<PAGE>

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

                                    Form 10-Q

         [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended March 31, 2001.

                                       OR

         [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
              For the transition period from ________ to _______

                        Commission File Number: 0-27422

                            ArthroCare Corporation
            (Exact name of registrant as specified in its charter)

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


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

                                (408) 736-0224
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X   No ___
                                       ---

The number of shares outstanding of the registrant's common stock as of April
30, 2001 was 22,252,721.

                           Exhibit index on page 40
<PAGE>

                            ARTHROCARE CORPORATION

                                     INDEX

                                                                            Page
                                                                            ----

PART I:  Financial Information

   Item 1.  Financial Statements (unaudited)

      Condensed Consolidated Balance Sheets as of March 31, 2001
      and December 31, 2000                                                    2

      Condensed Consolidated Statements of Operations for the
       three-month periods ended March 31, 2001 and                            3
       March 31, 2000

      Condensed Consolidated Statements of Cash Flows
       for the three-month periods ended March 31, 2001 and March 31,
       2000                                                                    4

       Notes to Condensed Consolidated Financial Statements                  5-9

   Item 2.  Management's Discussion and Analysis of
       Financial Condition and Results of Operations                       10-31

   Item 3.  Quantitative and Qualitative Disclosures About Market Risk        31


PART II: Other Information

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


SIGNATURES                                                                    38

<PAGE>

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                            ARTHROCARE CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                     March 31,              December 31,
                                        ASSETS                          2001                    2000
                                                                     ----------             ------------
                                                                     (Unaudited)
<S>                                                                  <C>                    <C>
Current assets:
     Cash and cash equivalents                                         $ 58,148                $ 35,782
     Available-for-sale securities                                       20,764                  32,256
     Accounts receivable, net of allowances                              16,436                  16,209
     Inventories, net                                                    11,629                  13,702
     Deferred tax asset                                                   9,558                   9,558
     Prepaid expenses and other current assets                            1,934                   1,679
                                                                     ----------             -----------
          Total current assets                                          118,469                 109,186

Available-for-sale securities                                             9,175                  18,776
Property and equipment, net                                               9,904                   9,469
Deferred tax asset                                                        1,584                   1,584
Related party receivables                                                 1,205                   1,205
Other assets                                                                 --                     242
                                                                     ----------             -----------
         Total assets                                                $  140,337             $   140,462
                                                                     ==========             ===========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                $    3,489             $     3,985
     Accrued liabilities                                                  1,322                   1,629
     Accrued compensation                                                 2,280                   2,860
     Deferred revenue                                                       825                     825
     Capital lease obligations, current portion                              60                      60
                                                                     ----------             -----------
          Total current liabilities                                       7,976                   9,359

Capital lease obligations, less current portion                               8                      22
Deferred rent                                                                70                      85
Deferred revenue                                                          4,445                   4,651
                                                                     ----------             -----------
          Total liabilities                                              12,499                  14,117
                                                                     ----------             -----------

Contingencies (Note 7)

Stockholders' equity:
    Common stock                                                             22                      22
    Additional paid-in capital                                          138,207                 137,302
    Accumulated other comprehensive loss                                 (2,014)                   (620)
    Accumulated deficit                                                  (8,377)                (10,359)
                                                                     ----------             -----------
          Total stockholders' equity                                    127,838                 126,345
                                                                     ----------             -----------
 Total liabilities and stockholders' equity                          $  140,337             $   140,462
                                                                     ==========             ===========
</TABLE>

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

                                 Page 2 of 40
<PAGE>

                            ARTHROCARE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATION
               (in thousands, except per share data; unaudited)

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                               -------------------------------------
                                                                                 March 31,               March 31,
                                                                                    2001                   2000
                                                                               --------------          -------------
<S>                                                                            <C>                     <C>
Revenues:
     Product sales                                                             $       18,097          $      15,691
     Royalties, fees and other                                                            989                    481
                                                                               --------------          -------------
           Total revenues                                                              19,086                 16,172

Cost of product sales                                                                   6,655                  6,570
                                                                               --------------          -------------

     Gross profit                                                                      12,431                  9,602
                                                                               --------------          -------------
Operating expenses:

      Research and development                                                          1,878                  1,757

      Sales and marketing                                                               7,458                  4,896

      General and administrative                                                        1,042                  1,239
                                                                               --------------          -------------

           Total operating expenses                                                    10,378                  7,892
                                                                               --------------          -------------
              Income from operations                                                    2,053                  1,710

Interest and other income, net                                                          1,060                  1,071
                                                                               --------------          -------------

Income before income taxes                                                              3,113                  2,781

Income tax provisions                                                                   1,131                    229
                                                                               --------------          -------------
Net income before cumulative effect of a change in accounting principle                 1,982                  2,552
Cumulative effect on prior years of the application
of SAB 101 "Revenue Recognition In Financial Statements"                                   --                 (4,300)
                                                                               --------------          -------------
Net Income (Loss)                                                              $        1,982          $      (1,748)
                                                                               ==============          =============

