, financial condition, results of operations or future growth
prospects. Our revenues and profitability will be critically dependent on
whether or not we can successfully continue to market our Coblation-based
technology product lines. We cannot assure you that we will maintain or increase
our revenues or level of profitability.

We May Be Unable to Effectively Protect Our Intellectual Property

  Our ability to compete effectively depends in part on developing and
maintaining the proprietary aspects of our Coblation technology. We believe that
our issued patents are directed at the core technology used in our soft-tissue
surgery systems, including both multi-electrode and single-electrode
configurations of our disposable devices, as well as the use of Coblation
technology in specific surgical procedures.

  We cannot assure you that the patents we have obtained, or any patents we may
obtain as a result of our pending U.S. or international patent applications,
will provide any competitive advantages for our products. We also cannot assure
you that those patents will not be successfully challenged, invalidated or
circumvented in the future. In addition, we cannot assure you that competitors,
many of which have substantial resources and have made substantial investments
in competing technologies, have not already applied for or obtained, or will not
seek to apply for and obtain, patents that will prevent, limit or interfere with
our ability to make, use and sell our products either in the

                                 Page 24 of 38
<PAGE>

United States or in international markets. Patent applications are maintained in
secrecy for a period after filing. We may not be aware of all of the patents and
patent applications potentially adverse to our interests.

     A number of medical device and other companies and universities and
research institutions have filed patent applications or have issued patents
relating to monopolar and/or bipolar electrosurgical methods and apparatus. We
have received, and we may receive in the future, notifications of potential
conflicts of existing patents, pending patent applications and challenges to the
validity of existing patents. In addition, we have become aware of, and may
become aware of in the future, patent applications and issued patents that
relate to our products and/or the surgical applications and issued patents and,
in some cases, have obtained internal and/or external opinions of counsel
regarding the relevance of certain issued patents to our products. We do not
believe that our products currently infringe any valid and enforceable claims of
the issued patents that we have reviewed. However, if third-party patents or
patent applications contain claims infringed by our technology and such claims
are ultimately determined to be valid, we may not be able to obtain licenses to
those patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology. Our inability to do either would have a material adverse
effect on our business, financial condition, results of operations and
prospects. We cannot assure you that we will not have to defend ourselves in
court against allegations of infringement of third-party patents, or that such
defense would be successful.

     In addition to patents, we rely on trade secrets and proprietary know-how,
which we seek to protect, in part, through confidentiality and proprietary
information agreements. We require our key employees and consultants to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with us. These agreements generally provide that all confidential
information, developed or made known to the individual during the course of the
individual's relationship with us, 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 us shall be
our exclusive property. We cannot assure you that employees will not breach such
agreements, that we would have adequate remedies for any breach or that our
trade secrets will not otherwise become known to or be independently developed
by competitors.

We May Become Subject to 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. We cannot assure you that we will not become subject to
patent infringement claims or litigation or interference proceedings declared by
the United States Patent and Trademark Office, the USPTO, to determine the
priority of inventions. In February 1998, we filed a lawsuit against Ethicon,
Inc., Mitek Surgical Products, a division of Ethicon, Inc., and GyneCare, Inc.
alleging, among other things, infringement of several of our patents. The

                                 Page 25 of 38
<PAGE>

parties subsequently settled this lawsuit. Under the terms of the settlement,
Ethicon, Inc. has licensed our U.S. patents for current products in the
arthroscopy and gynecology markets. The settlement agreement also established a
procedure for resolution of certain potential intellectual property disputes in
these two markets without litigation. Under this procedure, the licenses granted
in the Ethicon settlement have been extended to Australia, Canada and Japan.

     Defending and prosecuting intellectual property suits, USPTO interference
proceedings and related legal and administrative proceedings are costly and
time-consuming. Further litigation may be necessary to enforce our patents, to
protect our trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others. Any litigation or interference
proceedings will be costly and will result in significant diversion of effort by
technical and management personnel. An adverse determination in any of the
litigation or interference proceedings to which we may become a party could
subject us to significant liabilities to third parties, require us to license
disputed rights from third parties or require us to cease using such technology,
which would have a material adverse effect on our business, financial condition,
results of operations and future growth prospects. Patent and intellectual
property disputes in the medical device area have often been settled through
licensing or similar arrangements, and could include ongoing royalties. We
cannot assure you that we can obtain the necessary licenses on satisfactory
terms, if at all.

