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 October 3, 1998
 
                                       OR
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
               For the transition period from ________ to _______
 
                         Commission File Number: 0-27422
 
                             ARTHROCARE CORPORATION
             (Exact name of registrant as specified in its charter)
 
         DELAWARE                                        94-3180312
(State of incorporation)                    (I.R.S. Employer Identification No.)
 
                            595 North Pastoria Avenue
                           Sunnyvale, California 94086
                    (Address of principal executive offices)
 
                                 (408) 736-0224
              (Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X    No
                                      -----     -----
 
The number of shares outstanding of the registrant's common stock as of
November 9, 1998 was 8,968,233.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<PAGE>
 
                    ARTHROCARE CORPORATION
 
                             INDEX
 
 
 
 
PART 1:  Financial Information
 
     Item 1.  Financial Statements
 
          Condensed Consolidated Balance Sheets as of October 3, 1998
            (unaudited) and January 3, 1998
 
          Condensed Consolidated Statements of Operations (unaudited) for the
            three and nine months ended October 3, 1998 and September 27, 1997
 
          Condensed Consolidated Statements of Cash Flows (unaudited)
            for the nine months ended October 3, 1998 and September 27, 1997
 
          Notes to Condensed Consolidated Financial Statements (unaudited)
 
     Item 2.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations
 
PART II:  Other Information
 
     Item 1.  Legal Proceedings
     Item 2.  Changes in Securities
     Item 3.  Defaults upon Senior Securities
     Item 4.  Submission or Matters to Vote of Security Holders
     Item 5.  Other Information
     Item 6.  Exhibits and Reports on Form 8-K
 
SIGNATURE
<PAGE>
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                             ARTHROCARE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                    October 3,     January 3,
                                                       1998           1998
                                                   -------------  -------------
                                                   (unaudited)
<S>                                                <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                              $6,340         $8,188
  Available-for-sale securities                           4,080         10,674
  Accounts receivable, net                                4,946          2,223
  Inventory                                               5,778          2,019
  Prepaid expenses and other current assets                 522            210
                                                   -------------  -------------
       Total current assets                              21,666         23,314
 
Available-for-sale securities                             1,652          1,010
Property and equipment, net                               3,410          1,412
Related party receivables                                   890            876
Other assets                                                  0             63
                                                   -------------  -------------
     Total assets                                       $27,618        $26,675
                                                   =============  =============
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                       $1,686           $968
  Deferred Revenue                                          666              --
  Accrued liabilities                                     2,800          2,004
                                                   -------------  -------------
          Total current liabilities                       5,152          2,972
 
Deferred rent                                               145            157
                                                   -------------  -------------
          Total liabilities                               5,297          3,129
                                                   -------------  -------------
Stockholders' equity:
  Common stock                                               23              9
  Additional paid-in capital                             49,731         49,153
  Notes receivable from stockholders                        (83)           (92)
  Deferred compensation                                    (108)          (228)
  Unrealized gain on available-for-sale
    securities                                               15             10
  Cummulative translation adjustment                        (32)             0
  Accumulated deficit                                   (27,225)       (25,306)
                                                   -------------  -------------
          Total stockholders' equity                     22,321         23,546
                                                   -------------  -------------
     Total liabilities and stockholders' equity         $27,618        $26,675
                                                   =============  =============
</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
 
<PAGE>
                             ARTHROCARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                     Three Months Ended     Nine Months Ended
                                                 ---------------------  ----------------------
                                                 October 3,  September 2October 3,  September
                                                    1998       1997        1998        1997
                                                 ----------- ---------  ----------  ----------
<S>                                              <C>         <C>        <C>         <C>
Net sales                                            $6,721    $3,366     $17,265      $8,459
Cost of sales                                         3,136     2,201       9,131       5,874
                                                 ----------- ---------  ----------  ----------
Gross profit                                          3,585     1,165       8,134       2,585
                                                 ----------- ---------  ----------  ----------
Operating expenses:
   Research and development                           1,304     1,076       3,444       2,829
   Sales and marketing                                2,815     1,607       7,353       4,358
   General and administrative                           972       713       2,896       2,531
                                                 ----------- ---------  ----------  ----------
        Total operating expenses                      5,091     3,396      13,693       9,718
                                                 ----------- ---------  ----------  ----------
Loss from operations                                 (1,506)   (2,231)     (5,559)     (7,133)
Interest and other income, net                          426       331       3,638       1,077
                                                 ----------- ---------  ----------  ----------
Net loss                                            ($1,080)  ($1,900)    ($1,921)    ($6,056)
                                                 =========== =========  ==========  ==========
 
Net loss per common share and per common
 share-assuming dilution                             ($0.12)   ($0.22)     ($0.22)     ($0.69)
                                                 =========== =========  ==========  ==========
 
Shares used in computing net loss per common
 share and per common share-assuming dilution         8,950     8,812       8,921       8,801
                                                 =========== =========  ==========  ==========
 
</TABLE>
               The accompanying notes are an integral part of these
                   condensed consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<PAGE>
                           ARTHROCARE CORPORATION
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                      --------------------------
                                                       October 3,   September 27,
                                                          1998          1997
                                                      ------------  ------------
                                                      (unaudited)
<S>                                                   <C>           <C>
Cash flows from operating activities:
   Net loss                                               ($1,921)      ($6,056)
   Adjustments to reconcile net loss
    to net cash used in operating activities:
        Depreciation and amortization                         539           457
        Amortization of deferred compensation                 121           120
        Provision for doubtful accounts receivable
          and product returns                                  61            74
        Provision for excess and obsolete inventory            91           277
        Deferred rent                                         (12)            2
        Changes in operating assets and liabilities:
          Accounts Receivable                              (2,784)         (315)
          Inventory                                        (3,850)       (1,196)
          Prepaid expenses and other current assets          (326)          (80)
          Accounts payable                                    719           312
          Accrued liabilities                                 813           575
          Deferred Revenue                                    666            --
          Other assets                                         63             6
                                                      ------------  ------------
           Net cash used in
              operating activities                         (5,820)       (5,824)
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment                     (2,537)         (394)
   Purchases of available-for-sale securities             (26,048)      (11,931)
   Sale or maturities of available-for-sale securities     31,972        18,802
                                                      ------------  ------------
           Net cash provided by investing activities        3,387         6,477
                                                      ------------  ------------
 
Cash flows from financing activities:
   Repayment of capital leases                                (16)          (30)
   Issuance/Repayment of notes receivable                       9          (500)
   Proceeds from exercise of options
      to purchase common stock                                592           109
                                                      ------------  ------------
      Net cash provided by /used in financing activities      585          (421)
                                                      ------------  ------------
 
Net decrease /increase in cash and cash equivalents        (1,848)          232
Cash and cash equivalents, beginning of period              8,188        11,359
                                                      ------------  ------------
Cash and cash equivalents, end of period                   $6,340       $11,591
                                                      ============  ============
Supplemental schedule of non-cash investing and
      financing activities:
   Change in net unrealized gain/loss on
      available-for-sale securities                           $5           $54
 
</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
<PAGE>
                          ARTHROCARE CORPORATION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
 
1.  Basis of Presentation
 
        In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of which
are normal and recurring in nature) necessary to present fairly the
financial position, results of operations and cash flows of ArthroCare
Corporation (the company) for the periods indicated.  Interim results of
operations are not necessarily indicative of the results to be expected
for the full year or any other interim periods.  The notes to the
financial statements contained in the Form 10-K for the year ended
January 3, 1998 should be read in conjunction with these condensed
consolidated financial statements.  The balance sheet at January 3, 1998
was derived from audited financial statements; however, the financial
statements in this report do not include all disclosures required by
generally accepted accounting principles.
 
2.  Computation of Net Loss per Common Share and per Common Share and
      per Common Share-assuming dilution
 
        The company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share: and the
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No.
98, effective January 3, 1998 and has restated all prior periods
accordingly.  Net loss per common share and per common share-assuming
dilution is computed using the weighted average number of shares of
common stock outstanding.  Dilutive potential common equivalent shares
consist of the incremental common shares issuable upon conversion of
stock options.  The company has excluded stock options from the
computation of net loss per common share-assuming dilution because all
such securities are anti-dilutive for all periods presented.
 
Stock options to purchase 415,288 shares of common stock at prices
ranging from $.20 per share to $24.25 per share were outstanding at
October 3, 1998, but were not included in the computation of net loss
per common share-assuming dilution because they were antidilutive.  The
aforementioned stock options could potentially dilute earnings per share
in the future.
 
3. Interest and other income, net:
 
In February 1998, the company entered into a license agreement
under which Boston Scientific Corporation (BSC) will develop and market
products based on the company's  Coblation (TM)  technology for myocardial
revascularization procedures.  Under the agreement, BSC acquires
exclusive licensing rights to the company's  intellectual property in
this field. BSC will pay license fees, a portion of which will be
classified as prepaid royalties, to the company upon achievement of
designated milestones and royalties on sales of resulting products, if
any. Of this amount, the company received a license fee in the quarter
ended April 4, 1998, of $3.0 million in partial consideration for the
license granted.  The company recognized $2.25 million as other income
in the quarter received.  The remaining $0.75 million is being
recognized as progress is made toward the next milestone of which $0.125
million was recognized in the three-month period ended October 3, 1998.
Total revenue recognized during the nine-month period ended October 3,
1998 was $2.5 million.
 