Net income per share-basic:

Net income per share before cumulative effect of a change in accounting
principle                                                                      $         0.09          $        0.12

Cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements"                                                       --                  (0.20)
                                                                               --------------          -------------
Basic net income (loss) per share                                              $         0.09          $       (0.08)
                                                                               ==============          =============

Shares used in computing basic net income (loss) per share                             22,258                 21,836

Net income per share-diluted:
Net income per share before cumulative effect of a change in accounting
principle                                                                      $         0.09          $        0.11

Cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements"                                                       --                  (0.18)
                                                                               --------------          -------------
Diluted net income (loss) per share                                            $         0.09          $       (0.07)
                                                                               ==============          =============

Shares used in computing diluted net income (loss) per share                           23,285                 23,888
</TABLE>

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

                                 Page 3 of 40
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                              Three Months Ended
                                                                                        ------------------------------
                                                                                         March 31,         March 31,
                                                                                          2001                2000
                                                                                        ----------         -----------
<S>                                                                                     <C>                <C>
 Cash flows from operating activities:
      Net income (loss)                                                                 $    1,982         $    (1,748)
      Adjustments to reconcile net income to net cash provided by
       operating activities:
           Depreciation and amortization                                                     1,352                 851
           Amortization of deferred compensation and stock compensation expense                123                 364
           Provision for doubtful accounts receivable and product returns                      296                 (93)
           Provision for excess and obsolete inventory                                        (369)               (636)
           Deferred rent                                                                       (15)                 (4)

           Changes in operating assets and liabilities:
                Accounts receivable                                                         (1,207)             (3,120)
                Inventories                                                                  2,311              (1,162)
                Prepaid expenses and other current assets                                     (324)                 42
                Accounts payable                                                              (803)                203
                Accrued liabilities                                                           (887)                741
                Deferred revenue                                                              (206)              6,094
                Other assets                                                                   242                  --
                                                                                        ----------         -----------
                     Net cash provided by operating activities                               2,495               1,532
                                                                                        ----------         -----------

 Cash flows from investing activities:
      Purchases of property and equipment                                                   (1,787)             (1,460)
      Purchases of available-for-sale securities                                            (9,415)            (22,851)
      Sales or maturities of available-for-sale securities                                  30,506              20,624
                                                                                        ----------         -----------
                     Net cash provided by (used in) investing activities                    19,304              (3,687)
                                                                                        ----------         -----------

 Cash flows from financing activities:
      Issuance of notes receivable to related parties                                           --                  --
      Repayment of capital leases                                                              (14)                (20)
      Repayment of notes receivable from related parties                                        --                 273
      Proceeds from exercise of options to purchase common stock                               781               2,296
                                                                                        ----------         -----------
                     Net cash provided by financing activities                                 767               2,549
                                                                                        ----------         -----------

 Effect of exchange rate changes on cash                                                      (200)                (18)
                                                                                        ----------         -----------

 Net increase in cash and cash equivalents                                                  22,366                 376

 Cash and cash equivalents, beginning of period                                             35,782              47,875
                                                                                        ----------         -----------

 Cash and cash equivalents, end of period                                               $   58,148         $    48,251
                                                                                        ==========         ===========
</TABLE>

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

                                 Page 4 of 40
<PAGE>

                            ARTHROCARE CORPORATION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.       Basis of Presentation:

         In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position, results of operations and cash flows of ArthroCare Corporation and its
subsidiaries ("ArthroCare," "we," "us" or "our") for the periods indicated.
Interim results of operations are not necessarily indicative of the results to
be expected for the full year or any other interim periods. The notes to the
consolidated financial statements contained in our Form 10-K for the year ended
December 31, 2000 should be read in conjunction with these condensed
consolidated financial statements. The balance sheet at December 31, 2001 was
derived from our audited consolidated financial statements; however, the
financial statements in this report do not include all disclosures required by
generally accepted accounting principles.

         Our fiscal quarter ends fall on the Saturday closest to the last day of
the month. For presentation purposes both quarter end dates are shown as
March 31.

2.       Revenue Recognition

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

    We previously recognized non-refundable license fee and milestone revenue
when the fee was received or on completion of certain milestones. During the
quarter ended September 30, 2000, effective January 1, 2000, we adopted SEC
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
(SAB 101) and changed our method of accounting for license fees and milestones
to recognize such revenues over the term of the associated agreement unless the
fee or milestone is in exchange for products delivered or services performed
that represent the culmination of a separate earnings process. Amounts received
prior to revenue recognition are recorded as deferred revenue. The cumulative
effect of the change in accounting principle of $4.3 million (or $0.20 and $0.18
per share basic and diluted, respectively) was reported as a cumulative effect
of a change in accounting principle, retroactive to January 2, 2000. The
cumulative effect of the change in accounting principle includes license fee
revenues and deferred revenues that will be recognized over the lives of the
associated agreements.