The Market Price of Our Stock May Be Highly Volatile

     Within the last 12 months our common stock has traded between a range of
$12.06 and $45.25 per share after adjusting for a 2-for-1 stock split of our
common stock on July 3, 2000. The market price of our common stock could
continue to fluctuate substantially due to a variety of factors, including:

 .   quarterly fluctuations in results of our operations;

 .   our ability to successfully commercialize our products;

 .   announcements regarding results of regulatory approval filings, clinical
    studies or other testing, technological innovations or new commercial
    products by us or our competitors;

 .   developments concerning government regulations, proprietary rights or public
    concern as to the safety of our technology;

 .   the execution of new collaborative agreements and material changes in our
    relationships with our business partners;

 .   market reaction to acquisitions and trends in sales, marketing, and research
    and development;

                                 Page 26 of 38
<PAGE>

 .   changes in earnings estimates by analysts;

 .   sales of common stock by existing stockholders; and

 .   economic and political conditions.

    The market price for our common stock may also be affected by our ability to
meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common stock.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against the company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business, results of operations and financial condition. See "Item 5. Market
for Registrant's Common Equity and Related Stockholder Matters" in our Form 10-K
for the year ended December 30, 2000.


Delaware Law, Provisions in Our Charter and Our Stockholder Rights Plan Could
Make the Acquisition of Our Company By Another Company More Difficult

    Our stockholder rights plan and certain provisions of our 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 our company. This could limit the price that certain
investors might be willing to pay in the future for shares of our common stock.
Some provisions of our certificate of incorporation and bylaws allow us to issue
preferred stock without any vote or further action by the stockholders, to
eliminate the right of stockholders to act by written consent without a meeting,
to specify procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings, and to eliminate
cumulative voting in the election of directors. Some provisions of Delaware law
applicable to us could also delay or make more difficult a merger, tender offer
or proxy contest involving us, 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. Our
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 ArthroCare, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of our
common stock.

                                 Page 27 of 38
<PAGE>

We Must Obtain Governmental Clearances Or Approvals Before We Can Sell Our
Products; We Must Continue To Comply With Applicable Laws and Regulations


United States

    Our products are considered medical devices and are subject to extensive
regulation in the United States. We must obtain premarket clearance by the FDA
for each of our products and indications before they can be commercialized. FDA
regulations are wide ranging and govern, among other things:

 .   product design and development;

 .   product testing;

 .   product labeling;

 .   product storage;

 .   premarket clearance or approval;

 .   advertising and promotion; and

 .   product sales and distribution.

    Noncompliance with applicable regulatory requirements can result in
enforcement action, which may include:

 .   warning letters;

 .   fines, injunctions and civil penalties against us;

 .   recall or seizure of our products;

 .   operating restrictions, partial suspension or total shutdown of our
    production;

 .   refusing our requests for premarket clearance or approval of new products;

 .   withdrawing product approvals already granted; and

 .   criminal prosecution.

    Generally, before we can introduce a new medical device into the United
States market, we must obtain FDA clearance of a premarket notification 510 (k)
or approval of

                                 Page 28 of 38
<PAGE>

a premarket approval application, or PMA application. If we can establish that
our device is "substantially equivalent" to a "predicate device," i.e., a
legally marketed Class I or Class II device or a preamendment Class III device
(i.e., one that was in commercial distribution before May 28, 1976) for which
the FDA has not called for PMAs, we may seek clearance from the FDA to market
the device by submitting a 510(k). The 510(k) will need to be supported by
appropriate data, including, in some cases, clinical data, establishing the
claim of substantial equivalence to the satisfaction of the FDA.

   We have received 510(k) clearance to market our Arthroscopic System for
surgery of the knee, shoulder, elbow, wrist, hip and ankle joints. We have
received 510(k) clearance in the United States to market our Spinal Surgery
System. In addition, we have received 510(k) clearance to market our Cosmetic
Surgery System in general dermatology procedures and for skin resurfacing for
the purpose of wrinkle reduction. We have received 510(k) clearance to market
our ENT Surgery System in general head, neck and sinus surgical procedures, as
well as the treatment of snoring, hypertrophic turbinates and submucosal
tissue shrinkage. We cannot assure you that we will be able to obtain necessary
clearances or approvals to market any other products, or existing products for
new intended uses, on a timely basis, if at all. Delays in receipt or failure to
receive 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 our business, financial condition,
results of operations and future growth prospects.

