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

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**FORM 10-Q**

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(Mark One)

**[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended October 2, 1999.**

**OR**

**[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934**

**For the transition period from ________to _________**

**Commission file number 0-27422**

**ARTHROCARE CORPORATION**
(Exact name of Registrant as specified in its Charter)



|**Delaware**                                                   | **94-3180312**                      
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number)

**595 North Pastoria AvenueSunnyvale, California 94086**(Address of Principal Executive Offices including Zip Code)

**(408) 736-0224**(Registrant's Telephone Number, Including Area Code)

(Former name, former address and former fiscal year if changed
 since last report)







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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X]    NO [  ]

The number of shares outstanding of the registrant's common stock as of
November 6, 1999 was 10,435,179.







**ARTHROCARE CORPORATION
                                    FORM 10-Q
                                     INDEX**

**PART I. Financial Information**

Item 1.  Financial Statements (unaudited)

> Condensed Consolidated Balance Sheets as of
>             October 2, 1999 and January 2, 1999Condensed Consolidated Statements of Operations for the three
>             and nine month periods ended October 2, 1999 and October 3, 1998Condensed Consolidated Statements of Cash Flows for the
>             nine month periods ended October 2, 1999 and October 3, 1998Notes to Condensed Consolidated Financial
>          Statements

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

> OverviewResults of OperationsLiquidity and Capital Resources

Item 3.   Quantitative and Qualitative Disclosure about Market Risks

**PART II. Other Information**

Item 1:  Legal Proceedings

Item 2:  Changes in Securities

Item 3:  Defaults Upon Senior Securities

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

Item 5:  Other Information

Item 6:  Exhibits and Reports on Form 8-K

**SIGNATURES**

**PART I -- FINANCIAL INFORMATION**

Item 1.  Financial Statements

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**ARTHROCARE CORPORATION****CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)**

`October 2,     January 2,
                                                         1999           1999
                                                   -------------  -------------
                                                    (unaudited)
                        ASSETS
Current assets:
  Cash and cash equivalents.....................         $5,942         $2,826
  Available-for-sale securities.................          2,726          5,232
  Accounts receivable, net of allowances........          9,003          5,972
  Inventories, net..............................          7,321          7,069
  Prepaid expenses and other current assets.....            625          1,038
                                                   -------------  -------------
       Total current assets                              25,617         22,137

Property and equipment, net.....................          6,270          4,560
Related party receivables.......................          1,205            723
Other assets....................................            265            340
                                                   -------------  -------------
     Total assets...............................        $33,357        $27,760
                                                   =============  =============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..............................         $2,006         $1,797
  Accrued liabilities...........................          1,069          1,734
  Accrued compensation..........................          2,429          1,056
  Deferred revenue..............................            208            517
  Capital lease obligation, current portion.....             60             60
                                                   -------------  -------------
          Total current liabilities                       5,772          5,164

Capital lease obligation, less
   current portion..............................            102            151
Deferred rent...................................            128            140
                                                   -------------  -------------
          Total liabilities.....................          6,002          5,455
                                                   -------------  -------------
Contingencies (Note 6)

Stockholders' equity:
  Common stock..................................              9              9
  Additional paid in capital....................         52,159         49,901
  Notes receivable from stockholders............           --              (51)
  Deferred compensation.........................           --              (68)
  Accumulated other comprehensive
   (loss).......................................            (91)           (39)
  Accumulated deficit...........................        (24,722)       (27,447)
                                                   -------------  -------------
          Total stockholders' equity............         27,355         22,305
                                                   -------------  -------------
     Total liabilities and stockholders' equity.        $33,357        $27,760
                                                   =============  =============`

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

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**ARTHROCARE CORPORATION****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (In thousands)
                                  (unaudited)**

`Three Months Ended      Nine Months Ended
                                 ----------------------- -----------------------
                                   October 2,  October 3,  October 2,  October 3,
                                      1999        1998        1999        1998
                                 ----------- ----------- ----------- -----------
Revenues:
   Product sales................    $11,531      $6,721     $30,708     $17,265
   License fees and royalties...        769         207       3,519       2,832
                                 ----------- ----------- ----------- -----------
      Total revenues............     12,300       6,928      34,227      20,097
Cost of product sales...........      5,015       3,136      13,201       9,131
                                 ----------- ----------- ----------- -----------
Gross profit....................      7,285       3,792      21,026      10,966
                                 ----------- ----------- ----------- -----------
Operating expenses:
   Research and development.....      1,278       1,304       3,454       3,444
   Sales and marketing..........      3,876       2,815      11,022       7,353
   General and administrative...        947         972       3,975       2,896
                                 ----------- ----------- ----------- -----------
      Total operating expenses..      6,101       5,091      18,451      13,693
                                 ----------- ----------- ----------- -----------
Income (loss) from
  operations....................      1,184      (1,299)      2,575      (2,727)
Interest and other income, net..         49         219         264         806
                                 ----------- ----------- ----------- -----------
Income (loss) before taxes......      1,233      (1,080)      2,839      (1,921)
Income tax provision............         49          --         114          --
                                 ----------- ----------- ----------- -----------
Net income (loss)...............     $1,184     ($1,080)     $2,725     ($1,921)
                                 =========== =========== =========== ===========

Basic net income (loss) per
   share.......................       $0.13      ($0.12)      $0.30      ($0.22)
                                 =========== =========== =========== ===========
Diluted net income (loss) per
   share.......................       $0.12      ($0.12)      $0.28      ($0.22)
                                 =========== =========== =========== ===========
Shares used in computing basic
 net income (loss) per
 share..........................      9,185       8,950       9,042       8,921
                                 =========== =========== =========== ===========
Shares used in computing
 diluted net income (loss)
 per share...............            10,144       8,950       9,810       8,921
                                 =========== =========== =========== ===========`