                                 Page 5 of 40
<PAGE>

3.       Computation of Net Income Per Share:

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

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

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                              ------------------------------------------
                                                                                March 31,                   March 31,
                                                                                   2001                        2000
                                                                              ---------------              -------------
<S>                                                                           <C>                          <C>
Net income before cumulative effect of a change in accounting principle       $         1,982               $      2,552

Cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements"                                                       --                     (4,300)
                                                                              ---------------              -------------
Net income (loss)                                                             $         1,982              $      (1,748)
                                                                              ===============              =============

Shares calculation:
       Weighted average basic shares Outstanding                                       22,258                     21,836

       Options and warrants                                                             1,027                      2,052
                                                                              ---------------              -------------

Shares used in computing diluted net income (loss) per share                           23,285                     23,888
                                                                              ===============              =============
Net income per share-basic:

Net income per share before cumulative effect of a change in accounting
principle                                                                     $          0.09              $        0.12

Cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements"                                          $            --              $       (0.20)
                                                                              ---------------              -------------

Basic net income (loss) per share                                             $          0.09              $       (0.08)
                                                                              ===============              =============

Net income per share-diluted:
Net income per share before cumulative effect of a change in accounting
principle                                                                     $          0.09              $        0.11
                                                                              ===============              =============

Cumulative effect on prior years of the application of SAB 101 "Revenue
Recognition in Financial Statements"                                                       --                       0.18
                                                                              ---------------             --------------

Diluted net income (loss) per share                                           $          0.09              $       (0.07)
                                                                              ===============              =============
</TABLE>

                                 Page 6 of 40
<PAGE>

         Options to purchase 1,342,350 shares of common stock at prices ranging
from $19.44-$48.56 per share were outstanding during the three-month period
ended March 31 2001, but were not included in the computation of diluted
earnings per share because the option's exercise price was greater than the
average market price of the common stock during the period. Options to purchase
316,481 shares of common stock at prices ranging from $17.25-$24.25 per share
were outstanding during the three-month period ended March 31, 2000, but were
not included in the computation of diluted earnings per share because the
option's exercise price was greater than the average market price of the common
stock during the period .

4.   Taxes:

         Our effective tax rates for the periods ended March 31, 2001 and March
31, 2000 were 36% and 8%, respectively. The increase in the effective tax rate
is attributable principally to changes in the valuation allowance for deferred
tax assets. Historically we have established deferred tax assets arising from
federal net operating loss carryforwards, federal tax credit carryforwards as
well as from other timing differences. These deferred tax assets have been
offset in total by a valuation allowance due to the uncertainty surrounding the
realization of such assets. During the quarter ended September 30, 2000 we
decreased the valuation allowance and recognized a tax benefit relating to the
above items based on management's belief that it is more likely than not that
these deferred tax assets will be realized. During the quarter ended March 31,
2000 our effective tax rate was reduced by the use of the net operating loss
carryforwards generated in prior years.


                                Page 7 of 40
<PAGE>

5.    Comprehensive Income:

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

                                                    Three Months Ended
                                                -------------------------
                                                  March 31,     March 31,
                                                    2001          2000
                                                ------------    ---------

 Net income (loss)                                $  1,982       $  (1,748)
   Other comprehensive income:

   Change in unrealized gains and
      losses on available-for-sale
      marketable securities                           (208)            (85)

   Foreign currency translation adjustment          (1,186)            (18)
                                                  --------       ---------
          Comprehensive net income (loss)         $    588       $  (1,851)
                                                  ========       =========


6.    Balance Sheet Detail (in thousands):

                                                 March 31,     December 31,
                                                   2001            2000
                                              --------------   ------------

Inventories:
    Raw materials                                 $  4,783       $   5,915
    Work-in-process                                  2,450           3,278
    Finished goods                                   4,396           4,509
                                                  --------       ---------
Total                                             $ 11,629       $  13,702
                                                  ========       =========

                                 Page 8 of 40
<PAGE>

7.   Litigation:

     We are currently involved in ongoing litigation. On February 18, 2000, we
filed a complaint for declaratory relief in the Superior Court of California,
County of Santa Clara against a former independent contractor who alleges that
he is owed options under our stock option plan. On July 31, 2000, the defendant
filed a counterclaim in the United States District Court, Northern District
of California asserting breach of contract and ownership rights in certain of
ArthroCare's patents, among other claims and monetary damages. We believe these
claims are groundless and plan to vigorously defend against them.

8.   Segment Information:

     We have organized our marketing and sales efforts into business units based
on product markets. These business units are comprised of the following:
Arthroscopy, Spinal Surgery (including neurosurgery), ENTec (ear, nose and
throat surgery), Visage (cosmetic surgery), AngioCare (cardiology applications)
and Other (including general surgery). Product sales for the three-month period
ended March 31, 2001 for Arthroscopy, ENTec, and Spinal Surgery were $14.6
million, $1.4 million and $1.2 million, respectively. Product sales for the
remaining business units were $0.9 million for the current three-month period.
For the prior-year period product sales for Arthroscopy and Visage were $12.9
million and $2.6 million, respectively. Product sales for the remaining business
units were $0.2 million in the prior-year period.