   After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in the intended use of the device, requires a new 510(k) clearance.
The FDA requires each manufacturer to make this determination in the first
instance, but the FDA can review any such decision. If the FDA disagrees with a
manufacturer's decision not to seek a new 510(k) clearance, the agency may
retroactively require the manufacturer to submit a premarket notification
requesting 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance is obtained.
We have modified some of our marketed devices, but have determined that, in our
view, new 510(k) clearances are not required. No assurance can be given that the
FDA would agree with any of our decisions not to seek 510(k) clearance. If the
FDA requires us to seek 510(k) clearance for any modification, the FDA also may
require us to cease marketing and/or recall the modified device until we obtain
a new 510(k) clearance.

   If we cannot establish that a proposed device is substantially equivalent to
a legally marketed device, we must seek premarket approval through submission of
a PMA. A PMA 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. If necessary, we will file a PMA for
approval to sell our potential products. The PMA process can be expensive,
uncertain and lengthy. We cannot assure you that we will be able to obtain PMA
approvals on a timely basis, if at all, and delays in receipt or failure to
receive approvals, could have a material

                                 Page 29 of 38
<PAGE>

adverse effect on our business, financial condition, results of operations and
future growth prospects.

   We are also required to demonstrate and maintain compliance with the Quality
System Regulation, or QSR. The QSR incorporates the requirements of Good
Manufacturing Practice and relates to product design, testing, and manufacturing
quality assurance, as well as the maintenance of records and documentation. The
FDA enforces the QSR through inspections. We cannot assure you that we or our
key component suppliers are or will continue to be in compliance, will not
encounter any manufacturing difficulties, or that we or any of our
subcontractors or key component suppliers will be able to maintain compliance
with regulatory requirements. Failure to do so will have a material adverse
effect on our business, financial condition, results of operations and future
growth prospects.

   We may not promote or advertise our products for uses not within the scope of
our clearances or approvals or make unsupported safety and effectiveness claims.
These determinations can be subjective. We cannot assure you that the FDA would
agree that all of our promotional claims are permissible or that the FDA will
not require us to revise our promotional claims or take enforcement action
against us based upon our labeling and promotional materials.


International

   International sales of our products are subject to strict regulatory
requirements. The regulatory review process varies from country to country. We
have obtained regulatory clearance to market our Arthroscopic System in Europe,
Japan, Australia, Taiwan, Korea, Canada, China, Israel, Middle East, South
America and Mexico; to market our cosmetic surgery products in Europe,
Australia, Canada, Middle East, South America and Israel; to market our ENT
surgery products in Europe, Australia, Canada, China, Israel, Japan, Middle
East, Twain and South America; to market our spinal surgery products in Europe,
Canada, Japan, Mexico, Middle East, Taiwan; general surgery products in Europe,
Canada, Middle East and Taiwan and neurosurgery and urology products in Europe,
but we have not obtained any other international regulatory approvals in other
international markets. We cannot assure you that we will obtain such clearances
and approvals on a timely basis, or at all.

   For European distribution, we have received ISO 9001/EN46001 certification
and the EC Certificate pursuant to the European Union Medical Device Directive
93/42/EEC, allowing us to CE mark our products after assembling appropriate
documentation. ISO 9001/EN46001 certification standards for quality operations
have been developed to ensure that companies know the standards of quality on a
worldwide basis. Failure to maintain the CE Mark will preclude us from selling
our products in Europe. We cannot assure you that we will be successful in
maintaining certification requirements.

                                 Page 30 of 38
<PAGE>

We Face Product Liability Risks and May Not Be Able to Obtain Adequate Insurance

     The development, manufacture and sale of medical products involves
significant risk of product liability claims. Our current product liability
insurance coverage limits are $10.0 million per occurrence and $10.0 million in
the aggregate. We cannot assure you that such coverage limits are adequate to
protect us from any liabilities we might incur in connection with the
development, manufacture and sale of our products. In addition, we may be
required to increase our product liability coverage as potential products are
successfully commercialized. Product liability insurance is expensive and may
not be available to us in the future on acceptable terms, if at all. We have
received and settled several product liability claims to date and other claims
are pending. A successful product liability claim or series of claims brought
against us in excess of our insurance coverage could have a material adverse
effect on our business, financial condition, results of operations and future
growth prospects.

We May Be Unable to Attract and Retain Personnel

     We are 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 our business, financial condition, results of
operations and future growth prospects. Our success will also depend on our
ability to attract and retain additional highly qualified management and
technical personnel. We face intense competition for qualified personnel, many
of whom are often subject to competing employment offers, and we cannot assure
you we will be able to attract and retain such personnel. Furthermore, our
scientific advisory board members are all 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 our business.