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

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

`Nine Months Ended
                                                      --------------------------
                                                        October 2,    October 3,
                                                           1999          1998
                                                      ------------  ------------
Cash flows from operating activities:
   Net income (loss).................................      $2,725       ($1,921)
   Adjustments to reconcile net income (loss)
    to net cash provided by (used in)operating
    activities:
        Depreciation and amortization................       1,684           539
        Amortization of deferred and stock
          compensation...............................         603           121
        Provision for doubtful accounts receivable
          and product returns........................         199            61
        Provision for excess and obsolete inventory..         982            91
        Deferred rent................................         (12)          (12)
        Changes in operating assets and liabilities:
          Accounts receivable                              (3,230)       (2,784)
          Inventory..................................      (1,234)       (3,850)
          Prepaid expenses and other current assets..         413          (326)
          Accounts payable...........................         209           719
          Accrued liabilities........................         767           813
          Deferred revenue...........................        (309)          666
          Other assets...............................          75            63
                                                      ------------  ------------
   Net cash provided by (used in) operating
      activities.....................................       2,872        (5,820)
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment...............      (3,394)       (2,537)
   Purchases of available-for-sale securities........         (45)      (26,048)
   Sale or maturities of available-for-sale
     securities......................................       2,551        31,972
                                                      ------------  ------------
   Net cash provided by (used in) investing
     activities......................................        (888)        3,387
                                                      ------------  ------------
Cash flows from financing activities:
   Issuance of notes receivable to related
     parties.........................................        (575)          --
   Repayment of capital leases.......................        (108)          (16)
   Repayment of notes receivable from related
     parties.........................................         144             9
   Proceeds from exercise of options
     to purchase common stock........................       1,723           624
                                                      ------------  ------------
           Net cash provided by financing
               activities............................       1,184           617
                                                      ------------  ------------

Effect of exchange rate on changes in cash                    (52)          (32)
                                                      ------------  ------------
Net increase in cash and cash equivalents............       3,116        (1,848)
Cash and cash equivalents, beginning of period.......       2,826         8,188
                                                      ------------  ------------
Cash and cash equivalents, end of period.............      $5,942        $6,340
                                                      ============  ============`

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

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**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," 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 financial statements contained in our Form 10-K for the year ended
January 2, 1999 should be read in conjunction with these condensed consolidated
financial statements.  The balance sheet at January 2, 1999 was derived from
audited financial statements; however, the financial statements in this report
do not include all disclosures required by generally accepted accounting
principles.



2.  	Computation of Net Income (Loss) Per Share:



Basic net income (loss) per share is computed using the
weighted average number of shares of common stock outstanding.  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):

`Three Months Ended      Nine Months Ended
                                 ----------------------- -----------------------
                                   October 2,  October 3,  October 2,  October 3,
                                      1999        1998        1999        1998
                                 ----------- ----------- ----------- -----------
Net income (loss)...............     $1,184     ($1,080)     $2,725     ($1,921)
                                 =========== =========== =========== ===========
Shares calculation:
   Weighted average basic
    shares outstanding..........      9,185       8,950       9,042       8,921
   Options......................        959         --          768          --
                                 ----------- ----------- ----------- -----------
     Total shares used to
      compute diluted net
      income (loss) per share...     10,144       8,950       9,810       8,921
                                 =========== =========== =========== ===========
Net income (loss) per share:
   Basic........................      $0.13      ($0.12)      $0.30      ($0.22)
                                 =========== =========== =========== ===========
   Diluted......................      $0.12      ($0.12)      $0.28      ($0.22)
                                 =========== =========== =========== ===========`





Options to purchase 527,099 and 554,090 shares of common
stock at prices ranging from $0.20-$24.25 per share were outstanding during the
three and nine months period ended October 3, 1998, but were not included in the
computation of diluted net loss per share because inclusion of such options
would have been anti-dilutive.





3.     Comprehensive Income (Loss):



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

`Three Months Ended      Nine Months Ended
                                 ----------------------- -----------------------
                                   October 2,  October 3,  October 2,  October 3,
                                      1999        1998        1999        1998
                                 ----------- ----------- ----------- -----------
Net income (loss)...............     $1,184     ($1,080)     $2,725     ($1,921)

 Other comprehensive income
    (loss):

  Change in unrealized gain and
   losses in available for sale
   marketable securities........           --        15            --         5

  Foreign translation
   adjustment...................        (11)        (32)        (52)        (32)
                                 ----------- ----------- ----------- -----------
Comprehensive net income (loss)..    $1,173     ($1,097)     $2,673     ($1,948)
                                 =========== =========== =========== ===========`



4.  	Balance Sheet Detail (in thousands):

`October 2,  January 2,
                                                1999         1999
                                            ------------ ------------
                                            (unaudited)
Inventory:
   Raw materials.........................        $3,307       $3,127
   Work-in-process.......................         1,488        1,852
   Finished goods........................         2,526        2,090
                                            ------------ ------------
Total....................................        $7,321       $7,069
                                            ============ ============
Other accrued liabilities:
   Accrued professional fees.............           $88         $150
   Accrued warranty......................           189          302
   Other.................................           792        1,282
                                            ------------ ------------
Total....................................        $1,069       $1,734
                                            ============ ============`

5.     Line of Credit:



In June 1999, we entered into a $7.0 million
revolving line of credit that expires in June 2000.  Available borrowings under
this line of credit are contingent upon and collateralized by our assets and are
subject to covenants related to financial ratios and profits.  Borrowings under
the line of credit bear interest at the bank's prime rate plus one-quarter of
one percentage point.   At October 2, 1999, we were in compliance with these
covenants and no borrowings were outstanding.