     Income (loss) from operations for the three month period ended March 31,
2001, for Arthroscopy, ENTec and Spinal Surgery were $4.3 million, ($0.3)
million and ($0.1) million, respectively. Income (loss) for the remaining
business units $0.5 million. For the prior-year period income (loss) for
Arthroscopy and Visage were $3.8 million and $1.2 million respectively. Income
(loss) for the remaining business units was ($1.0) million for the prior-year
period. Our reportable segments do not include certain corporate expenses that
amounted to ($2.3) million for the three months ended March 31, 2001 and March
31, 2000.

                                 Page 9 of 40
<PAGE>

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

Overview

     Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which express that ArthroCare Corporation
("ArthroCare" "we," "us," or "our") "believes", "anticipates", "intends",
"estimates", "expects" or "plans to", as well as other statements which are not
historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual events or results may
differ materially as a result of the risks and uncertainties described herein
and elsewhere including, in particular, those factors described under "Business"
set forth in Part I of our Annual Report on Form 10-K for the year ended
December 31, 2000 and "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set
forth below.

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

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

                                 Page 11 of 40
<PAGE>

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

     We commercially introduced our Arthroscopic Surgery System in December
1995 and have derived a significant portion of our sales from this system. We
are marketing and selling our arthroscopic, ENT and spinal surgery products in
the United States through a network of direct sales representatives and
independent distributors supported by regional managers. We have more than 141
distributors representing more than 680 field sales representatives in the
United States. We have also established distribution capability in Europe,
Australia, New Zealand, China, Korea, Japan, Taiwan, Canada, Mexico, the
Caribbean, Russia, South Africa, the Middle East, Northern Africa and South and
Central America. In addition, we have entered into a license agreement under
which the SciMed division of Boston Scientific Corporation will develop, obtain
regulatory approval for and market products based on Coblation technology for a
specific application within the cardiology market. We have entered into a
distribution agreement with Integra NeuroSciences, a division of Integra
LifeSciences Holding Corporation ("Integra"), for Integra to be our exclusive
sales and distribution partner in certain countries for our products in the
neurosurgical market.

     We have received 510(k) clearance for use of our technology in several
additional fields. We cannot be sure that any of our clinical studies in other
fields will lead to 510(k) applications or that the applications will be cleared
by the FDA on a timely basis, if at all. In addition, we cannot be sure that the
products, if cleared for marketing, will ever achieve commercial acceptance.

Results of Operations

Revenues:

     Product sales for the three-month period ended March 31, 2001 were $18.1
million, an increase of $2.4 million, or 15%, from $15.7 million for the prior
year period.

                                 Page 12 of 40
<PAGE>
The increase in product sales for the current three-month period resulted
primarily from the number of unit shipments of disposable devices and an
increase in the list price. The higher unit volume of sales resulted primarily
from increased demand for newly introduced models of disposable devices and
sales of devices in the ENT and spinal surgery markets, and increasing
international sales. We attribute increasing disposable device sales to our
strategic plan to build market share through continued promotional programs of
controller placements, to commercialization of our technology in fields outside
of arthroscopy and by continuing to introduce new products designed to address
surgical procedures that have traditionally been difficult to perform.

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

         International product sales for the three-month period ended March 31,
2001 were 9% of total product sales, compared to 10%, of product sales, for the
same period of the prior year.

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

         License fees and royalty income was $0.9 million for the three-month
period ended March 31, 2001, as compared to $0.5 million for the three-month
periods ended March 31, 2000. Effective January 1, we implemented SAB 101, which
relates to timing of recognition of certain up-front license fees and milestone
payments. The difference in royalties, fees and other revenue in the current
three-month period compared to the same period in the prior year is primarily
due to the timing of licensing payments and royalties due from our business
partners.

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

Cost of Product Sales

                                 Page 13 of 40
<PAGE>

         Cost of product sales for the three months ended March 31, 2001 was
$6.7 million or 37% of product sales, as compared with $6.5 million or 42% of
product sales for the three months ended March 31, 2000. The decrease
in cost of product sales as a percentage of product sales for the three-month
period ended March 31, 2001 as compared to the prior year period is attributable
to increased manufacturing efficiency for established product lines, increased
production volume and the sale of products at higher average selling prices.

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

Operating Expenses

         Research and development expense was $1.9 million for the three-month
period ended March 31, 2001, as compared to $1.8 for the same period of the
previous fiscal year. In general, overall spending in research and development
for the three-month period increased as we continued to develop new products in
our currently commercialized markets, continued our development efforts for
potential additional products and continued to maintain and develop our patent
position. The increases are mainly attributable to increasing salaries and
related compensation expenses, as we continued to increase headcount in order to
support our increasing research and development efforts along with increasing
prototype and material costs offset by a reduction of reimbursable expenses in
conjunction with research and development efforts on behalf of business partners
and a reduction of the expenses associated with the non-cash charges incurred by
the company for non-employee stock options. We believe continued investment in
Coblation technology is essential for us to maintain our competitive position.