 
In June 1998, the company entered into a license and distribution
agreement with Xomed Surgical Products ("Xomed") whereby Xomed will
acquire exclusive, worldwide, marketing rights for the company's
patented Coblation technology in the ear, nose and throat (ENT)
market.  Under the terms of the agreement, Xomed will pay license fees
based upon the achievement of certain milestones.  During the three and
nine-month periods ending October 3, 1998, the company recognized, $0.08
million and $0.33 million, respectively, of such payments as other
income.
 
 
 
4.  Balance sheet detail (in thousands):
 
<TABLE>
<CAPTION>
 
                                         October 3,      January 3,
                                            1998            1998
                                        ------------    ------------
                                        (Unaudited)
<S>                                     <C>             <C>
Inventory:
   Raw materials                             $2,358            $921
   Work-in-process                            1,467             165
   Finished goods                             1,953             933
                                        ------------    ------------
Total                                        $5,778          $2,019
                                        ============    ============
 
 
 
 
Accrued liabilities:
   Compensation                              $1,811          $1,314
   Other                                        989             690
                                        ------------    ------------
Total                                        $2,800          $2,004
                                        ============    ============
</TABLE>
 
 
 
 
 
 
 
 
 
 
5.  Recent Accounting Pronouncements:
 
        Effective April 4, 1998 the company adopted SFAS No. 130,
"Reporting Comprehensive Income" which establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements.  Comprehensive income
is defined as the change in equity of a business enterprise during a
period, resulting from transactions and other events and circumstances
from non-owner sources.  As the components of comprehensive income for
the company are not material, the additional reporting and display of
comprehensive income and its components has not been reflected in the
accompanying condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<PAGE>
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART 1. FINANCIAL INFORMATION
 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
Overview
 
Statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which express that
ArthroCare Corporation (the company) "believes", "anticipates",
"expects" or "plans to..."  as well as other statements which are not
historical fact, are forward-looking,  statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
events or results may differ materially as a result of the risks and
uncertainties described herein and elsewhere including, in particular,
those factors described under "Business" set forth in Part I of the
company's  Annual Report on Form 10-K for the year ended January 3, 1998
and "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set forth below.
 
        Since commencing operations in April 1993, the company has
primarily engaged in the design, development, clinical testing,
manufacturing and marketing of its Arthroscopic System. The Arthroscopic
System uses the company's  novel Coblation technology that allows
surgeons to operate with increased precision and accuracy with minimal
damage to surrounding tissue. It is currently being used in closed-joint
surgery, including many types of knee and shoulder procedures. The
Arthroscopic System consists of a disposable, multi-electrode bipolar
Device, a radio frequency controller that powers the disposable and a
cable that connects the disposable to the controller. The disposable
ablates (removes) soft tissue with minimal damage to surrounding healthy
tissue and simultaneously achieves hemostasis (sealing of small bleeding
vessels).
 
        In February 1998, the company entered into a license and OEM
agreement under which Boston Scientific Corporation (BSC) will develop
and market products based on the company's  Coblation technology for
myocardial revascularization procedures.  In April 1998, the company
announced that it is entering the cosmetic surgery market and that it
has formed a new business unit, called Visage(TM), to commercialize its
technology in this field.  In May 1998, the company announced that it is
entering the otorhinolaryngology (ear, nose and throat) market and that
it has formed a new business unit, called ENTec (TM), to commercialize the
technology in this field.  In June 1998, the company entered into a
license agreement and OEM agreement with Xomed . Under the terms of this
agreement, Xomed will become the exclusive worldwide marketer of
ArthroCare's patented Coblation technology in the otorhinolaryngology
market.
 
        The company received clearance of its 510(k) premarket
notification from the United States Food and Drug Administration (FDA)
in March 1995 to market its Model 970 Arthroscopic Electrosurgery System
in the United States for use in arthroscopic surgery of the knee,
shoulder, elbow and ankle. The company has since received clearance for
use in the wrist and hip.  In October 1996, the company received
clearance of its 510(k) premarket notification for the System 2000
Arthroscopic Electrosurgery System in the United States for use in
arthroscopic surgery of the knee, shoulder, elbow, ankle, wrist and hip.
 
        In December 1995, the company commercially introduced its
Arthroscopic System through a network of distributors in the United
States. In light of the foregoing, the company has a limited history of
operations.  The company's strategy includes placing with arthroscopic
surgeons, controllers that are intended to generate future disposables
revenues. The company's long-term strategy includes applying its
patented platform technology to a range of other soft-tissue surgical
procedures, including ear, nose and throat and cosmetic surgical
procedures. The company has received 510(k) clearance for use of its
technology in several fields and has received approval of an
Investigational Device Exemption (IDE) to conduct a clinical study in
one such field which may result in the company submitting a 510(k)
application to the FDA.  There can be no assurance that any of the
company's clinical studies will lead to 510(k) applications or that the
applications will be cleared by the FDA on a timely basis, if at all, or
that the products, if cleared for marketing, will ever achieve
commercial acceptance.
 
Results of Operations
 
Revenues
 
Revenues for the three and nine-month periods ended October 3,
1998 increased to $6.7 million or 100% and $17.3 million or 104%,
respectively, as compared to $3.3 million and $8.5 million for the same
periods during the prior year.  The increase in revenues of $3.4 million
and $8.8 million for the three and nine-month periods ended October 3,
1998, respectively, was primarily due to higher unit volume disposables
sales.  The higher unit volume of disposables sales resulted from a
larger installed base of controllers and increased sales activity for
newly introduced disposables styles. Disposables continue to be sold at
or near list price.   The company expects that the channels in which
products are distributed, including international sales and sales to the
company's marketing partner Xomed, will reduce disposable ASP in the
future.
 
International sales were $0.8 or 12% of total revenues for the
three-month period ended October 3, 1998.  During the three and nine-
month period ending September 27, 1997 and the nine-month period ending
October 3, 1998, international sales were insignificant as a percentage
of total revenues.  Sales in Europe composed the majority of
international sales during the three-month period ending October 3,
1998.  While the company plans to expand its international operations,
there can be no assurance that the company will be successful in this
endeavor.
 
The majority of revenues for the three and nine-month  periods
ended October 3, 1998 were attributable to disposable sales. The company
expects disposable sales to remain the primary component of revenues in
the future.  During the three-month period ended July 4, 1998, the
company implemented  a new controller placement program.  This program
did not have a significant impact on revenues during the three or the
nine-month period ended October 3, 1998,  for a discussion of the
program's impact on gross margin, see Cost of Sales below.
 
The company believes that, in its eleven quarters of product
shipments, it has penetrated 25% to 30% of hospitals that perform
arthroscopic procedures in the United States. In addition, the company
believes that approximately half of the company's disposable revenue is
being generated by disposables purchased for use in shoulder procedures.
The company believes that shoulder procedures are the fastest growing
segment of the arthroscopic market and knee procedures represent the
largest segment of the arthroscopic market based on the number of
procedures.  In order to achieve increasing disposable sales over time,
the company believes it must continue to penetrate the market for knee
procedures, expand the education of physicans of the Coblation
technology, continue working on articular cartilage applications and
base product development focus specifically for knee applications.
 
To that end, during the second quarter of this year, the company
introduced five new arthroscopy disposable styles.   The Eliminator,
Saber, and Covac disposables were designed to be used primarily in knee
procedures.   The company also developed and introduced new disposables
for small joint procedures and for capsular shrinkage procedures.  In
November 1997, the company introduced the System 2000 controller
designed for more aggressive ablation and hemostasis.  The company
believes the features found in the System 2000 as well as these
additional disposables will increase disposable sales in the market for
knee and shoulder procedures. There can be no assurance that the use of
these new products will be adopted by doctors.  The company has limited
sales and marketing experience and can make no assurance that current
trends in sales and product acceptance will continue.
 
 
Cost of Sales
 
        Cost of sales was $3.1 million, or 47% of revenue, and $9.1
million, or 53% of revenue for the three and nine-months ended October
3, 1998, respectively.  During the three and nine-month periods ended
September 27, 1997, cost of sales was $2.2 million, or 65% of revenue
and $5.9 million or 69% of revenue, respectively.  The dollar increase
in cost of sales in the current-year quarter and for the nine-month
period ended October 3, 1998 is due to increased disposable unit sales.
As a percentage of revenue, cost of sales has decreased 19% and 16% as
compared with the prior year three and nine-month periods primarily as a
result of the following:  fixed and semi-fixed costs are being spread
over higher disposable manufacturing volume; related disposable
manufacturing efficiencies; the cessation by the company of purchasing
controllers from a subcontract manufacturer, in November 1997, at a cost
that exceeded the current internal cost to manufacture;  the
implementation of an additional controller placement program late in the
first half of 1998 in which the company maintains title to the
controllers thus allowing the company to amortize the cost over future
periods rather than expensing 100% of the cost at the time of shipment.
In addition, prior to introduction of its new controller in November
1997, the company purchased its controllers from a subcontract
manufacturer at a cost that exceeded the current internal cost to
manufacture.  In 1998, the company charges expenses related to quality
control to cost of sales since most of these activities relate to on-
going manufacturing; previously, these expenses were charged to research
and development.
 