6.   	Litigation:



We are currently involved in ongoing litigation. In June
1998, we announced that we had entered into an exclusive worldwide marketing and
distribution agreement with Xomed Surgical Products for our products in the ear,
nose, and throat ("ENT") surgery market. On February 4, 1999, Xomed Surgical
Products, Inc. ("Xomed") of Jacksonville, Florida filed a complaint against us
in the Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by us. In the complaint, Xomed has demanded a full refund of the
amounts paid for certain products bought by Xomed from us, and for a portion of
an exclusive license fee paid by Xomed pursuant to an exclusive license and
distribution agreement between Xomed and us. We terminated this license and
distribution agreement on February 5, 1999. We believe the suit is without
merit, and filed a Motion to Dismiss and Answer to the Complaint on May 3, 1999.
In addition, we filed two counterclaims against Xomed for damages caused by
Xomed's failure to perform under the contract and for a certain milestone
payment owed to us by Xomed.

On February 4, 1999, California Medical, Inc. filed a
complaint in California state court against us alleging breach of contract,
interference with contractual and economic relations, trade libel,
misappropriation of trade secrets, misrepresentation and unfair competition.
California Medical is a former distributor of our products in Northern
California. We terminated our distribution agreement with California Medical at
the end of 1997. We believe the suit is without merit and filed a motion to
dismiss on May 31, 1999. As a result of the hearing on our motion to dismiss,
California Medical filed an amended complaint on August 9, 1999, in which they
dropped the causes of action alleging misrepresentation. The parties' attempt to
resolve the dispute through mediation on September 17, 1999.



7.  	Recent Accounting Pronouncements:



In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133").  SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments, embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.  In July 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 137").  SFAS 137 deferred the effective date of SFAS 133 until the
first fiscal year beginning after June 15, 2000.  We will adopt the standard
during January 2001.  To date, we do not engage in hedging activities.





8.	Segment Information:



We are organized into five business units based on
product markets:  arthroscopy, spinal surgery, ear nose and throat, cosmetic
surgery and cardiology.  To date, substantially all of our product sales have
been related to the arthroscopy segment.  Licensing fees during the nine- month
period ending October 2, 1999 are primarily attributable to the arthroscopy
segment. However, during the three and nine-month periods ended October 2, 1999,
approximately $0.1 million and $0.4 million, respectively, of our license
revenue was attributable to the cardiology segment and $0.6 million and $1.6
million, respectively, was attributable to the cosmetic surgery segment.  During
the three and nine-month periods ended October 3, 1998, approximately $0.1
million and $2.5 million, respectively, of our license revenue was attributable
to the cardiology segment.



9. 	Subsequent Events: Stock Offering



In October and November 1999, we sold a total of
1,368,500 shares of common stock at $56.00 per share.  The net proceeds from the
offering of approximately $71 million will be used by us for sales, marketing
and development efforts associated with the commercialization of our spinal
surgery product line and the balance to fund the development, commercialization
and associated working capital requirements of applying our CoblationTM
technology to a broad range of other soft-tissue surgical markets and for
corporate and other general purposes.











PART 1. FINANCIAL INFORMATION



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



Overview



Statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations which express that
ArthroCare Corporation ("ArthroCare" "we," "us," or "our") "believes",
"anticipates", "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 January
2, 1999 and "Additional factors that
might affect future results" set forth
below.



We are



Coblation technology is applicable across many soft-
tissue surgical markets. The soft-tissue surgery systems are used to perform
many types of arthroscopic surgery. Our strategy includes applying our patented
Coblation technology to a broad range of other soft-tissue surgical markets,
including spinal surgery, cosmetic surgery, ENT surgery and various cardiology
applications.



In April 1998, we announced that we had entered the
cosmetic surgery market and formed a business unit called Visage® to
commercialize Coblation technology in this field. In early 1999, we entered into
a license and distribution agreement with Collagen Aesthetics, Inc.
("Collagen"). Under this agreement, Collagen acquired exclusive, worldwide,
marketing rights for our cosmetic surgery line of products for the dermatology
and cosmetic surgery markets.  In September 1999, Collagen was acquired by
Inamed Corporation, which has agreed to continue to perform Collagen's
obligations under the agreement.



In May 1998, we announced that we had entered the ear,
nose and throat market and had formed a business unit called ENTecTM to
commercialize Coblation technology in this field. In June 1998, we entered into
a license agreement with Xomed Surgical Products, Inc. ("Xomed") to market
Coblation products in the ear, nose and throat market. In February 1999, Xomed
filed a suit against us alleging breach of contract and seeking monetary
damages. We then terminated this agreement and have been marketing and selling
the ENT surgery product line through a network of distributors supported by
regional sales managers.



In September 1999, we announced the introduction of a
new product line using Coblation technology for the spinal surgery market.



In early 1998, we formed a business unit,
AngioCareTM, for the purpose of further developing and for commercializing
our technology in specific applications in the field of cardiology. As part of
those efforts, in February 1998, we entered into a license agreement under which
Boston Scientific Corporation ("BSC") will help develop, obtain regulatory
approval for and market products based on Coblation technology for myocardial
revascularization procedures.



We have received 510(k) clearance to market our
Arthroscopic System for use in arthroscopic surgery of the knee, shoulder,
ankle, elbow, wrist and hip, and the Arthroscopic System is CE marked for use in
arthroscopic surgery. Our Cosmetic Surgery System is CE marked for general
dermatology, skin resurfacing and wrinkle reduction procedures and we have
received 510(k) clearance for use of our Cosmetic Surgery System in general
dermatology procedures in the United States. We are pursuing additional
clearances that will allow our Cosmetic Surgery System to be marketed in the
United States specifically for skin resurfacing and wrinkle reduction. Our ENT
surgery system is CE marked, and we have received 510(k) clearance for our
system in general head, neck, oral and sinus surgery procedures in the United
States. Our Spinal Surgery System is CE marked and we have applied for 510(k)
clearance in the United States to market this system for spinal surgery. We have
received 510(k) clearance to market Coblation technology for general
surgery.