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

                                 Page 14 of 40
<PAGE>

         Sales and marketing expense increased to $7.5 million, or 41% of
product sales during the three-month period ended March 31, 2001, as compared to
$4.9 million, or 31%, of product sales, during the same period of the previous
fiscal year. The increase in spending for the current three-month period was
primarily due to increased staffing and related expenditures due to the hiring
of an internal sales force, higher commissions resulting from increased sales as
well as increased trade-show and related activities, including travel and
promotional materials.

         We anticipate that sales and marketing spending will continue to
increase in absolute dollars due to the expansion of our distribution and sales
force capabilities to address the ENT and spinal surgery markets, higher
commissions from increased sales, the additional cost of penetrating
international markets, higher promotional, demonstration and sample expenses and
additional investments in the sales, marketing and support staff necessary to
market our current products and commercialize future products.

         General and administrative expenses were $1.0 million, or 6% of
product sales, during the three-month period ended March 31, 2001, as compared
to $1.2 million, or 8%, of product sales during the same period of the previous
fiscal year. The decrease in spending for the current three-month period
compared to the prior three-month period ended March 31, 2000, is attributable
to personnel related expenditures and reporting costs.

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

Interest and Other Income, net

         Interest and other income, net remained flat at $1.1 million for the
three-month periods ended March 31, 2001 and March 31, 2000.

Income Tax Provision

         The provision for income taxes was $1.1 million for the three-month
period ended March 31, 2001 compared to $229,000 for the three-month period
ended March 31, 2000. Our effective tax rates for the periods ended March 31,
2001 and March 31, 2000 were 36% and 8%, respectively. The increase in the
effective tax rates is attributable principally to changes in the valuation
allowance for deferred tax assets. Historically we have established deferred tax
assets arising from federal net operating loss carryforward, and federal tax
credit carryforwards as well as from other timing differences. These deferred
tax assets have been offset in total by a valuation allowance due to the
uncertainty surrounding the realization of such assets. During the quarter ended
September 30, 2000 we decreased the valuation allowance and recognized a tax
benefit effective relating to the above items based on management's belief that
it is more likely than not that these deferred tax assets will be realized.
During the quarter ended March 31, 2000 our effective tax rate was reduced by
the use of net operating loss carryforwards generated in prior years. We believe
that our tax effective rate in the near future will be approximately 36%.


                                 Page 15 of 40
<PAGE>

Net Income

         Net income of $2.0 million, or $0.08 per diluted share, in the first
quarter of 2001 compares with $2.6 million, or $0.07 per diluted share, in the
same quarter of the previous year before the cumulative effect of a change in
accounting principle. The cumulative effect on prior years of the application of
SAB 101 "Revenue Recognition In Financial Statements" was $4.3 million.

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

Liquidity and Capital Resources

         On March 31, 2001, we had $96.5 million in working capital. The
principal sources of liquidity consisted of $78.9 million in cash, cash
equivalents and available-for-sale securities. The cash and cash equivalents are
highly liquid with original maturities of ninety days or less. In addition, we
had $9.2 million in long-term available for sales securities.

         Net cash provided by operating activities for the three-month period
ended March 31, 2001 was $2.5 million, as compared to $1.5 million for the
three-month period ended March 31, 2000. The increase in cash provided by
operating activities is primarily due to an increase in depreciation and
amortization and a reduction in inventory, partially offset by an increase
in accounts receivable, accrued liabilities and a decrease in accounts payable.


         Net cash provided by investing activities for the three months ended
March 31, 2001 was $19.3 million compared to ($3.7) million for the three month
period ended March 31, 2000. The increase in cash provided by investing
activities is primarily due to the timing of the purchasing and sale or
maturities of available for sale securities.

         Net accounts receivable increased to $16.4 million as of March 31, 2001
from $16.2 million as of December 31, 2000. The increase in accounts receivable
is mainly attributable to the increase in product shipments offset by
collections during the quarter.

         Inventories decreased to $11.7 million as of March 31, 2001 from $13.7
million as of December 31, 2000, due to increased sales and the timing of
receipt of raw materials pursuant to various purchase agreements. Future
inventory levels may grow to support sales volume increases, as a result of our
expansion into the markets of spinal surgery, neurosurgery, ear, nose and throat
surgery and cosmetic surgery.

                                 Page 16 of 40
<PAGE>

         Net property and equipment increased to $9.9 million as of March 31,
2001 from $9.5 million as of December 31, 2000. The increase is primarily
attributable to the capitalization of controllers placed under various
promotional programs along with an increase of computer software and equipment.

         As of March 31, 2001, we had committed to capital expenditures of
approximately $0.5 million. Our future liquidity and capital requirements will
depend on numerous factors, including our success in commercializing our
products, development and commercialization of products in fields other than
arthroscopy, the ability of our suppliers to continue to meet our demands at
current prices, obtaining and enforcing patents important to our business, the
status of regulatory approvals and competition.