The company believes that future improvements to gross margin will
depend upon the mix of disposable sales versus controller sales as well
as the distribution channels utilized to sell the company's products.
The company believes the placement program will contribute to the growth
of the installed base of controllers and generate an increase in the
demand for  disposables resulting in a decrease of cost of
sales as a percentage of sales and an improvement of gross margins.
There can be no assurance that the company will be successful in
maintaining the mix of disposables as compared to controller placements
or be able to increase demand for its disposables.
 
 
Operating Expenses
 
Research and development expense increased to $1.3 million, or 19%
of revenue and $3.4 million, or 20% of revenue for the three and nine-
month periods ended October 3, 1998, respectively, from $1.1 million and
$2.8 million, respectively, for the same periods during the prior fiscal
year.  The increase in spending represents a 21% and 22% increase over
the three and the nine-month periods, respectively, of the prior fiscal
year. The increases are attributed to the cost of development of new
disposable styles and the product lines associated with the launch of
two new business units which bring the company's technology to the
cosmetic surgery and ear, nose and throat surgical markets, as well as
the costs associated with running clinical trials on certain new
products. This increase was partially offset by the decreased allocation
of expenses related to quality control, which are being charged to cost
of sales in 1998 as quality activities primarily relate to manufacturing
rather than research and development and reimbursement for contract
studies.
 
The company believes that continued investment in its platform
technology is essential if it is to maintain its competitive position.
The company expects to continue increasing research and development
spending through substantial expenditures on new product development,
regulatory affairs, clinical studies and patents, although not at the
rate seen in the past year.  The company believes that its ability to
attract and retain qualified engineers in the future is critical to the
continued success of the company.
 
Sales and marketing expense increased to $2.8 million and $7.4
million, respectively, during the three and nine-month periods ended
October 3, 1998, as compared to $1.6 million and $4.4 million incurred
during the same periods of the previous fiscal year. The increase in
spending represents a 75% and 69% increase over the three and the nine-
month periods, respectively, of the prior fiscal year.  The increases
are primarily due to higher dealer commissions resulting from increased
sales, higher staffing to meet the increased level of sales and
marketing activity, and promotional and trade show expenses relating
primarily to the company's introduction of two new business units and
several new arthroscopy products.  Additional sales and marketing
expenses were incurred during 1998 as the company expanded operations in
Europe.
 
The company anticipates that sales and marketing spending will
continue to increase due to higher dealer commissions from increased
sales, the additional cost of penetrating international markets and new
surgical markets for the company's products, higher promotional,
demonstration and sample expenses, and additional investments in the
sales, marketing and support staff necessary to market its current
products and commercialize future products.  There can be no assurance
that the company will successfully develop its own marketing and sales
capabilities and experience or that its distributors and marketing
partners will commit the necessary resources to effectively market and
sell the company's current products and future products.
 
General and administrative expense increased to $1.0 million and
$2.9 million, respectively, during the three and nine-month periods
ended October 3, 1998, as compared to $0.7 million and $2.5 million
incurred during the same periods of the previous fiscal year. The
increase in spending represents a 36% and 14% increase over the three
and nine-month periods, respectively, of the prior fiscal year. The $0.3
million increase during the quarter ended October 3, 1998 is primarily
due to legal expenses related to on-going patent litigation brought by
the company against certain competitors and additional infastructure
development.   For a description of the patent litigation, refer to Part
II, Item 1 of this Quarterly Report on Form 10-Q.  The company expects
that general and administrative expenses will continue to increase as a
result of the patent litigation, further expansion of its staff, and
business development activities.
 
Interest and Other Income, net
 
Net interest and other income increased to $0.4 million and $3.6
million for the three and nine-month periods ended October 3, 1998,
respectively, up from $0.3 million and $1.1 million for the three-month
and nine-month periods ended September 27, 1997 primarily due to
milestone payments recognized from BSC and Xomed pursuant to technology
licensing agreements signed with each party during 1998 offset partially
by a decrease in interest income from investment due to the declining
cash balance.
 
In February 1998, the company entered into a license agreement
under which BSC will develop and market products based on the company's
Coblation  technology for myocardial revascularization procedures. Under
the agreement, BSC acquired exclusive licensing rights to the company's
intellectual property in this field. BSC will pay license fees, a
portion of which will be classified as prepaid royalties, to the company
upon achievement of designated milestones and royalties on sales of
resulting products, if any. The first milestone payment of $3.0 million
was received in the first quarter of 1998. The company recognized $2.25
million of that payment as other income during the first quarter of
fiscal year 1998. The remaining $0.75 million is being recognized as
progress is made toward future milestones of which .125 million was
recognized during the three-month period ended October 3, 1988.  Total
revenue recognized during the nine-month period ended October 3, 1998
was $2.5 million.
 
        In June 1998, the company entered into a license and distribution
agreement with Xomed whereby Xomed will acquire exclusive, worldwide,
marketing rights for the company's patented Coblation technology in the
ear, nose and throat market.  Under the terms of the agreement, Xomed
will pay license fees based upon the achievement of certain milestones.
During the three and nine-month periods ended October 3, 1998, the
company recognized $0.08 million and $0.33 million, respectively, of
such payments as other income.  Excluding the aforementioned milestone
payments net interest and other income would have been $0.2 million and
$0.8 million, a $0.1 million and $0.3 million decrease for the three and
nine-month periods ended October 3, 1998, respectively.  The decrease in
interest income is attributable to the decrease in cash balances and
henceforth the interest earned year-over-year.
 
 
Net Loss
 
Net loss was $1.1 million and $1.9 million for the three and the
nine-months ended October 3, 1998, respectively, compared to a loss of
$1.9 million and $6.1 million in the three and the nine-month periods
ended September 27, 1997, respectively. Excluding the payments detailed
above, (see Interest and Other Income, net discussion above), the
company would have reported a loss of  $1.3 million or $0.6 million less
than in the comparable three-month period ended September 27, 1997.  For
the nine-month period ended October 3, 1998, excluding the milestone
payments discussed above, net loss would have been $4.8 million or $1.3
million less than the prior year.
 
Net loss decreased over the prior-year period for both the three
and nine-month periods primarily due to an overall improvement in the
operating position of the company.  Specifically,  the company
experienced a significant increase in sales along with an improvement to
the gross margin during both the three and nine-month periods ended
October 3, 1998.  The improvement in operating income is due to the
improvement to gross margin as well as reduced costs of research and
development, sales and marketing, and general and administrative
expenses overall as a percentage of revenues during both the three and
nine-month periods ended October 3, 1998. In addition, the milestone
payments received from BSC and Xomed, which were recognized as other
income contributed significantly to the decrease in net loss for the
nine month period ending October 3, 1998, (see Interest and Other
Income, net discussion above).
 
The company expects net losses to continue in the future. However,
the company believes that net losses will continue to decrease as sales
increase faster than operating expenses.  There can be no assurance the
company will be successful in its efforts to increase sales and control
the growth of operating expenses.
 
 
Liquidity and Capital Resources
 
On October 3, 1998, the company had $16.5 million in working
capital.   Principal sources of liquidity consisted of $12.1 million in
cash, cash equivalents, and available-for-sale securities, which include
long-term available-for-sale securities. The cash and cash equivalents
are highly liquid with original maturities of ninety days or less.
 
Net cash used in operating activities  for the nine-month period
October 3, 1998, and September 27, 1997 was  $5.8 million.
 
Net accounts receivable increased to $4.9 million as of  October
3, 1998 from $2.2 million as of January 3, 1998. The increase in
accounts receivable is due to a corresponding increase in sales as well
as timing of sales during the quarter.
 
Inventories increased to $5.8 million as of October 3, 1998
compared to $2.0 million at January 3, 1998 due to higher product sales
activity along with the ramp-up for two new product markets. The company
expects future inventory levels to grow both in absolute value and as a
percentage of total assets as sales volume increases.
 
Net property and equipment increased to $3.4 million as of October
3, 1998 from $1.4 million on January 3, 1998.  The increase is primarily
attributable to the capitalization of controllers placed under the newly
implemented placement program along with an increase of computer
software and equipment for new hires and an additional facility.
 
The company plans to finance its capital needs principally from
cash from product sales, cash, cash equivalents, and available-for-sale
securities, which include long-term available-for-sale securities and
related interest.  The company believes the existing capital resources
together with cash generated from  licensing arrangements will
be sufficient to fund its operations through fiscal year 1999. The
company currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide
additional working capital.  As of October 3, 1998, the company had
committed to capital expenditures of approximately $0.3 million. The
company's future liquidity and capital requirements will depend on
numerous factors including the company's success of commercializing its
products, development and commercialization of products in fields other
than arthroscopy, the ability of the company's suppliers to continue to
meet the demands of the company at current prices, the cost associated
with the company's ongoing patent litigation, obtaining and enforcing
patents important to the company's business, the status of regulatory
approvals and competition. There can be no assurance that the company
will not be required to raise additional capital or that such capital
will be available on acceptable terms, if at all.
 