In December 1995,
we introduced our Arthroscopic System commercially in the United States and have
derived substantially all of our sales from this system.  As of October 2, 1999,
we had shipped more than 5,900 controller units and more than 540,000 disposable
devices for a variety of indications. Our strategy includes placing controller
units, at substantial discounts, to generate future disposable revenue. Our
strategy also includes applying our patented Coblation technology to a range of
other soft-tissue surgical markets, including the products that have been
introduced in the fields of spinal surgery, cosmetic surgery and ear, nose and
throat surgery. We have received 510(k) clearance for use of our technology in
several other fields.





Results of Operations



Revenues:



Product sales for the three months ended October 2,
1999 were $11.5 million, an increase of  $4.8 million or 72% from $6.7 million
for the prior year period. For the nine months ended October 2, 1999 product
sales were $30.7 million, representing a 78% increase from $17.3 million for the
same period of the prior year.  The increase in product sales resulted primarily
from an increase in the number of unit sales of both controllers and disposable
devices.  The higher unit volume of sales resulted primarily from increased
activity for newly introduced models of disposable devices for arthroscopy, and
sales of disposable devices for new product lines including increased
international sales.



International product sales for the three months ended
October 2, 1999 increased to 21% of total product sales compared to 12% of
product sales for the same period of the prior year.  International product
sales for the nine months ended October 2, 1999 increased to 15% compared to 10%
of product sales for the same period in 1998.  The increase in international
sales is primarily attributable to increasing sales in Europe and the Pacific
Rim.



Our strategy in arthroscopy has been, and continues to be, to
increase future disposable device sales by increasing the installed base of
controllers through promotional programs.  Disposable devices are consistently
sold at or near list price, except for sales to international distributors and
marketing partners, which are currently sold at discounted prices. We expect
these discounts to continue in the future.



Based on the estimated number of procedures performed each
year, we believe that knee procedures represent the largest segment of the
arthroscopic market.  To continue to achieve increasing disposable device sales
in arthroscopy, 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.  During the second half of fiscal year 1998, we introduced new
disposable styles, including the SaberTM and CovacTM, which are
designed primarily to be used in arthroscopic knee procedures.  Sales of these
disposables accounted for approximately 18% of the arthroscopic disposable
devices sold during the quarter. We expect disposable device sales to remain the
primary component of product sales in the future.



License fees and royalty income increased to
$0.8 million for the three months ended October 2, 1999 from $0.2 million for
the three months ended October 3, 1998 and increased to $3.5 million for the
nine months ended October 2, 1999 from $2.8 million for the nine months ended
October 3, 1998.  The increase in license fees and royalty revenue in the
current three months period is primarily due to the timing of licensing payments
received from our business partners. The increase in license fees and royalties
for the nine months ended October 2, 1999, is primarily attributable to license
fees received as the result of settlement of a patent infringement suit
initiated by us against Ethicon, Inc., ("Ethicon") partially offset by the
timing of license fees received from our business partners in the prior year.
In February 1998, we entered into a license agreement under which BSC was
granted an exclusive right to develop and market products based on our Coblation
technology for myocardial revascularization procedures. BSC pays license fees, a
portion of which will be classified as prepaid royalties, to us upon achievement
of designated milestones, and royalties on sales of resulting products, if any.
Licensing fees are primarily attributable to the arthroscopy segment; however,
during the three-and nine-month periods ended October 2, 1999, we recognized
$0.1 million and $0.4 million, respectively, of such payments as license fees
and royalty revenue.  We received a license payment from BSC of $3.0 million in
February 1998, of which $0.1 million and $2.5 million was recognized as revenue
during the three- and nine-month periods ended October 3, 1998,
respectively.



In January 1999, we entered into a license and distribution
agreement with Collagen, which was broadened by mutual agreement in February
1999, whereby Collagen acquired exclusive, worldwide marketing rights for our
patented Coblation technology in the dermatology, cosmetic and plastic surgery
markets. Under the terms of the agreement, Collagen pays license fees based upon
the achievement of certain milestones and royalties on sales of products to end-
users. In September 1999, Inamed acquired Collagen and amended the terms of
their agreement with us.  During the three- and nine-month periods ended October
2, 1999, we recognized $0.6 million and $1.6 million, respectively, of such
payments as license fees and royalty revenue.



We cannot assure you that we will be able to continue to
achieve the milestones required to recognize future license fees, or that
products will be developed, cleared for marketing by various regulatory agencies
or achieve sufficient commercial acceptance so that we may continue to receive
licensing and royalty revenues from our business partners.



Cost of Product
Sales



Cost of product sales for the three months ended October
2, 1999 was $5.0 million or 43% of product sales, as compared with $3.1 million
or 47% of product sales for the three months ended October 3, 1998.  For the
nine months ended October 2, 1999, cost of product sales was $13.2 million or
43% of product sales, as compared with $9.1 million or 53% of product sales for
the comparable period of the prior year. The increase in cost of product sales
for the three- and nine-month periods ended October 2, 1999, compared to the
same periods of the prior year, is attributable to increasing unit sales of both
controllers and disposable devices. The decrease in cost as a percentage of
product sales for the three- and nine-month periods ended October 2, 1999, as
compared to the prior year period ended October 3, 1998, is attributable to
increased manufacturing efficiency for established product lines and increased
production volume partially offset by an increase in the manufacturing expense
related to newly introduced styles of disposable devices.



We cannot assure you that cost of product sales as a
percentage of product sales will remain at current levels or show improvement in
the future due to the distribution channels utilized, 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 and the various distribution
channels utilized to sell products in all commercialized fields. We cannot
assure you that we will be successful in maintaining the mix of disposable
devices to controllers or be able to continue to increase demand for disposable
devices. In addition, production of future products, 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 $1.3 million for
the three months ended October 2, 1999 and October 3, 1998.   For the nine
months ended October 2, 1999, and October 3, 1998, research and development
expense was $3.5 million and $3.4 million, respectively.   In general, overall
spending in research and development increased slightly as we continued to
develop new products in our currently commercialized markets, and  for
development efforts for potential additional products including non-cash charges
for stock options awarded to non-employees.  Increases in research and
development expense have been partially offset by funding received from business
partners for continued product development and by a decrease in the expenditures
associated with clinical trials.   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, as well as increased non-cash charges for stock options
granted to non-employees, but anticipate expenses to continue to decrease as a
percentage of product sales.