                                 Page 17 of 40
<PAGE>

ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

     We became a public company in February 1996. Included here are risk factors
as updated from our Annual Report on Form 10-K, filed March 30, 2001 for the
year ended December 30, 2000. The following factors represent current challenges
to us that create risk and uncertainty. Failure to adequately overcome any of
the following challenges, either singularly or in combination, could have a
material adverse effect on our results of operations, business, or financial
position.

We Are Dependent Upon Our Arthroscopic System

     We commercially introduced our Arthroscopic System in December 1995. Since
our Arthroscopic System accounted for 85% of our product sales in 2000 and 81%
in the first quarter of 2001 we are highly dependent on its sales. We have only
recently begun to market our spinal surgery, neurosurgery, ENT surgery, cosmetic
surgery, and general surgery products and to date, we have sold only a small
number of units. We cannot assure you that we will be able to continue to
manufacture arthroscopy products in commercial quantities at acceptable costs,
or that we will be able to continue to market our products successfully.

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

     We believe that surgeons will not use our products unless they determine,
based on experience, clinical data and other factors, that these systems are an
attractive alternative to conventional means of tissue ablation. There are only
a few independently published clinical reports and limited long-term clinical
follow-up to support the marketing efforts for our Arthroscopic System. We
believe that continued recommendations and endorsements by influential
arthroscopic surgeons are essential for market acceptance of our Arthroscopic
System. If our Coblation technology does not continue to receive endorsement by
influential surgeons or long-term data does not support our current claims of
efficacy, our business, financial condition, results of operations and future
growth prospects could be materially adversely affected.

Commercial Success of Our Non-Arthroscopic Products Is Uncertain

     We have developed several applications for our Coblation technology in
spinal and neurosurgery, ENT surgery, cosmetic surgery, and general surgery.
Additionally we have established a program to explore the application of our
Coblation technology in

                                 Page 18 of 40
<PAGE>

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

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

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

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

     .    delays in testing or marketing;

     .    unplanned expenditures or in expenditures above those anticipated by
          us;

     .    such products will not be proven safe or effective;

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

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

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

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

     In addition, the success of our non-arthroscopic products will depend on
their adoption as alternatives to conventional means of tissue ablation.
Clinical experience and

                                 Page 19 of 40
<PAGE>

follow-up data for our non-arthroscopic indications are limited, and we have
sold only a small number of units to date. We believe that recommendations and
endorsement of influential physicians are essential for market acceptance of our
products.

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

We Have Limited Marketing and Sales Experience

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

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

We Have Risks Associated with Manufacturing

      To be successful, we must manufacture our products in commercial
quantities in compliance with regulatory requirements at acceptable costs. At
the present time, we have limited manufacturing experience. Our manufacturing
operations consist of an in-house assembly operation for the manufacture of
disposable devices and controllers. We currently produce more than 65 models of
disposable devices utilizing different functionalities, including suction and
fluid management. As we increase the number of product designs for our
disposable devices, the complexity of our manufacturing processes will increase.
We manufacture three different controller models. Although the manufacturing
processes for the controllers designed to date are substantially the same,

                                 Page 20 of 40
<PAGE>

we cannot be certain that we will be able to continue to manufacture these
controllers without additional expense and capabilities. We could also encounter
difficulties in manufacturing our current or future products which could reduce
yields, result in supply disruptions and adversely affect our gross margins. If
we have delays in manufacturing, we will not have adequate finished inventory to
meet our needs. If our quality assurance programs do not continue to meet the
demands of the complexity and capacity of the products we manufacture, we may
experience product returns.

We Are Dependent on Key Suppliers

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

     In addition, we use a single subcontractor, using two facilities, to
sterilize the disposable devices. We cannot assure you that we can identify and
qualify an alternate sterilizer. Our inability to secure an alternative
sterilizer, if required, would limit our ability to manufacture disposable
devices and could have a material adverse effect on our business, financial
condition, results of operations and future growth prospects.

We Face Intense Competition

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

          In arthroscopy, we compete against companies, such as Johnson &
Johnson, Smith & Nephew, Inc., Conmed Corporation, Stryker Corp. and Oratec
Interventions, Inc., which market products to remove or shrink tissue.
Specifically, Johnson & Johnson and Stryker are currently marketing worldwide
bipolar electrosurgical systems for tissue ablation and shrinkage based upon
technology licensed by us. We are also aware of additional competitors that may
commercialize products using technology similar to ours. In spinal surgery, we
compete against companies which market products to remove tissue and treat
spinal disorders. In addition, Oratec is currently marketing a percutaneous

                                 Page 21 of 40
<PAGE>

thermal heating product for treating certain types of disc pain. In ENT surgery,
we compete against companies that offer manual instruments, such as Smith &
Nephew, Inc., Stryker Corp., Conmed Corporation, and Xomed Surgical Products,
Inc., which was acquired by Medtronic, Inc. In addition, we compete with
companies that develop and market lasers for various ENT surgery applications,
including ESC Medical Systems Ltd. Smaller companies, including Somnus Medical
Technologies Inc., Elmed Inc. and Ellman International, Inc., also sell medical
devices for the treatment of various ENT disorders, including snoring and
obstructive sleep apnea. In cosmetic surgery, we compete against companies, such
as Coherent Medical Group, and ESC Medical Systems Ltd., which market lasers for
use in this field. In addition, other large companies manufacture and sell
medical devices that use radio frequency energy for certain applications in
dermatology and cosmetic surgery. In cardiology, we may compete with companies
which use lasers to treat cardiovascular disease. Other approaches to
alleviating cardiovascular disease, including drugs or other surgical
approaches, are also potentially competitive with our products.