Year 2000
 
The company relies on computers and computer software to run its
business as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates
commencing in the year 2000.  The company is currently upgrading its'
information technology system which includes upgrades for Year 2000;
Year 2000 and is evaluating the need for a contingency plan.
The company currently expects the project to be substantially complete
by mid 1999 and the total cost is yet to be determined,
to date the company has spent approximately $.25 million.  Based upon the
company's assessment to date, the company has not found any material impact
which may result from the failure of its computers and computer
software or that of its vendors, suppliers and customers.
 
Significant uncertainty exists concerning the potential effects
associated with Year 2000 compliance.  Any Year 2000 compliance
problem to either the company, its suppliers, its service providers
or its customers could result in a material adverse effect on the company's
financial condition and operating results.  There can be no assurance that
further assessment of the company's suppliers, data processing systems or
contingency plans will address all issues of Year 2000 compliance.
 
 
Recent Accounting Pronouncements
 
        In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosure about Segments of an Enterprise and Related
Information.  This statement establishes standards for disclosure about
operating segments in annual financial statements and selected
information in interim financial reports.  It also establishes standards
for related disclosures about products and services, geographic areas
and major customers.  This statement supersedes SFAS No. 14,  Financial
Reporting for Segments of a Business Enterprise.  The new standard
becomes effective for the year ended January 2, 1999 for the company and
requires that comparative information from earlier years be restated to
conform to requirements of this standard.  The company is evaluating the
requirements of SFAS No. 131 and the effects, if any, on the company's
current reporting and disclosures.
 
 
 
 
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
 
ArthroCare became a public company in February 1996.  Included
here are risk factors as updated from the company's  Annual Report on
Form 10-K for the year ended January 3, 1998 filed April 3, 1998.  The
following factors represent current challenges to the company that
create risk and uncertainty. Failure to adequately overcome any of the
following challenges, either singularly or in combination, could have a
material adverse effect on the company's  results of operations,
business, or financial position.
 
 
Early Stage of Commercialization of Current Non-Arthroscopic Products;
Uncertainties Associated with Current Non-Arthroscopic Products.
 
In April 1998, the company announced the creation of its new
business division, Visage, created for the purpose of commercializing
the company's  Cosmetic Surgery System ("CSS") for use in dermatology and
cosmetic surgery procedures.   In May 1998, the company announced the
creation of its new business division, ENTec, created for the purpose of
commercializing the company's   ENT (ear, nose and yhroat) Surgery System
("ESS") for use in head and neck surgical procedures. With respect to
CSS, the company applied the CE mark for marketing of CSS in Europe for
skin resurfacing and wrinkle removal procedures and has received 510(k)
clearances for use of CSS in general dermatology procedures in the
United States.  The company is pursuing additional clearances that will
allow CSS to be marketed in the United States specifically for wrinkle
removal.  With respect to ESS, the company intends to apply the CE mark
certification for marketing in Europe and has received 510(k) clearances
for use of ESS in general head and neck surgical procedures in the
United States. In addition, the company has received clearances that
will allow ESS to be marketed in the United States for certain specific
indications while it is pursuing additional clearances for certain other
indications.  Both of these products have only recently been
commercially introduced and to date, the company has sold only a small
number of units, and these have been utilized by a limited number of
doctors.  No assurance can be given that the company will be able to
manufacture CSS or ESS in commercial quantities at acceptable costs, or
that it will be able to market such products successfully.  If CSS and
ESS are not commercially successful, the company's  business, financial
condition and results of operations would be materially adversely
affected.
 
A significant investment in additional preclinical and clinical
testing, regulatory and sales and marketing activities will be necessary
in order for the company to commercialize CSS and ESS.  There can be no
assurance that CSS or ESS will generate sufficient or sustainable
revenues to enable to the company to be profitable.  Furthermore,
although the company believes that these products offer certain
advantages, there can be no assurance that these advantages will be
realized, or if realized, that these products will result in any
meaningful benefits to current or future collaborative partners or
patients.
 
Development and commercialization of CSS and ESS are subject to
the risks of failure inherent in the development of new medical devices.
These risks include the possibility that the company will experience
delays in testing or marketing, that such testing or marketing will
result in unplanned expenditures or in expenditures above those
anticipated by the company, that CSS or ESS will not be proven safe or
effective, that such products will not be easy to use or cost-effective,
that third parties will develop and market superior or equivalent
products, that such products will fail to receive necessary regulatory
approvals, that such products will be difficult or uneconomical to
manufacture on a commercial scale, that proprietary rights of third
parties will preclude the company or its collaborative partners from
marketing such products and that such products will not achieve market
acceptance.  As a result of these risks, there can be no assurance that
research  and development efforts conducted by the company or its
collaborative partners will result  in any commercially viable products.
If required regulatory approvals are not obtained for CSS or ESS, or any
approved products are not commercially successful, there will be a
material adverse effect on company's business, financial condition and
results of operations.
 
Dependence Upon Arthroscopic System
 
The company commercially introduced the Arthroscopic System in
December 1995 and by the quarter ended October 3, 1998, had reported 34
months of sales.  The Arthroscopic System is the company's  first
commercial product and will account for a substantial portion of the
company's  revenue for the near future.  As such, the company is highly
dependent on its Arthroscopic System.  Additionally, the company's
potential products for non-arthroscopic indications are in various
stages of development and commercialization, and the company may be
required to undertake time-consuming and costly development activities
and seek regulatory approval of these devices.  There can be no
assurance that product development will ever be successfully completed,
that regulatory approval, if applied for, will be granted by the United
States Food and Drug Administration (FDA) or foreign regulatory
authorities on a timely basis, if at all, or that new products will ever
achieve commercial acceptance. Failure by the company to develop, obtain
necessary regulatory approval for or to successfully market new products
could have a material adverse effect on the company's business,
financial condition and results of operations.
 
Currently, the majority of the company's  sales come from the United
States. The company has established distribution capability in Europe,
Australia, Korea, Japan, Canada, South Africa and parts of South and
Central America.  Before the Arthroscopic System can be sold in some of
these regions, the company will have to obtain additional international
regulatory approvals and establish additional distribution capability in
other geographic regions.  If such regulatory approval is obtained,
there can be no assurance that the company will be able to establish a
successful distribution capability.
 
 
 
 
Dependence Upon Collaborative Arrangements
 
  In order to successfully develop and commercialize certain
products, the company may enter into collaborative or licensing
arrangements with medical device companies and other entities to fund
and complete its research and development activities, preclinical and
clinical testing and manufacturing, to seek and obtain regulatory
approval and to achieve successful commercialization of future products.
The company has recently entered into collaborative arrangements with
BSC and Xomed.  See "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Overview" for a discussion of these
arrangements.
 
 The company's  dependence on collaborative and licensing
arrangements with third parties subjects it to a number of risks.
Agreements with collaborative partners typically allow such partners
significant discretion in electing whether to pursue any of the planned
activities.  The company cannot control the amount and timing of
resources its collaborative partners may devote to the products and
there can be no assurance that such partners will perform their
obligations as expected. Business combinations or significant changes in
a corporate partner's business strategy may adversely affect such
partners ability to complete its obligations under the arrangements.  If
any collaborative partner were to terminate or breach its agreement with
the company, or otherwise fail to complete its obligations in a timely
manner, such conduct could have a material adverse effect on the
company's  business, financial condition and results of operations.  To
the extent that the company is not able to establish further
collaborative arrangements or that any or all of the company's  existing
collaborative arrangements are terminated, the company would be required
to seek new collaborative arrangements or to undertake product
development and commercialization at its own expense, which could
significantly increase the company's  capital requirements, place
additional strain on its human resource requirements and limit the
number of products which the company would be able to develop and
commercialize.  In addition, there can be no assurance that existing and
future collaborative partners will not pursue alternative technologies
or develop alternative products either on their own or in collaboration
with others, including the company's  competitors.  There can also be no
assurance that disputes will not arise in the future with respect to the
ownership of rights to any technology or products developed with any
collaborative partner.  Lengthy negotiations with potential new
collaborative partners or disagreements between established
collaborative partners and the company could lead to delays or
termination in the research, development or commercialization of certain
products or result in litigation or arbitration, which would be time
consuming and expensive.  Failure by any collaborative partner to
develop or commercialize successfully any product candidate to which it
has obtained rights from the company or the decision by a collaborative
partner to pursue alternative technologies or commercialize or develop
alternative products, either on their own or in collaboration with
others, could have a material adverse effect on the company's  business,
financial condition and results of operations.
 
 
Uncertainty of Market Acceptance
 
Physicians will not use the company's  products unless they
determine, based on experience, clinical data and other factors, that
these systems are an attractive alternative to conventional means of
tissue ablation.  No independent published clinical reports exist to
support the company's  marketing efforts for any of its products, which
may have an adverse effect on its ability to obtain physician
acceptance.  The company believes that continued recommendations and
endorsements by influential physicians are essential for market
acceptance of its products.  If the Arthroscopic System does not
continue to receive broad-based physician acceptance and endorsement by
influential physicians, the company's  business, financial condition and
results of operations would be materially adversely affected. Similarly,
if CSS, ESS or the company's  potential new products do not receive
broad-based physicians acceptance and endorsement by influential
physicians, the company's  business, financial condition and results of
operations would be materially adversely affected.
 