Sales and marketing expense increased to $3.9 million
or 34% of product sales during the three months ended October 2, 1999, as
compared to $2.8 million or 42% of product sales during the same period of the
previous fiscal year. For the nine months ended October 2, 1999, and October 3,
1998, sales and marketing expense increased to $11.0 million or 36% of product
sales from $7.4 million or 43% of product sales, respectively.  The increase in
spending in absolute dollars for the three- and nine-month periods was primarily
due to higher dealer commissions resulting from increased sales, increased
staffing and increased trade-show related expenses. We also incurred additional
sales and marketing expenses during the current-year periods as we expanded
operations in Europe.



We anticipate that sales
and marketing spending will continue to increase in absolute dollars due to the
expansion of our distribution capabilities to address the spinal surgery market,
higher dealer commissions from increased sales, the additional cost of
penetrating international markets, higher promotional, demonstration and sample
expenses, additional investments in the sales, marketing and support staff
necessary to market our current products and commercialize future products and
due to non-cash charges associated with stock options awarded to non-employees.



General and administrative expenses were $0.9 million
or 8% of product sales during the three months ended October 2, 1999, as
compared to $1.0 million or 15% of product sales during the same period of the
previous fiscal year.  For the nine months ended October 2, 1999, and October 3,
1998, general and administrative expense increased to $4.0 million or 13% of
product sales from $2.9 million or 17% of product sales, respectively.  The
decrease in spending for the three months ended October 2, 1999 as compared to
the three months ended October 3, 1998, is attributable to a reduction in legal
fees. The most significant increase in spending for the nine-month comparable
periods was attributable to legal expenses related to the patent infringement
claims we brought against Ethicon.  We expect that general and administrative
expenses will decrease as a result of the recent settlement of this litigation,
offset partially by an increase in additional business development activities.



Interest and Other Income, net



Interest and other income, net decreased to $49,000
during the three months ended October 2, 1999 from $219,000 for the three months
ended October 3, 1998.



Income Tax Provision



The provision for income taxes was $49,000 and
$114,000 for the three- and nine- month periods ended October 2, 1999,
respectively.  Our tax rate is below the statutory rate due to the utilization
of net operating loss carryforwards incurred in prior years.  We have  federal
net operating loss carryforwards which expire in the years 2004 through 2018 and
state net operating loss carryforwards which expire in the years 2000 through
2003.  We are subject to certain alternative minimum tax requirements for which
an estimate is made based on the anticipated effective tax rate at the end of
the fiscal year.







Net Income (Loss)



Net income was $1.2 million for the three months ended
October 2, 1999 compared to a loss of $1.1 million for the period ended October
3, 1998.  For the nine months ended October 2, 1999, net income increased to
$2.7 million from a net loss of $1.9 million for the same period of the prior
year.  Net income for the current periods reflects an increase in product sales,
license fees and gross margin, partially offset by increased spending in sales
and marketing and legal expenses.  Although we have experienced substantial
revenue growth since our inception, and have been profitable on a quarterly
basis since the quarter ended April 3, 1999, due to our short operating history,
no assurance can be given that revenue growth or profitability will be
sustained.





Liquidity and Capital Resources



On October 2, 1999, we had $19.8 million in working capital.
The principal sources of liquidity consisted of $8.7 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 $7.0 million available under a line of credit. Available borrowings under
this line of credit are contingent upon and collateralized by some of our asset
balances and are subject to covenants related to financial ratios and profits.
Borrowings under the line of credit bear
interest at the bank's prime rate plus one-quarter of one percentage point. At
October 2, 1999 we were in compliance with these covenants and had no borrowings
outstanding.



Net cash provided by operating activities for the nine months
ended October 2, 1999 was $2.9 million. Cash used in operating activities for
the nine months ended October 3, 1998 was $5.8 million.  The increase in cash
provided by operating activities year-over-year was primarily due to the net
income of $2.7 million for 1999 compared to a net loss in 1998 of $1.9 million
and an increase in the depreciation amounts year-over-year, partially offset by
increases in accounts receivable and inventory.



Net accounts receivable increased to $9.0 million as of
October 2, 1999 from $6.0 million as of January 2, 1999. The increase in
accounts receivable is mainly attributable to the corresponding increase in
product sales along with the timing of sales during the quarter.



Inventories increased slightly to $7.3 million as of October
2, 1999 from $7.1 million at January 2, 1999, due to the need to support higher
anticipated product sales activity.  We expect future inventory levels to grow
to support sales volume increases, as a result of our expansion into the markets
of spinal surgery, ear, nose and throat surgery and cosmetic surgery.



Net property and equipment increased to $6.3 million as of
October 2, 1999 from $4.6 million on January 2, 1999.  The increase is primarily
attributable to the capitalization of controllers placed under various
promotional programs along with an increase of computer software and
equipment.



The proceeds from the sale of the 1,368,500 shares of common
stock we offered during October and November 1999, were approximately $71.0
after deducting the underwriting discounts and commissions and estimated
offering expenses.  We believe that the proceeds from the offering, together
with our current cash balances, cash equivalents, short-term investments and
cash generated from our collaborative arrangements will be sufficient to meet
our operating and capital requirements through the end of 2000. As of October 2,
1999, we had committed to capital expenditures of approximately $0.6 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.