Lack of Dividends

     We have not paid any dividends and do not anticipate paying any dividends
in the foreseeable future.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio and conduct all transactions in U.S. dollars. Our
investment portfolio only includes highly liquid instruments.

                                 Page 31 of 38
<PAGE>

     We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our cash and cash
equivalents and our short-term investments.

     Although payments under the operating leases for our facility are tied to
market indices, we are not exposed to material interest rate risk associated
with the operating lease.  Our capital lease obligations are not subject to
changes in the interest rate and, therefore, are not exposed.

     PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

     On July 25, 2001, the company filed a lawsuit against Smith & Nephew, Inc.
("the Defendant") in the United States District Court of Delaware. The lawsuit
alleges, among other things, that the Defendant has been, and is, currently
infringing three patents issued to the company. Specifically, the Defendants
use, import, market and sell an electrosurgical system under the name of the
Dyonics Control RF System which infringes these patents. The company seeks: (1)
a judgment that the Defendant has infringed these patents; (2) to permanently
enjoin the Defendant from using, importing, marketing and selling the Dyonics
Control RF System; and (3) an award of damages (including attorney's fees) to
compensate the company for lost profits and Defendant's use of the company's
inventions, the damages to be trebled because of the Defendant's willful
infringement.

Item 2.  Changes in Securities and Use of Proceeds

     None

Item 3.  Defaults upon Senior Securities

     None

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

     At the annual meeting of stockholders on May 23, 2001, the following
matters were submitted to a vote of the Company's stockholders:

Proposal 1.   Election of Directors.

Nominee                            Votes For           Votes Withheld
-------                            ---------           --------------

Michael A. Baker                  19,768,940                406,093
Annette J. Campbell-White         20,132,294                 42,739
C. Raymond Larkin, Jr.            20,131,394                 43,639
John S. Lewis                     20,132,594                 42,439
Robert R. Mornsen                 20,132,494                 42,539
Hira V. Thapliyal, Ph.D.          20,132,462                 42,571

Proposal 2. Ratification of the Appointment of PricewaterhouseCoopers LLP as the
Company's Independent Accountants.

Votes For:     20,138,693     Votes Against:   29,689       Abstain:  6,651


Item 5.  Other Information

       None


Item 6.  Exhibits and Reports on Form 8 - K

       a)  Exhibits

                                 Page 32 of 38
<PAGE>

3. EXHIBITS (in accordance with Item 601 of Regulation S-K).

   3.1     Restated Certificate of Incorporation of ArthroCare Corporation.
           (Incorporated herein by reference to the same-numbered exhibit filed
           previously with the Registrant's Registration Statement on Form 8-A
           (Registration No. 000-27422)).

   3.2     Amended and Restated Bylaws of the Registrant. (Incorporated herein
           by reference to the same-numbered Exhibit filed previously with the
           Registrant's Quarterly Report on Form 10-Q for the period ended
           October 3, 1998).

   4.1     Specimen Common Stock Certificate. (Incorporated herein by reference
           to the same-numbered Exhibit filed previously with the Registrant's
           Registration Statement on Form 8-A (Registration No. 000-27422)).

  10.1     Form of Indemnification Agreement between the Registrant and each of
           its directors and officers. (Incorporated herein by reference to the
           same-numbered Exhibit filed previously with the Registrant's
           Registration Statement on Form S-1 (Registration No. 33-80453)).

  10.2     Incentive Stock Plan and form of Stock Option Agreement thereunder.
           (Incorporated herein by reference to the same-numbered Exhibit filed
           previously with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

  10.3     Director Option Plan and form of Director Stock Option Agreement
           thereunder. (Incorporated herein by reference to the same-numbered
           Exhibit filed previously with the Registrant's Registration Statement
           on Form S-1 (Registration No. 33-80453)).

  10.4     Employee Stock Purchase Plan and forms of agreements thereunder.
           (Incorporated herein by reference to the same-numbered Exhibit filed
           previously with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

  10.5     Form of Exclusive Sales Representative Agreement. (Incorporated
           herein by reference to the same-numbered Exhibit filed previously
           with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

  10.6     Form of Exclusive Sales Representative Agreement. (Incorporated
           herein by reference to the same-numbered Exhibit filed previously
           with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

  10.7     Consulting Agreement, dated May 10, 1993, between the Registrant and
           Philip E. Eggers, and amendment thereto. (Incorporated herein by
           reference to the same-numbered Exhibit filed previously with the
           Registrant's Registration Statement on Form S-1 (Registration No. 33-
           80453)).