Limited Operating History
 
The company's  operations to date, have consisted of more than two
years of sales of its Arthroscopic System and very limited sales of CSS
and ESS. In addition, the company has incurred expenses related to
research and development, product engineering, applying for and
obtaining FDA and foreign regulatory clearance of its products and
potential new products, developing a network of distributors in the
United States and internationally  and assembling a direct sales force
to market its products. The company continues to generate operating
losses and anticipates generating losses in the future.  Whether the
company can successfully manage the transition to a larger-scale,
commercial enterprise will depend upon increasing sales of disposable  s
from its distribution network, successful commercialization of CSS, ESS
and the company's  technology in additional surgical markets, obtaining
additional international regulatory approvals for the company's
products, obtaining domestic and international regulatory approvals for
its current and potential new products and maintaining its financial and
management systems, procedures and controls.
 
Limited Domestic and International Marketing and Sales Experience
 
The company has shipped over 3,000 Arthroscopic System controller
units, more than 270,000 disposables, and a limited number of CSS and
ESS units through the end of the third quarter of 1998. The company is
marketing and selling CSS domestically through a direct sales force and
internationally through its subsidiary, ArthroCare Europe AB.  The
company currently has very limited experience in directly marketing and
selling its products and is in the process of assembling a marketing and
sales staff for CSS.  There can be no assurance that the company will
successfully develop its own marketing and sales capabilities or
experience for CSS.
 
The company is marketing and selling its Arthroscopic System in
the United States and internationally through a network of independent
orthopedic distributors. These distributors sell orthopedic arthroscopy
and ENT devices for a number of other manufacturers.  Xomed is the
exclusive and worldwide distributor for ESS. There can be no assurance
that these distributors will commit the necessary resources to
effectively market and sell the company's  Arthroscopic System or ESS, or
that they will be successful in closing sales with doctors and
hospitals. The inability to sell sufficient quantities of disposables
would have a material adverse effect on the company's  business,
financial condition and results of operations.
 
The company has signed distribution agreements with independent
distributors to sell and market the Arthroscopic Systems in Europe,
Australia, Mexico, Brazil, Argentina, Canada, Taiwan, South Africa,
Israel, Japan and Korea. In other international markets, the company
intends to collaborate with one or more marketing partners to establish
marketing and distribution channels for the Arthroscopic System and to
assist with regulatory requirements in such distributors' jurisdictions.
However, regulatory requirements vary by region, and compliance with
such regulations may be costly and time-consuming. Accordingly, the
distribution, pricing and marketing structure to be established by the
company may vary from country to country.  In June 1998, the company
entered into a license agreement with Xomed whereby Xomed has the
exclusive worldwide distribution rights for ESS.   For a description of
additional risks and uncertainties relating to Xomed's exclusive
worldwide distribution rights for ESS, see "ADDITIONAL FACTORS THAT
MIGHT AFFECT FUTURE RESULTS - Dependence on Collaborative Arrangements"
on page 19 of this Quarterly Report on Form 10-Q.
 
No assurance can be given that the company will successfully sell
CSS directly, successfully sell its Arthroscopic System through its
distributors in Europe, Australia, Mexico, Brazil, Argentina, Canada,
Taiwan, South Africa, Israel, Japan or Korea, successfully sell ESS
through Xomed, that the company will secure marketing partners for other
international markets, successfully sell its products in international
markets or that any of its international distributors and marketing
partners will commit the necessary resources to obtain additional
necessary international regulatory approvals on behalf of the company
and successfully sell the Arthroscopic System or other products in
international markets.
 
Limited Manufacturing Experience
 
The company's  manufacturing operations consist of an in-house
assembly operation for the manufacturing of Disposables, and a separate
in-house operation for the manufacturing of the System 2000 controllers.
The company's products are manufactured from several components, some of
which are supplied to the company by third parties. Manufacture of the
System 2000 controller, of which an earlier version was manufactured by
a third party, was brought in-house in late 1997 for the purposes of
maintaining process control, managing availability, and leveraging fixed
costs.
 
In December 1997, the company started manufacturing and selling
units of its System 2000 controllers. As a result, the company has
limited experience manufacturing controllers in the volumes necessary
for the company to achieve additional commercial sales, and there can be
no assurance that reliable, high-volume manufacturing can be achieved at
a commercially reasonable cost.  In addition, there can be no assurance
that the company or its suppliers will not encounter any manufacturing
difficulties, including problems involving regulatory compliance,
product recalls, production yields, quality control and assurance,
supplies of components or shortages of qualified personnel.
 
In April 1998, the company started manufacturing its System 5000
controllers for cosmetic surgery and only a small number of this model
of controllers have been manufactured and sold.  In the same time
period, the company began to manufacture limited numbers of disposable
disposables for ENT and cosmetic surgery applications.  As a result, the
company has limited experience manufacturing its current products for
ENT and cosmetic surgery in the volumes necessary for the company to
achieve additional commercial sales, and there can be no assurance that
reliable, high-volume manufacturing can be achieved at a commercially
reasonable cost.   In addition, there can be no assurance that the
company or its suppliers will not encounter any manufacturing
difficulties, including problems involving regulatory compliance,
product recalls, production yields, quality control and assurance,
supplies of components or shortages of qualified personnel.
 
The company and its component suppliers are required to operate in
conformance with FDA Quality System Regulation (QSR) requirements in
order to produce products for sale in the United States, and ISO 9001
standards in order to produce products for sale in Europe.  There can be
no assurance that the company or its component suppliers will remain in
compliance with the QSR or ISO 9001 standards.  Any failure by the
company or its component suppliers to remain in compliance with the QSR
or ISO 9001 standards could have a material adverse effect on the
company's  business, financial condition and results of operations.
 
 In addition, the Disposable is sterilized by a single
subcontractor and the connector housings at each end of the cable are
supplied  from a single source.  There can be no assurance that an
alternate sterilizer or connector housing supplier could be established
if necessary or that available inventories would be adequate to meet the
company's  product needs during any prolonged interruption of supply.
The company's  inability to secure an alternative sterilizer, if
required, would limit its ability to manufacture the company's
Arthroscopic System and would have a material adverse effect on the
company's  business, financial condition and results of operations.
 
In connection with regulatory inspections of the company's
manufacturing facility in Sunnyvale, California, the FDA issued the
company FDA Form 483, which detailed specific areas where the FDA
observed that the company's operations were not in full compliance with
some areas of the QSR.  The company has responded to the FDA, and has
implemented corrective changes and believes that it is in good standing
with the FDA.
 
History of Losses; Fluctuations in Operating Results; Losses Expected to
Continue
 
The company has experienced significant operating losses since
inception and, as of October 3, 1998, had an accumulated deficit of
$27.2 million.  The company expects to generate additional losses due to
increased operating expenditures primarily attributable to the expansion
of marketing and sales activities, the launch of additional product
lines (including CSS and ESS), increased research and development and
activities to support regulatory applications.  Results of operations
may fluctuate significantly from quarter to quarter due to the timing of
such expenditures, absence of a backlog of orders, timing of the receipt
of orders, and promotional programs for the company's  products.  The
company's  revenues and profitability will be critically dependent on
whether it can successfully continue to market its soft-tissue surgery
systems. In addition, the company's  gross margins may be adversely
affected due to the necessity to promote and sell its products at
significantly reduced prices.  There can be no assurance that
significant profitability will ever be achieved.
 
Patents and Proprietary Rights
 
The company's  ability to compete effectively depends in part on
developing and maintaining the proprietary aspects of its platform
Coblation technology. The company owns eleven issued United States
patents, and has filed more than 45 pending United States patent
applications and additional international patent applications in Europe
(covering 16 separate countries), Japan, Canada, Australia and New
Zealand corresponding to fourteen of the United States filings relating
to its Coblation technology. The initial patent is currently set to
expire in 2008, three issued patents are currently expected to expire
between 2008 and 2012 and the other seven patents are expected to expire
between 2014 and 2016. The company believes that the issued patents
cover both the core technology used in the company's  soft-tissue surgery
systems, including both multielectrode and single-electrode
configurations of its disposable tools, as well as the use of Coblation
technology in specific surgical procedures.
 
There can be no assurance that the patents that have been issued
to the company or any patents which may be issued as a result of the
company's  United States or international patent applications will
provide any competitive advantages for the company's  products or that
they will not be successfully challenged, invalidated or circumvented in
the future.  In addition, there can be no assurance that competitors,
many of which have substantial resources and have made significant
investments in competing technologies, will not seek to apply for and
obtain patents that will prevent, limit or interfere with the company's
ability to make, use and sell its products either in the United States
or in international markets.
 
A number of medical device and other companies, universities and
research institutions have filed patent applications or have issued
patents relating to monopolar and/or bipolar electrosurgical methods and
apparatus.  If third-party patents or patent applications contain claims
infringed by the company's  technology and such claims are ultimately
determined to be valid, there can be no assurance that the company would
be able to obtain licenses to those patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology, either of
which would have a material adverse effect on the company's  business,
financial condition and results of operations.  There can be no
assurance that the company will not be obligated to defend itself in
court against allegations of infringement of third-party patents.
 