Year 2000



We rely on computers and computer software to run our
business, as do our vendors, suppliers and customers. These computers and this
computer software may not be able to properly recognize the dates commencing in
the Year 2000. We have assigned a task force to handle the significant
uncertainty that exists concerning the potential effects associated with Year
2000 compliance. The task force has formulated and begun to implement a plan to
address Year 2000 compliance, including the formulation of contingency plans. To
date, we have not found a material impact that may result from the failure of
our computers and computer software, or that of our vendors, suppliers, and
customers, to recognize dates. We have completed an upgrade of our information
technology system, including our financial, order processing, manufacturing and
inventory systems, which included Year 2000 compliance. To date we have spent
approximately $900,000 upgrading our computer system and related technology. We
have not yet completed the steps to quantify the effects of noncompliance of our
customers, suppliers and/or our service providers. Our goal is to complete all
phases of our review and be Year 2000 compliant by December 1999.



Any Year 2000 compliance problems affecting us, our
suppliers, our service providers or our customers could result in a material
adverse effect on our financial condition and operating results. We cannot be
sure that further assessment of our suppliers, data processing systems or
contingency plans will address all issues of Year 2000 compliance.





Recent Accounting Pronouncements



In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities ("SFAS"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments, embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In July 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133
("SFAS 137").  SFAS 137 deferred the effective date of SFAS 133 until the first
fiscal year beginning after June 15, 2000.  We will adopt the standard during
January 2001.   To date, we do not engage in hedging activities.









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 April 2,
1999 for the year ended January 2, 1999. 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



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 placed our arthroscopic
controllers at substantial discounts in order to stimulate demand for disposable
devices.



We believe that surgeons will not use our products
unless they determine, based on experience, clinical data and other factors,
that our 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 our 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 new applications for our Coblation technology in

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 the spinal
surgery, cosmetic surgery, ENT 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 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: that
such products will not be easy to use, will require extensive training or will
not be cost-effective; that we will experience delays in testing or marketing;
that such testing or marketing will result in unplanned expenditures or in
expenditures above those anticipated by us; that the products will not be proven
safe or effective; that third parties will develop and market superior or
equivalent products; that such products will fail to receive necessary
regulatory clearance or approvals; that such products will be difficult or
uneconomical to manufacture on a commercial scale; and that proprietary rights
of third parties will 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.



We Have Limited Marketing and Sales Experience

We currently have limited experience in marketing and selling
our products.  To the extent that we have established or will enter into
distribution arrangements for the sale of our products, we are and will be
dependent upon the efforts of third parties. Currently, we are marketing and
selling the arthroscopic surgery and ENT surgery product lines in the United
States through a network of independent distributors, supported by regional
sales managers and a small direct sales force. These distributors sell
arthroscopy and ENT surgery devices for a number of other manufacturers. In
addition, we are marketing and selling our Spinal Surgery System internationally
and building our domestic distribution capabilities in this area in anticipation
of 510(k) clearance. In order to market our spinal surgery products, we plan to
utilize existing distributors, add new distributors that specialize in spinal
surgery products and add additional regional managers, both domestically and
internationally. We cannot assure you that these distributors will commit the
necessary resources to effectively market and sell the arthroscopic surgery,
spinal surgery or ENT surgery product lines, or that they will be successful in
selling our products.



We have recently established a marketing presence in
various countries and can give no assurance that these newly established
operations will be successful. In order to successfully market 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 disposable devices by
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 Limited Manufacturing Experience

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.
Manufacturing operations consist of an in-house assembly operation for the
manufacture of disposable devices and controllers. We currently produce 32
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 the manufacturing processes will
increase. We manufacture three different controller models. Although the
manufacturing processes for the controllers designed to date are substantially
the same, we cannot be certain that we will be able to continue to manufacture
these controllers without additional expense and capabilities. We could also
encounter difficulties in manufacturing our current or future products which
could reduce yields, result in supply disruptions and adversely affect gross
margins. If we experience delays in manufacturing, we may not have adequate
finished inventory to meet our customers' needs. If our quality assurance
programs do not continue to meet the demands of the complexity and capacity of
the products manufactured, 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 one component that we include in substantially
all of the 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 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 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.

Our Operating Results Will Fluctuate

We have experienced significant operating losses since
inception and, as of October 2, 1999, had an accumulated deficit of $24.7
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 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. 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 revenues or the level of profitability.



We Face Intense Competition

The markets for our current and potential products are
intensely competitive. These markets include arthroscopy, spinal surgery, ENT
surgery, cosmetic 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 is currently marketing worldwide a
bipolar electrosurgical system for tissue ablation. 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 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
recently acquired by Medtronic, Inc. In addition, we compete with companies that
develop and market lasers for various ENT surgery applications, including ESC
Medical Systems Ltd. Smaller companies, including Somnus Medical Technologies
Inc., Elmed Inc. and Ellman International, Inc. also sell medical devices for
the treatment of various ENT disorders including snoring and obstructive sleep
apnea. In cosmetic surgery, we compete against companies such as Coherent
Medical Group and ESC Medical Systems Ltd., which market lasers for use in this
field. In addition, other large companies manufacture and sell medical devices
that use radio frequency energy for certain applications in dermatology and
cosmetic surgery. In cardiology, we may compete with companies that use lasers
to treat cardiovascular disease. Other approaches to alleviating cardiovascular
disease, including drugs or other surgical approaches, may also be
competitive.

Many of our
competitors have significantly greater financial, manufacturing, marketing,
distribution and technical resources than we do. Some of these

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 products are used
or adverse changes in governmental and private third-party

We are unable to predict what changes will be made in
the reimbursement methods used by third-party health care payors. In addition,
some health care providers are moving toward a managed care system in which
providers contract to provide comprehensive health care for a fixed cost per
person. Managed care providers are attempting to control the cost of health care
by authorizing fewer elective surgical procedures. We anticipate that in a
prospective payment system, such as the diagnosis related group system utilized
by Medicare, and in many managed care systems used by private health care
payors, the cost of our products will be incorporated into the overall cost of
the procedure and that there will be no separate, additional reimbursement for
our products.  We anticipate that hospital administrators and physicians will
justify the use of our  products by the apparent cost savings and clinical
benefits that we believe will be derived from the use of our products. However,
we cannot assure you that this will be the case.