                                 Page 33 of 38
<PAGE>

   10.8    Consulting Agreement, dated May 20, 1993, between the Registrant and
           Eggers & Associates, Inc., and amendment thereto. (Incorporated
           herein by reference to the same-numbered Exhibit filed previously
           with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

   10.9    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. (Incorporated herein by reference to Exhibit 10.10 filed
           previously with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

   10.10   Employment Letter Agreement, dated July 18, 1995, between the
           Registrant and Robert T. Hagan. (Incorporated herein by reference to
           Exhibit 10.16 filed previously with the Registrant's Registration
           Statement on Form S-1 (Registration No. 33-80453)).

   10.11   Restricted Stock Purchase and Security Agreement, dated August 1,
           1995, between the Registrant and Robert T. Hagan. (Incorporated
           herein by reference to Exhibit 10.17 filed previously with the
           Registrant's Registration Statement on Form S-1 (Registration No. 33-
           80453)).

   10.12+  Radiation Services Agreement, dated September 13, 1995, between the
           Registrant and SteriGenics International. (Incorporated herein by
           reference to Exhibit 10.19 filed previously with the Registrant's
           Registration Statement on Form S-1 (Registration No. 33-80453)).

   10.13   Amended and Restated Stockholder Rights Agreement, dated October 16,
           1995, between the Registrant and certain holders of the Registrant's
           securities. (Incorporated herein by reference to Exhibit 10.20 filed
           previously with the Registrant's Registration Statement on Form S-1
           (Registration No. 33-80453)).

   10.14   Contribution Agreement, dated March 31, 1995, by and among Philip E.
           Eggers, Robert S. Garvie, Anthony J. Manlove, Hira V. Thapliyal and
           the Registrant. (Incorporated herein by reference to Exhibit 10.21
           filed previously with the Registrant's Registration Statement on Form
           S-1 (Registration No. 33-80453)).

   10.15   Amended and Restated Stockholder Rights Agreement, dated October 2,
           1998, between the Registrant and Norwest Bank Minnesota, N.A.
           (Incorporated herein by reference to Exhibit 10.20 filed previously
           with the Registrant's Registration Statement on Form 8-A filed
           October 21, 1998 (Registration No. 000-27422)).

   10.16   Exclusive Distributor Agreement, dated April 15, 1997, between the
           Registrant and Arthrex, GmbH and Amendment dated October 2, 1998.
           (Incorporated herein by reference to Exhibit 10.20 filed previously
           with the Registrant's Quarterly Report on Form 10-Q for the period
           ended

                                 Page 34 of 38
<PAGE>

    /         April 3, 1999).

   10.17      Employment Letter Agreement, dated June 20, 1997, between the
              Registrant and Michael A. Baker. (Incorporated herein by reference
              to Exhibit 10.24 filed previously with the Registrant's Quarterly
              Report on Form 10-Q for the period ended June 28, 1997).

   10.18+     Exclusive Distributor Agreement, dated August 21, 1997, between
              the Registrant and Kobayashi Pharmaceutical Company, Ltd.
              (Incorporated herein by reference to Exhibit 10.25 filed
              previously with the Registrant's Quarterly Report on Form 10-Q for
              the period ended September 27, 1997).

   10.19+     License Agreement dated February 9, 1998, between the Registrant
              and Boston Scientific Corporation. (Incorporated herein by
              reference to Exhibit 10.26 filed previously with the Registrant's
              Annual Report on Form 10-K for the period ended January 3, 1998).

   10.20+     Development and Supply Agreement, dated February 9, 1998, between
              the Registrant and Boston Scientific Corporation. (Incorporated
              herein by reference to Exhibit 10.27 filed previously with the
              Registrant's Annual Report on Form 10-K for the period ended
              January 3, 1998).

   10.21      Lease Agreement date 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. (Incorporated
              herein by reference to Exhibit 10.28 filed previously with the
              Registrant's Annual Report on Form 10-K for the period ended
              January 3, 1998).

   10.22+     Term sheet for License and Distribution Agreement between Xomed
              Surgical Products and the Registrant dated June 25, 1998.
              (Incorporated herein by reference to Exhibit 10.29 filed
              previously with the Registrant's Quarterly Report on Form 10-Q for
              the period ended October 3, 1998).