In addition to patents, the company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements.  The company
requires its key employees and consultants to execute confidentiality
agreements upon the commencement of an employment or consulting
relationship with the company.  These agreements generally provide that
all confidential information, developed or made known to the individual
by the company during the course of the individual's relationship with
the company, is to be kept confidential and not disclosed to third
parties.  These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to the
company shall be the exclusive property of the company.  There can be no
assurance that such agreements will not be breached, that the company
would have adequate remedies for any breach or that the company's  trade
secrets will not otherwise become known to or be independently developed
by competitors.
 
Patent Litigation
 
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual
property litigation to gain a competitive advantage.  There can be no
assurance that the company will not become subject to patent
infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office ("USPTO") to determine
the priority of inventions.  On February 13, 1998, the company filed a
lawsuit (the "Lawsuit") against Ethicon, Inc., Mitek Surgical Products,
a division of Ethicon, Inc. and GyneCare, Inc. alleging, among other
things, infringement of several of the company's  patents.  See Part II,
Item I of this quarterly Report on Form 10-Q.  The defense and
prosecution of the Lawsuit and intellectual property suits generally,
USPTO interference proceedings and related legal and administrative
proceedings are both costly and time-consuming.  The company believes
that the Lawsuit is necessary and if others violate the proprietary
rights of the company, further litigation may be necessary to enforce
patents issued to the company, to protect trade secrets or know-how
owned by the company or to determine the enforceability, scope and
validity of the proprietary rights of others.  Any litigation or
interference proceedings will result in substantial expense to the
company and significant diversion of effort by the company's  technical
and management personnel.  An adverse determination in the Lawsuit or
other litigation or interference proceedings to which the company may
become a party could subject the company to significant liabilities to
third parties, require disputed rights to be licensed from third parties
or require the company to cease using such technology.  Although patent
and intellectual property disputes in the medical device area have often
been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing
royalties.  Furthermore, there can be no assurance that necessary
licenses would be available to the company on satisfactory terms, if at
all. Adverse determinations in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the company from
manufacturing and selling its products, which would have a material
adverse effect on the company's  business, financial condition and
results of operations.
 
Competition
 
The arthroscopic medical device industry is intensely competitive.
The company's Coblation technology is replacing older tissue removal
technology, such as laser systems, conventional electrosurgical systems,
manual instruments and power shavers, in arthroscopic procedures.
Consequently, the company competes indirectly with the providers of such
tissue removal systems because the company must convert customers over
to its Coblation technology.  Many of these competitors have significantly
greater financial, manufacturing, marketing, distribution and technical
resources than the company. Smith & Nephew Endoscopy (which owns Acufex
Microsurgical, Inc. and Dyonics, Inc.), Conmed Corporation (including
its Linvatec unit) and Stryker Corporation  each have large shares of
the market for manual instruments, power shavers and arthroscopes.
These companies offer broad product lines, which they may offer as a
single package; have substantially greater resources and name
recognition than the company; and frequently offer significant discounts
as a competitive tactic.  There can be no assurance that the company can
effectively convince surgeons and physicians to adopt the company's
Coblation technology in the face of such competition.  In addition,
there can be no assurance that these or other companies will not succeed
in developing technologies and products that are more effective than the
company's or that would render the company's technology or products
obsolete or uncompetitive.
 
Johnson & Johnson (including Mitek, a division of its Ethican
unit) is marketing a bipolar electrosurgical tool developed by Gyrus
Medical Ltd, a company based in the United Kingdom.  The bipolar
electrosurgical tool marketed by Mitek competes directly with the
company's tissue ablation and shrinkage technology in arthroscopy.  In
order to successfully compete against Mitek, the company anticipates
that it may have to continue to offer substantial discounts on its
controller in order to increase demand for the disposables, and that
such competition could have a material adverse effect on the company's
business, financial condition and results of operation.  Furthermore,
certain of the company's competitors, including Ethicon, utilize
purchasing contracts that link discounts on the purchase of one product
to purchases of other products in their broad product lines.  Many of
the hospitals in the United States have purchasing contracts with such
competitors of the company. Accordingly, customers may be dissuaded from
purchasing the company's products rather than the products of such
competitors to the extent the purchase would cause them to lose
discounts on products that they regularly purchase from such
competitors.
 
Oratec Interventions Inc.,  a company based in Menlo Park, California,
manufactures and sells a monopolar tissue shrinkage system that competes
directly with the company's tissue shrinkage products.  The tissue
shrinkage market represents a small portion of the overall market in
arthroscopy, for the company's products.
 
The ENT medical device industry is rapidly becoming more
competitive.  The company  has an exclusive license and distribution
agreement with Xomed Surgical Products, which is currently the largest
company focused solely on the ENT market, see "ADDITIONAL FACTORS THAT
MIGHT AFFECT FUTURE RESULTS - Dependence on Collaborative Arrangements"
on page 19 of this Quarterly Report on Form 10-Q.  However, other large
companies, such as Smith & Nephew, Stryker Corp. and Conmed Corporation
(including its Linvatec unit) each have shares of the market for manual
instruments, such as microdebriders for endoscopic sinus surgery.  In
addition, the company faces competition with much larger laser
companies, such as ESC Medical Systems of Tel Aviv, Isreal, that
developes and markets lasers for certain ENT applications, such as
laser-assisted uvuloplasty (LAVP).  The company expects that competition
from these and other well-established competitors will increase as will
competition from start-up and small cap medical device companies, such
as Somnus Medical Technologies, a company based in Sunnyvale,
California, Elmed Inc. of Addison, Illinois and Ellman International,
Inc. of Hewlett, New York.  Somnus manufactures and sells medical
devices that utilize RF technology for the treatment of upper airway
disorders, such as snoring, enlarged turbinates, and obstructive sleep
apnea.  Elmed and Ellman both manufacture and sell a variety of medical
devices that use conventional RF technology for tissue dessication,
cutting and/or coagulation in turbinate surgery, the treatment of
snoring and other ENT procedures.
 
The cosmetic surgery industry includes a number of  large and well
established companies that provide devices for rejuvenating facial skin,
hair removal, scar removal, the treatment of vascular and pigmented
lesions and other applications,  including companies that manufacture
and sell dermabrasion equipment or chemical peels, and companies that
manufacture and sell CO2 and Er:YAG lasers.  In skin resurfacing, the
company will directly compete with much larger companies that
manufacture lasers for medical use,  such as Coherent Medical Group of
Santa Clara, California and ESC Medical Systems of Tel Aviv, Isreal.
ESC recently merged with Laser Industries, Ltd, already one of the
largest medical laser manufacturers in the world.  The combined company
develops and markets lasers for a broad range of cosmetic applications
including the non-invasive treatment of varicose veins and other benign
vascular lesions, hair removal, skin rejuvenation and others.  In
addition, other large companies manufacture and sell medical devices
that use RF energy for certain applications in dermatology and cosmetic
surgery.  One such company is Conmed Corporation, which currently sells
medical devices for electrodessication, fulguration and coagulation in
office based dermatology procedures.
 
The company has received 510(k) premarket notifications for
clearance to market tissue ablation products to treat certain
urological, periodontal, dermatological, ear/nose/throat and general
surgical conditions and has filed 510(k) premarket notification for
clearance to market products for gynecological conditions; the FDA has
indicated that the 510(k) submission for certain gynecological
conditions must be supported by data from clinical trials. These fields
are intensely competitive and no assurance can be given that these
potential products, if approved, would be successfully marketed.
 
Uncertainty of Approvals; Extensive Governmental Regulation
 
United States
 
The company's  products are regulated in the United States as
medical devices by the FDA under the Federal Food, Drug, and Cosmetic
Act (FDC Act) and require premarket clearance or approval by the FDA
prior to commercialization. In addition, certain design, process,
material changes or modifications to medical devices also are subject to
FDA review and clearance or approval. Pursuant to the FDC Act, the FDA
regulates the research, testing, design, manufacture, safety, labeling,
storage, record keeping, advertising, distribution and production of
medical devices in the United States. Noncompliance with applicable
requirements can result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or
premarket approval for devices, and criminal prosecution. Failure to
comply with the regulatory requirements could have a material adverse
effect on the company's  business, financial condition and results of
operations.
 
Generally, before a new device can be introduced into the market
in the United States, the manufacturer or distributor must obtain FDA
clearance of a 510(k) notification or approval of a premarket approval
application (PMA). If a medical device manufacturer or distributor can
establish that a device is "substantially equivalent" to a legally
marketed Class I or Class II device, or to a Class III device for which
the FDA has not required PMAs, the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k)
notification. The 510(k) notification will need to be supported by
appropriate data establishing the claim of substantial equivalence to
the satisfaction of the FDA. The FDA recently has been requiring a more
rigorous demonstration of substantial equivalence.  Following submission
of the 510(k) notification, the manufacturer or distributor may not
place the device into commercial distribution until an order is issued
by the FDA.  At this time, the FDA typically responds to the submission
of a 510(k) notification within 90 to 120 days, but it may take longer.
The FDA order may declare that the device is substantially equivalent to
another legally marketed device and allow the proposed device to be
marketed in the United States. The FDA, however, may determine that the
proposed device is not substantially equivalent or require further
information, including clinical data, to make a determination regarding
substantial equivalence. Such determination or request for additional
information could be costly and delay market introduction of the
products that are the subject of the 510(k) notification.
 