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 signed an exclusive, worldwide distribution agreement
with Collagen for our cosmetic surgery products. We have also 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.

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
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 their obligations under the arrangements.
For example, Collagen was recently acquired by Inamed Corporation. 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 future growth 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 human resource requirements and limit the number of products which we
would be able to develop and commercialize. In addition, we cannot assure you
that our existing and future collaborative partners will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including our competitors.

We cannot assure you that disputes will not arise in
the future with respect to the ownership of rights to any technology or products
developed with any collaborative partner. Lengthy negotiations with potential
new collaborative partners or disagreements between established collaborative
partners and us, could lead to delays in or termination of the research,
development or commercialization of certain products or result in litigation or
arbitration that would be time-consuming and expensive. Failure by any
collaborative partner to successfully commercialize any product candidate to
which it has obtained rights from us, or the decision by a collaborative partner
to pursue alternative technologies or to 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.



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, among other things, the core
technology used in our soft tissue surgery systems, including both multi-
electrode and single electrode configurations of the 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 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 may receive in the future, notifications of
potential conflicts of existing patents, pending patent applications or
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 future growth prospects.  We cannot assure you that we will not
have to defend ourselves in court against allegations of infringement of third-
party patents, or that such defense would be successful.

In addition to patents, we rely on trade secrets and
proprietary know-how, which we seek to protect, in part, through confidentiality
and proprietary information agreements.  We require our key employees and
consultants to execute confidentiality agreements upon the commencement of an
employment or consulting relationship. 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 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,
("USPTO"), to determine the priority of inventions. On February 13, 1998, we
filed a lawsuit against Ethicon, Inc., Mitek Surgical Products, a division of
Ethicon, Inc., and GyneCare, Inc. alleging, among other things, infringement of
several of our patents. The parties subsequently settled this lawsuit. Under the
terms of the settlement, Ethicon, Inc. has licensed our U.S. patents for current
products in the arthroscopy and gynecology markets. The settlement agreement
also established a procedure for resolution of certain potential intellectual
property disputes in these two markets without litigation.

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

The Market Price of Our Stock May Be Highly Volatile

Within the last 12
months, our common stock has traded between a range of $11.25 and$79.00per share. The market price of our common stock could

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
the 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.



We Are Involved In A Number of Legal Proceedings

We are currently involved in ongoing litigation.  In
June 1998, we announced that we had entered into an exclusive worldwide
marketing and distribution agreement with Xomed Surgical Products Inc. ("Xomed")
for our products in the ENT surgery market. On February 4, 1999, Xomed filed a
complaint against us alleging breach of contract. On February 5, 1999, we
terminated this agreement. In a separate action, California Medical, Inc. filed
a complaint in California State court against us on February 4, 1999 alleging
breach of contract, interference with contractual and economic relations, trade
libel, misappropriation of trade secrets, misrepresentation and unfair
competition. California Medical, Inc. is a former distributor of our products in
Northern California. As a result of a hearing on our motion to dismiss,
California Medical, Inc. filed an amended complaint on August 9, 1999, in which
they dropped the causes of action alleging misrepresentation. If these legal
proceedings are adversely adjudicated or settled, they could have an adverse
effect on the financial condition, results of operations and future growth
prospects. The defense of these actions is expensive and may divert management's
attention from the core business.

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:

Unless an exemption
applies, generally, before we can introduce a new medical device into the United
States market, it must obtain FDA clearance of a

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 submitted requests for 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. We are also pursuing additional clearances that will allow us to
market the cosmetic surgery products for skin resurfacing and wrinkle reduction.
We received 510(k) clearance to market the ENT surgery system in general head
and neck surgical procedures, as well as minimally-invasive sinus surgery. We
cannot assure you that we will be able to obtain necessary clearances or
approvals to market any other products, or existing products for new intended
uses, on a timely basis, if at all. Delays in receipt or failure to receive
clearances or approvals, the loss of previously received clearances or
approvals, or failure to comply with existing or future regulatory requirements
could have a material adverse effect on our business, financial condition,
results of operations and future growth prospects.

After a device
receives 510(k) clearance, any modification that could significantly affect its
safety or effectiveness, or that would constitute a major change in the intended
use of the device, requires a new 510(k) clearance. The FDA requires each
manufacturer to make this determination in the first instance, but the FDA can
review any such decision. If the FDA disagrees with a manufacturer's decision
not to seek a new 510(k) clearance, the agency may retroactively require the
manufacturer to submit a premarket notification requesting 510(k) clearance. The
FDA can also require the manufacturer to cease marketing and/or recall the
modified device until 510(k) clearance is obtained.



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.

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 the
Arthroscopic System in Europe, Japan, Australia, Taiwan, Korea, Canada and
Mexico, to market our cosmetic surgery products in Europe and Canada and to
market our ENT surgery products and our spinal surgery products in Europe, but
we have not obtained any other international regulatory approvals in other
international markets. We cannot assure you that we will be able to obtain such
clearances and approvals on a timely basis, if at all.

For European distribution, we have received ISO
9001/EN46001 certification and the EC Certificate pursuant to the European Union
Medical Device Directive 3/42/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 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 $10.0 million per occurrence and
$10.0 million in the aggregate. We cannot assure you that such coverage limits
are adequate to protect us from any liabilities we might incur in connection
with the development, manufacture and sale of our products. In addition, we may
be required to increase our product liability coverage as potential products are
successfully commercialized. Product liability insurance is expensive and may
not be available to us in the future on acceptable terms, if at all. We have 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 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.