   10.23+     License Agreement dated February 9, 1999 between the Registrant
              and Collagen Aesthetics. (Incorporated herein by reference to
              Exhibit 10.27 filed previously with the Registrant's Annual Report
              on Form 10-K for the period ended January 2, 1999).

   10.24      Change of Control Agreement between the Registrant and Michael
              Baker, CEO. (Incorporated herein by reference to Exhibit 10.28
              filed previously with the Registrant's Annual Report on Form 10-K
              for the period ended January 2, 1999).

   10.25      The Form of "VP Continuity Agreement" between the Registrant and
              its Vice Presidents. (Incorporated herein by reference to Exhibit
              10.29 filed previously with the Registrant's Annual Report on Form
              10-K for the period ended January 2, 1999).

   10.26      Letter Agreement dated February 9, 1999 between the Registrant and
              Collagen Aesthetics. (Incorporated herein by reference to Exhibit
              10.30 filed previously with the Registrant's Annual Report on Form
              10-K/A for

                                 Page 35 of 38
<PAGE>

              the period ended January 2, 1999).

   10.27      Employment Letter Agreement, between the Registrant and John R.
              Tighe dated January 26,1999. (Incorporated herein by reference to
              Exhibit 10.30 filed previously with the Registrant's Quarterly
              Report on Form 10-Q for the period ended April 3, 1999).

   10.28      Employment Letter Agreement, between the Registrant and Christine
              Hanni amended May 19, 1999. (Incorporated herein by reference to
              Exhibit 10.31 filed previously with the Registrant's Quarterly
              Report on Form 10-Q for the period ended April 3, 1999).

   10.29      Employment Letter Agreement, between the Registrant and Bruce
              Prothro amended May 19, 1999. (Incorporated herein by reference to
              Exhibit 10.32 filed previously with the Registrant's Quarterly
              Report on Form 10-Q for the period ended April 3, 1999).

   10.30+     Litigation Settlement Agreement, between the Registrant and
              ETHICON, Inc. dated June 24, 1999. (Incorporated herein by
              reference to Exhibit 10.33 previously filed with the Registrant's
              Quarterly Report on Form 10-Q for the period ended July 3, 1999).

   10.31      Relocation Loan Agreement, between the Registrant and John R.
              Tighe dated May 1, 1999. (Incorporated herein by reference to
              Exhibit 10.34 previously filed with the Registrant's Quarterly
              Report on Form 10-Q for the period ended July 3, 1999).

   10.32      Line of Credit Agreement with Silicon Valley Bank dated June 11,
              1999. (Incorporated herein by reference to Exhibit 10.35
              previously filed with the Registrant's Quarterly Report on Form
              10-Q for the period ended July 3, 1999.)

   10.33+     Amendment to License Agreement between ArthroCare Corporation and
              Inamed Corporation dated October 1, 1999. (Incorporated herein by
              reference to Exhibit 10.33 previously filed with the Registrant's
              Registration Statement on Form S-3 (Registration No. 333-87187))

   10.34      First Amendment to Rights Agreement between ArthroCare Corporation
              and Norwest Bank Minnesota, N.A. (the "Rights Agent") dated March
              10, 2000. (Incorporated herein by reference to Exhibit 99.1
              previously filed with the Registrant's Form 8-K filed March 10,
              2000.)

   10.35      Nonstatuatory Stock Option Plan and form of Stock Option Agreement
              thereunder. (Incorporated herein by reference to the same-numbered
              exhibit filed previously with the Registrant's Annual Report on
              Form 10-K for the period ended January 1, 2000.)

   10.36+     License Agreement between ArthroCare Corporation and Stryker
              Corporation, dated June 28, 2000. (Incorporated herein by
              reference to the same-numbered exhibit filed previously with the
              Registrant's Annual Report on Form 10-Q for the period ended July
              1, 2000.)

                                 Page 36 of 38
<PAGE>

   +    Confidential treatment granted.



   (b)  Reports on Form 8-K
          None

                                 Page 37 of 38
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                    ARTHROCARE CORPORATION
                                    a Delaware corporation


Date: August 13, 2001               /s/ Michael A. Baker
                                    --------------------------------------
                                    Michael A. Baker
                                    President, Chief Executive Officer
                                    and Director
                                    (Principal Executive Officer)


Date: August 13, 2001               /s/ Christine Hanni
                                    --------------------------------------
                                    Christine Hanni
                                    Vice President of Finance, Chief
                                    Financial Officer and Assistant
                                    Secretary
                                    (Principal Financial and Accounting
                                     Officer)

                                 Page 38 of 38