The company has received clearance of 510(k) premarket
notifications to market its Arthroscopic System for surgery of the knee,
shoulder, elbow, wrist, hip and ankle joints. In addition, the company
has received 510(k) premarket notifications to market CSS in general
dermatology procedures and is pursuing additional clearances that will
allow CSS to be marketed in the United States specifically for wrinkle
removal. With respect to ESS, the company has received clearance of
510(k) premarket notifications to market ESS in general head and neck
surgical procedures, and has received regulatory clearance that will
allow ESS to be marketed in the United States for certain specific
indications while it is pursuing additional clearances for certain other
indications.  There can be no assurance that the company will be able to
obtain necessary clearances or approvals to market any other products on
a timely basis, if at all, and delays in receipt or failure to receive
such clearances or approvals, the loss of previously received clearances
or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the company's
business, financial condition and results of operations.
 
If a manufacturer or distributor of medical devices cannot
establish that a proposed device is substantially equivalent to a
legally marketed device, the manufacturer or distributor must seek
premarket approval of the proposed device through submission of a PMA
application. The PMA application approval process can be expensive,
uncertain and lengthy. A number of devices for which premarket approval
has been sought have never been approved for marketing. The review time
is often significantly extended by the FDA, which may require more
information or clarification of information already provided in the
submission. In addition, the FDA will inspect the manufacturing facility
prior to approval to ensure compliance with the FDA's QSR.  If granted,
the approval of the PMA application may include significant limitations
on the indicated uses for which a product may be marketed.
 
If necessary, the company may file a PMA application with the FDA
for approval to sell its potential products commercially in the United
States when it has developed such products. There can be no assurance
that the company will be able to obtain necessary PMA application
approvals to market such products on a timely basis, if at all, and
delays in receipt or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
the company's  business, financial condition and results of operations.
 
The company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the California
Department of Health Services (CDHS) and to list its products with the
FDA. As such, the company is subject to periodic inspections by both the
FDA and the CDHS for compliance with the FDA's QSR and other applicable
regulations. These regulations require that the company maintain its
documents in a prescribed manner with respect to manufacturing, testing
and control activities.  There can be no assurance that the company will
not encounter any manufacturing difficulties, or that they will not
experience difficulties, including problems involving regulatory
compliance, product recalls, production yields, quality control and
assurance, supplies of components or shortages of qualified personnel.
 
Regulations regarding the manufacture and sale of the company's
products are subject to change. The company cannot predict the effect,
if any, that such changes might have on its business, financial
condition or results of operations.
 
International
 
International sales of the company's  products are subject to the
regulatory agency product registration requirements of each country. The
regulatory review process varies from country to country. The company
has obtained regulatory clearance to market the Arthroscopic System in
Australia, Europe, Canada and Mexico, to market CSS in Europe and Canada
and is currently seeking approval for ESS in Europe but has not obtained
any other international regulatory approvals permitting sales of its
products outside of the United States. The company is seeking and
intends to seek regulatory approvals in certain other international
markets. There can be no assurance, however, that such approvals will be
obtained on a timely basis or at all.
 
For European distribution, the company has received ISO 9001
certification and the CE mark. ISO 9001 certification standards for
quality operations have been developed to ensure that companies know, on
a worldwide basis, the standards of quality to which they will be held.
The European Union has promulgated rules requiring medical products to
receive the CE mark, an international symbol of quality and compliance
with applicable European medical device directives. Failure to maintain
the CE mark will prohibit the company from selling its products in
Europe. ISO 9001 certification in conjunction with demonstrated
performance to the medical device directive is one of the alternatives
available to meet the CE mark requirements. There can be no assurance
that the company will be successful in maintaining certification
requirements.
 
 
 
 
Uncertainty Relating to Third-Party Reimbursement
 
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices, such as the company's
products, generally rely on third-party payors, principally federal
Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical
device is being used. Reimbursement for arthroscopic, cosmetic and ENT
procedures performed using devices that have received FDA approval has
generally been available in the United States.  In addition, certain
health care providers are moving toward a managed care system in which
such providers contract to provide comprehensive health care for a fixed
cost per person. Managed care providers are attempting to control the
cost of health care by authorizing fewer elective surgical procedures,
such as certain knee and shoulder, ankle, wrist, elbow and hip
arthroscopic procedures.
 
The company is unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. The
company anticipates that in a prospective payment system, such as the
diagnosis related group (DRG) system utilized by Medicare, and in many
managed care systems used by private health care payors, the cost of the
company's  products will be incorporated into the overall cost of the
procedure and that there will be no separate, additional reimbursement
for the company's  products. The company anticipates that hospital
administrators and physicians will justify the use of the company's
products by the apparent cost savings and clinical benefits that the
company believes will be derived from the use of its products. However,
there can be no assurance that this will be the case. Furthermore, the
company could be adversely affected by changes in reimbursement policies
of governmental or private health care payors, particularly to the
extent any such changes affect reimbursement for procedures in which the
company's  products are used.  Failure by physicians, hospitals and other
users of the company's  products to obtain sufficient reimbursement from
health care payors for procedures in which the company's  products are
used or adverse changes in governmental and private third-party payors,
policies toward reimbursement for such procedures would have a material
adverse effect on the company's  business, financial condition and
results of operations.
 
If the company obtains the necessary international regulatory
approvals, market acceptance of the company's  products in international
markets would be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems.
Reimbursement and health care payment systems in international markets
vary significantly by country, and include both government-sponsored
health care and private insurance. The company intends to seek
international reimbursement approvals, although there can be no
assurance that any such approvals will be obtained in a timely manner,
if at all.
 
Uncertainty of New Product Development
 
The company has undertaken preliminary animal studies and
development for the use of its Coblation technology with its controller
in several fields.  The company has received 510(k) clearance for use of
its technology in certain of these fields.  The company has received
approval of an Investigational Device Exemption (IDE) to conduct a
clinical study on a specific indication.  Following the completion of
this study, the company may submit a 510(k) application to the FDA.
 
Each of the company's   potential products that may result from
these investigations are in early stages of development, and the company
may be required to undertake time-consuming and costly development
activities and seek regulatory approval of these devices.  There can be
no assurance that product development will ever be successfully
completed, that PMA or 510(k) applications, if applied for, will be
granted by the FDA on a timely basis, if at all, or that the products
will ever achieve commercial acceptance.  Failure by the company to
develop, obtain necessary regulatory approval for or to successfully
market new products could have a material adverse effect on the
company's  business, financial condition and results of operations.
 
Product Liability Risk; Limited Insurance Coverage
 
The development, manufacture and sale of medical products entail
significant risk of product liability claims. The company's  current
product liability insurance coverage limits are $7,000,000 per
occurrence and $7,000,000 in the aggregate.  There can be no assurance
that such coverage limits are adequate to protect the company from any
liabilities it might incur in connection with the development,
manufacture and sale of its products.  In addition, the company may
require increased product liability coverage if any potential products
are successfully commercialized.  Product liability insurance is
expensive and in the future may not be available to the company on
acceptable terms, if at all.  The company has been selling its
Arthroscopic System since December 1995 and recently commenced sales of
CSS and ESS and has not experienced any product liability claims to
date.  However, a successful product liability claim or series of claims
brought against the company in excess of its insurance coverage could
have a material adverse effect on the company's  business, financial
condition and results of operations.
 
Dependence on Key Personnel and Key Consultants
 
The company is dependent upon a number of key management and
technical personnel.  The loss of the services of one or more key
employees or consultants could have a material adverse effect on the
company.  The company's  success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel.  The company faces intense competition for qualified
personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the company will be able to
attract and retain such personnel.  Furthermore, the company's
scientific advisory board members all are otherwise employed on a
full-time basis.  As a result, the scientific advisory board members are
not available to devote their full time or attention to the company's
affairs.
 
Significant Influence by Directors, Executive Officers and Affiliated
Entities
 
The company's  directors, executive officers and entities
affiliated with them, in the aggregate, beneficially own approximately
45% of the company's  common stock.  These stockholders, if acting
together, will have significant influence over all matters requiring
approval by the stockholders of the company, including the election of
directors and the approval of mergers or other business combination
transactions.
 
 
 
 
Potential Volatility of Stock Price
 
The stock markets have experienced price and volume fluctuations
that have particularly affected medical technology companies, resulting
in changes in the market prices of the stocks of many companies that may
not have been directly related to the operating performance of those
companies.  Such broad market fluctuations may adversely affect the
market price of the company's  common stock.  In addition, the market
price of the company's  common stock may be highly volatile.  Factors
such as variations in the company's  financial results, comments by
security analysts, announcements of technological innovations or new
products by the company or its competitors, changing government
regulations and developments with respect to FDA submissions, patents,
proprietary rights or litigation may have a significant adverse effect
on the market price of the company's common stock.
 
Anti-Takeover Effect of Stockholder Rights Plan and Certain Charter and
Bylaw Provisions
 
In November 1996, the company's  Board of Directors adopted a
Stockholder Rights Plan.  The Stockholder Rights Plan provides for a
dividend distribution of one Preferred Shares Purchase Right (a Right)
on each outstanding share of the company's  common stock.  Each Right
entitles stockholders to buy 1/1000th of a share of the company's  Series
A participating preferred stock at an exercise price of $50.00.  The
Rights will become exercisable following the tenth day after a person or
group announces acquisition of 15% or more of the company's  common
stock, or announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15% or more of
the company's  common stock.  The company will be entitled to redeem the
Rights at $0.01 per Right at any time on or before the tenth day
following acquisition by a person or group of 15% or more of the
company's  common stock.
 