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

We Face Uncertainty Over Reimbursement

          Failure by physicians, hospitals and other users of our products to
obtain sufficient reimbursement from health care payors for procedures in which
our products are used or adverse changes in governmental and private third-party
payors' policies toward reimbursement for such procedures would have a material
adverse effect on our business, financial condition, results of operations and
future growth prospects. Reimbursement for arthroscopic, spinal surgery,
neurosurgery and ENT surgery procedures performed using devices that have
received FDA clearance has generally been available in the United States.
Typically, cosmetic surgery procedures are not reimbursed.

      We are unable to predict what changes will be made in the reimbursement
methods used by third-party health care payors. In addition, some health care
providers are moving toward a managed care system in which providers contract to
provide comprehensive

                                 Page 22 of 40
<PAGE>

health care for a fixed cost per person. Managed care providers are attempting
to control the cost of health care by authorizing fewer elective surgical
procedures. We anticipate that in a prospective payment system, such as the
diagnosis related group system utilized by Medicare, and in many managed care
systems used by private health care payors, the cost of our products will be
incorporated into the overall cost of the procedure and that there will be no
separate, additional reimbursement for our products.

      If we obtain the necessary international regulatory approvals, market
acceptance of our products in international markets would be dependent, in part,
upon the availability of reimbursement within prevailing health care payment
systems. Reimbursement and health care payment systems in international markets
vary significantly by country and include both government-sponsored health care
and private insurance. We intend to seek international reimbursement approvals,
although we cannot assure you that any such approvals will be obtained in a
timely manner, if at all.

Our Business Depends on Attracting and Retaining Collaborators and Licensors

      In order to successfully develop and commercialize certain products, we
may enter into collaborative or licensing arrangements with medical device
companies and other entities to fund and complete our research and development
activities, pre-clinical and clinical testing, manufacturing, regulatory
approval activities and to achieve successful commercialization of future
products. We have entered into a license agreement under which Boston Scientific
Corporation will help develop, obtain regulatory approval for and market
products based on our Coblation technology for myocardial revascularization
procedures. In addition, we have entered into a distribution agreement with
Integra Neurosciences to market and sell our Coblation-based products for
neurosurgery. See the information under the heading "Collaborative Arrangements"
in our Form 10-K for the year ended December 30, 2000 for a discussion of these
arrangements.

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

                                 Page 23 of 40
<PAGE>

existing and future collaborative partners will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including our competitors.

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

Our Operating Results Will Fluctuate

     We only achieved profitability in 1999 and, as of March 31, 2001, we had
an accumulated deficit of $8.4 million. Results of operations may fluctuate
significantly from quarter to quarter due to many factors, including the
following:

 .    the introduction of new product lines;

 .    increased penetration in existing applications;

 .    product returns;

 .    achievement of research and development milestones;

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

 .    manufacturing or supply disruptions;

 .    timing of expenditures;

 .    absence of a backlog of orders;

 .    receipt of necessary regulatory approvals;

 .    the level of market acceptance for our products;

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

                                 Page 24 of 40
<PAGE>

 .    promotional programs for our products.

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

We May Be Unable to Effectively Protect Our Intellectual Property

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

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

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

                                 Page 25 of 40
<PAGE>

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

We May Become Subject to Patent Litigation

     The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. We cannot assure you that we will not become subject to
patent infringement claims or litigation or interference proceedings declared by
the United States Patent and Trademark Office, the USPTO, to determine the
priority of inventions.

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

                                 Page 26 of 40
<PAGE>

The Market Price of Our Stock May Be Highly Volatile

     Within the last twelve months, ending March 31, 2001, our common stock has
traded between a range of $12.06 and $52.31 per share after adjusting for the
stock split. The market price of our common stock could continue to fluctuate
substantially due to a variety of factors, including:

 .    quarterly fluctuations in results of our operations;

 .    our ability to successfully commercialize our products;

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

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

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

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

 .    changes in earnings estimates by analysts;

 .    sales of common stock by existing stockholders; and

 .    economic and political conditions.

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

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

     Our stockholder rights plan and certain provisions of our certificate of
incorporation and bylaws may have the effect of making it more difficult for a
third party to acquire, or

                                 Page 27 of 40
<PAGE>

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

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

 United States

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

 .    product design and development;

 .    product testing;

 .    product labeling;

 .    product storage;

 .    premarket clearance or approval;

 .    advertising and promotion; and

 .    product sales and distribution.

                                 Page 28 of 40
<PAGE>

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

 .    warning letters;

 .    fines, injunctions and civil penalties against us;

 .    recall or seizure of our products;

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

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

 .    withdrawing product approvals already granted; and

 .    criminal prosecution.