The Stockholder Rights Plan and certain provisions of the
company's  Certificate of Incorporation and Bylaws may have the effect of
making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire control of the
company.  This could limit the price that certain investors might be
willing to pay in the future for shares of the company's  common stock.
Certain provisions of the company's  Certificate of Incorporation and
Bylaws allow the company to issue preferred stock without any vote or
further action by the stockholders, eliminate the right of stockholders
to act by written consent without a meeting and to call a special
meeting of the stockholders, specify procedures for director nominations
by stockholders and submission of other proposals for consideration at
stockholder meetings, and eliminate cumulative voting in the election of
directors.  Certain provisions of Delaware law applicable to the company
could also delay or make more difficult a merger, tender offer or proxy
contest involving the company, including Section 203, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain
conditions are met.  The Stockholder Rights Plan, the possible issuance
of preferred stock, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the company,
including without limitation, discouraging a proxy contest or making
more difficult the acquisition of a substantial block of the company's
common stock.  These provisions could also limit the price that
investors might be willing to pay in the future for
shares of the company's  common stock.
 
Lack of Dividends
 
The company has not paid any dividends and does not anticipate
paying any dividends in the foreseeable future
 
 PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
On February 13, 1998, the company filed a lawsuit against Ethicon, Inc.
Mitek Surgical Products, a division of Ethicon, Inc. and GyneCare, Inc.
(the Defendants) in the United States District Court for the Northern
District of California.   The lawsuit alleges, among other things, that
the Defendants have been and are currently infringing four patents
issued to the company in December 1997.  Specifically, the Defendants
use, market and sell two separate electrosurgical systems under the
names of  "VAPR" and "VersaPoint" which infringe these patents.  The
company seeks: (1) a judgment that the Defendants have infringed these
patents; (2) to preliminarily and permanently restrain and enjoin the
Defendants from marketing and selling the VAPR and VersaPoint systems;
and (3) an award of damages (including attorneys' fees) to compensate
the company for lost profits, the damages to be trebled because of the
Defendants' willful infringement.  In addition, the company filed a
motion on March 5, 1998 for preliminary injunction against the
Defendants marketing and selling of the VAPR system.  On June 15, 1998,
the court held a claim construction hearing ("Markman hearing") to
determine the meaning of the claims of the patents in suit as a matter
of law.  On July 6, 1998, the court issued a Memorandum Decision and
Order in which all of the claims were construed in ArthroCare's favor.
On September 18, 1998, the court held an evidentiary hearing on the
motion for preliminary injunction.  The motion is still pending.
 
Item 2.  Changes in Securities
 
None
 
Item 3.  Defaults upon Senior Securities
 
None
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
None
 
Item 5.  Other Information
 
With respect to stockholer proposals not included in the company's proxy
statement for the 1999 Annual Meeting of Stockholders, the persons named
entitled to exercise the discretionary voting power conferred by such proxy
under the circumstances' specified in Rule 14a-4(c) under the Securities
Exchange Act of 1934, as amended, including with respect to proposals
received by the  company within forty-five (45) days of the date of mailing
of the proxy statement for the 1999 Annual Meeting of Stockholders.
 
 
 
 
 
 
 
 
Item 6.  Exhibits and Reports on Form 8 - K
 
a)  Exhibits
 
3.2  (1) Certificate of Incorporation of the Registrant.
 
 
3.3      Amended Restated Bylaws of the Registrant.
 
4.1  (1) Specimen Common Stock Certificate.
 
10.1 (1) Form of Indemnification Agreement between the Registrant and each of
         its directors and officers.
 
10.2 (1) Incentive Stock Plan and form of Stock Option Agreement thereunder.
 
10.3 (1) Director Option Plan and form of Director Stock Option Agreement
         thereunder.
 
10.4 (1) Employee Stock Purchase Plan and forms of agreements thereunder.
 
10.5 (1) Form of Exclusive Distribution Agreement.
 
10.6 (1) Form of Exclusive Sales Representative Agreement.
 
10.7 (1) Consulting Agreement, dated May 10, 1993, between the Registrant and
         Philip E. Eggers, and amendment thereto.
 
10.8 (1) Consulting Agreement, dated May 20, 1993, between the Registrant and
         Eggers &  Associates, Inc., and amendment thereto.
 
10.9 (1) Lease Agreement, dated September 15, 1994, between Registrant and The
          Arrillaga Foundation and the Perry Foundation for  the Registrant's
          facility located at 595 North Pastoria Avenue, Sunnyvale, California
          94086.
 
10.10 (1) Employment Letter Agreement, dated October 21, 1994, between the
          Registrant and Allan  Weinstein and amendment thereto.
 
10.11 (1) Purchase Assistance Promissory Note, dated January 19, 1995, between
          Registrant and Allan Weinstein.
 
10.12 (1) Mortgage Assistance Promissory Note Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.
 
10.13 (1) Restricted Stock Purchase and Security Agreement, dated February 5,
          1995, between the Registrant and Allan Weinstein.
 
10.14 (1) Employment Letter Agreement, dated July 18, 1995, between the
          Registrant and Robert T. Hagan.
 
10.15 (1) Restricted Stock Purchase and Security Agreement, dated August 1,
          1995, between the Registrant and Robert T. Hagan.
 
10.16 (1) + Radiation Services Agreement, dated September 13, 1995, between
          the Registrant and SteriGenics International.
 
10.17 (1) Amended and Restated Stockholder Rights Agreement, dated October 16,
          1995, between the Registrant and certain holders of the Registrant's
          securities.
 
10.18 (1) Contribution Agreement, dated March 31, 1995, by and among Philip E.
          Eggers, Robert S. Garvie, Anthony J. Manlove, Hira  V. Thapliyal and
          the Registrant.
 
10.19 (2) Preferred Stock Rights Agreement, dated November 14, 1996, between
          the Registrant and Norwest Bank Minnesota, N.A.
 
10.19 A  (7) Amended Preferred Shares Rights Agreement, dated October 2, 1998,
          between the Registrant and Norwest Bank Minnesota, N.A.
 
10.20 (6) + Exclusive Distributor Agreement, dated April 15, 1997, between the
          Registrant and Arthrex, Gmbh.
 
10.21 (4) Employment Letter Agreement, dated June 20, 1997, between the
          Registrant and Michael A. Baker.
 
10.22 (5) + Exclusive Distributor Agreement, dated August 21, 1997, between the
          Registrant and Kobayashi Pharmaceutical Company, Ltd.
 
10.23 (6) + License Agreement dated February 9, 1998, between the Registrant
          and Boston Scientific Corporation.
 
10.24 (6) + Development and Supply Agreement dated February 9, 1998, between
          the Registrant and Boston Scientific Corporation.
 
10.25 (6) Lease Agreement dated March 25, 1998 between the Registrant and Aetna
          Life Insurance company for the Registrant's facility located at 840
          Del Rey Avenue, Sunnyvale, California 94086.
 
10.26 (7) Term sheet for License and Distribution Agreement between Xomed
          Surgical Products and the Registrant dated June 25, 1998.
 
 
27.1    Financial Data Schedule.
 
(1)     Incorporated herein by reference to the same-numbered exhibit
        previously filed with the Registrant's Registration Statement on
        Form S-1 (Registration No. 33-80453).
 
(2)     Incorporated herein by reference to Exhibit 5 previously filed
        with the Registrant's Registration Statement on Form 8-A
        (Registration No. 000-27422).
 
(3)     Incorporated herein by reference to the same-numbered exhibit
        previously filed with the Registrant's Quarterly Report on Form
        10-Q for the period ended March 29, 1997.
 
(4)     Incorporated herein by reference to the same-numbered exhibit
        previously filed with the Registrant's Quarterly Report on Form
        10-Q for the period ended June 28, 1997.
 
(5)     Incorporated herein by reference to the same numbered exhibit
        previously filed with the Registrant's Quarterly Report on Form
        10-Q for the period ended September 27, 1997.
 
(6)     Incorporated herein by reference to the same numbered exhibit
        previously filed with the Registrant's Annual Report on Form 10-K
        for the year ended January 3, 1998.
 
(7)     Incorporated herein by reference to Exhibit 1 previously filed with the
        Resgistration statement on Form 8-A/A (Registration No. 000-27422).
 
+       Confidential treatment granted.
 
 
b)  Reports on Form 8-K
None
 
 
<PAGE>
 
 
 
 
 
 
 
 
 
 
 
                            SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 
ARTHROCARE CORPORATION
a Delaware corporation
 
Date: November 17, 1998
 
/s/ CHRISTINE E. HANNI
Christine E. Hanni
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer
and Accounting Officer)
 
Date: November 17, 1998
 
/s/  MICHAEL A. BAKER
Michael A. Baker
President, Chief Executive
Officer and Director
(Principal Executive Officer)
 
 
 
<PAGE>
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                    EXHIBIT INDEX
 
Exhibit
Number                          Exhibit Description
 
3.3  Amended and Restated Bylaws of the Registrant.
       Surgical Products and the Registrant dated June 25, 1998.
 
 
27.1   Financial Data Schedule.