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

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

     After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in the intended

                                 Page 29 of 40
<PAGE>

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

     If we cannot establish that a proposed device is substantially equivalent
to a legally marketed device, we must seek premarket approval through submission
of a PMA application. A PMA application must be supported by extensive data,
including, in many instances, preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device. If
necessary, we will file a PMA application for approval to sell our potential
products. The PMA process can be expensive, uncertain and lengthy. We cannot
assure you that we will be able to obtain PMA approvals on a timely basis, if at
all, and delays in receipt or failure to receive approvals, could have a
material adverse effect on our business, financial condition, results of
operations and future growth prospects.

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

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

                                 Page 30 of 40
<PAGE>

 International

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

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

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

         The development, manufacture and sale of medical products involves
significant risk of product liability claims. Our current product liability
insurance coverage limits are $2.0 million per occurrence and $10.0 million in
the aggregate. We cannot assure you that such coverage limits are adequate to
protect us from any liabilities we might incur in connection with the
development, manufacture and sale of our products. In addition, we may be
required to increase our product liability coverage as potential products are
successfully commercialized. Product liability insurance is expensive and may
not be available to us in the future on acceptable terms, if at all. We have not
received any product liability claims to date. However, a successful product
liability claim or series of claims brought against us in excess of our
insurance coverage could have a material adverse effect on our business,
financial condition, results of operations and future growth prospects.

We May Be Unable to Attract and Retain Personnel

         We are dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on our business, financial condition,
results of operations and

                                 Page 31 of 40
<PAGE>

future growth prospects. Our success will also depend on our ability to attract
and retain additional highly qualified management and technical personnel. We
face intense competition for qualified personnel, many of whom are often subject
to competing employment offers, and we cannot assure you we will be able to
attract and retain such personnel. Furthermore, our scientific advisory board
members are all otherwise employed on a full-time basis. As a result, the
scientific advisory board members are not available to devote their full time or
attention to our business.

Lack of Dividends

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         Our exposure to market risk for changes in interest rates primarily to
our investment portfolio. We do not use derivative financial instruments in our
investment portfolio and conduct all transactions in U.S. dollars. Our
investment portfolio only includes highly liquid instruments with original
maturities of less than one year.

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

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

                                 Page 32 of 40
<PAGE>

          PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         We are currently involved in ongoing litigation. On February 18, 2000,
we filed a complaint for declaratory relief in the Superior Court of California,
County of Santa Clara against a former independent contractor who alleges that
he is owed options under our stock option plan. On July 31, 2000, the defendant
has filed a counterclaim in the United States District Court, Northern District
of California asserting breach of contract and ownership rights in certain of
ArthroCare's patents, among other claims and monetary damages. We believe these
claims are groundless and plan to vigorously defend against them.

Item 2.  Changes in Securities and Use of Proceeds

         None

Item 3.  Defaults upon Senior Securities

         None

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8 - K

         a)  Exhibits

                                 Page 33 of 40
<PAGE>

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


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

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

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

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

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

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

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

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

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

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

                                 Page 34 of 40
<PAGE>

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

   10.9        Lease Agreement, dated September 15, 1994, between Registrant and
               The Arrillaga Foundation and the Perry Foundation for the
               Registrant's facility located at 595 North Pastoria Avenue,
               Sunnyvale, California 94086. (Incorporated herein by reference to
               Exhibit 10.10 filed previously with the Registrant's Registration
               Statement on Form S-1 (Registration No. 33-80453)).

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

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

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

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

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

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

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

                                 Page 35 of 40
<PAGE>

               April 3, 1999).

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

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

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

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

  10.21        Lease Agreement date March 25, 1998 between the Registrant and
               Aetna Life Insurance Company for the Registrant's facility
               located at 840 Del Rey Avenue, Sunnyvale, California 94086.
               (Incorporated herein by reference to Exhibit 10.28 filed
               previously with the Registrant's Annual Report on Form 10-K for
               the period ended January 3, 1998).

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

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

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

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

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

                                 Page 36 of 40
<PAGE>

               the period ended January 2, 1999).

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

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

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

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

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

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

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

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

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

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

                                 Page 37 of 40
<PAGE>


+   Confidential treatment granted.


b)   Reports on Form 8-K

         None

                                 Page 38 of 40
<PAGE>

                                  SIGNATURES

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

                                          ARTHROCARE CORPORATION
                                          a Delaware corporation

Date: May 14, 2001                        /s/ Michael A. Baker
                                          -----------------------------------
                                          Michael A. Baker
                                          President, Chief Executive Officer
                                          and Director
                                          (Principal Executive Officer)



Date: May 14, 2001                        /s/ Christine Hanni
                                          -----------------------------------
                                          Christine Hanni
                                          Vice President of Finance, Chief
                                          Financial Officer and Assistant
                                          Secretary
                                          (Principal Financial Officer and
                                          Accounting Officer)

                                 Page 39 of 40