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



Our stockholder
rights plan and certain provisions of our certificate of incorporation and
bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
our company. This could limit the price that certain investors might be willing
to pay in the future for shares of our common stock. Some provisions of our
certificate of incorporation and bylaws allow us to issue preferred stock
without any vote or further action by the stockholders,

Future Sales By Current Stockholders Could Cause Our Common Stock Price
to Decline

The market price of
our common stock could decline as a result of sales of a large number of shares
in the market after this offering or the perception that

We Face Uncertainty With Year 2000 Compliance

We rely on computers and
computer software to run our business, as do our vendors, suppliers and
customers. These computers and this computer software may not be able to
properly recognize the dates commencing in the Year 2000. We have assigned a
task force to handle the significant uncertainty that exists concerning the
potential effects associated with Year 2000 compliance. The task force has
formulated and begun to implement a plan to address Year 2000 compliance,
including the formulation of contingency plans. To date, we have not found a
material impact that may result from the failure of our computers and computer
software, or that of our vendors, suppliers, and customers, to recognize dates.
We have completed an upgrade of our information technology system, including our
financial, order processing, manufacturing and inventory systems, which included
Year 2000 compliance. To date we have spent approximately $900,000 upgrading our
computer system and related technology. We have not yet completed the steps to
quantify the effects of noncompliance of our customers, suppliers and/or our
service providers. Our goal is to complete all phases of our review and be Year
2000 compliant by December 1999.



Any Year 2000 compliance problems affecting us, our
suppliers, our service providers or our customers could result in a material
adverse effect on our financial condition and operating results. We cannot
assure you that further assessment of our suppliers, data processing systems or
contingency plans will address all issues of Year-2000 compliance.



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



We have an investment portfolio of fixed income
securities that are classified as "available-for-sale securities."  These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase.  We attempt to limit
this exposure by investing primarily in short-term securities.



PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

On February 13, 1998, we filed a lawsuit against Ethicon,
Inc. ("Ethicon")  Mitek Surgical Products, a division of Ethicon, Inc. and
GyneCare, Inc. ("the Defendants") in the United States District Court for the
Northern District of California. We settled this patent litigation on June 24,
1999.  Under the terms of the settlement, Ethicon has licensed our United States
patents in the arthroscopy and gynecology markets and we have dismissed the
legal action. Ethicon has paid us a license fee and will pay us ongoing
royalties on sales in the United States of certain arthroscopy and gynecology
products.  The settlement agreement also establishes a procedure for resolution
of certain potential intellectual property disputes in these two markets without
litigation.



On February 4, 1999, Xomed Surgical Products, Inc. ("Xomed")
of Jacksonville, Florida filed a complaint against us in the Fourth Judicial
Circuit, Duval County, Florida, alleging breach of contract by us. In the
complaint, Xomed has demanded a full refund of the amounts paid for certain
products bought by Xomed from us, and for a portion of an exclusive license fee
paid by Xomed pursuant to an exclusive license and distribution agreement
between Xomed and us. We terminated this license and distribution agreement on
February 5, 1999. We believe the suit is without merit, and filed a Motion to
Dismiss and Answer to the Complaint on May 3, 1999.  In addition, we filed two
counterclaims against Xomed for damages caused by Xomed's failure to perform
under the contract and for a certain milestone payment owed to us by Xomed.

On February 4, 1999, California Medical, Inc. filed a
complaint in California state court against us alleging breach of contract,
interference with contractual and economic relations, trade libel,
misappropriation of trade secrets, misrepresentation and unfair competition.
California Medical is a former distributor of our products in Northern
California. We terminated our distribution agreement with California Medical at
the end of 1997. We believe the suit is without merit and filed a motion to
dismiss on May 31, 1999. As a result of the hearing on our motion to dismiss,
California Medical filed an amended complaint on August 9, 1999, in which they
dropped the causes of action alleging misrepresentation. The parties' attempt to
resolve the dispute through mediation on September 17, 1999.



Item 2.  Changes in Securities and Use of Proceeds



Item 3.  Defaults upon Senior Securities



None



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

None



Item 5.  Other Information





Item 6.  Exhibits and Reports on Form 8 - K



a)  Exhibits

**Item 6: Exhibits**

> a)  Exhibits3.1      Restated Certificate of Incorporation of the Registrant.
>          (Incorporated herein by reference to the Exhibit filed
>          previously with the Registrant's Registration Statement on Form 8-A
>          (Registration No.000-27422))
> 
> 3.2      Amended 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 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 Distribution 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))
> 
> 10.8     Consulting Agreement, dated May 20, 1993, between the Registrant and
>          Eggers &  Associates, Inc., and amendment thereto. (Incorporated herein
>          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 as exhibit numbered 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 as Exhibit 10.20 filed
>           previously with the Registrant's Registration Statement on Form S-1
>           (Registration No. 000-27422.))
> 
> 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 Rights Agreement, dated October 2, 1998, between the
>           the Registrant and Norwest Bank Minnesota, N.A.
>           (Incorporated herein by reference to Exhibit 1 previously filed with
>           the Registrant's Registration Statement on Form 8-A
>           filed October 21, 1998 (Registration number 000-27422).
> 
> 10.16     Amended Distribution Agreement, between the
>           Registrant and Arthrex, GmbH. effective October 2, 1998.
>           (Incorporated herein by reference to  Exhibit
>           10.20 previously filed with the Registrant's Quarterly
>           Report on Form 10-Q  for the period ended 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 previously filed with Amendment No. 1 to
>           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 previously filed
>           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 previously filed
>           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 previously filed
>           with the Registrant's Annual Report on Form 10-K for the period
>           ended January 3, 1998).
> 
> 10.21     Lease Agreement dated March 25, 1998 between the Registrant and Aetna
>           Life Insurance company for the Registrant's facility located at 840
>           Del Rey Avenue, Sunnyvale, California 94086. (Incorporated
>           herein by reference to Exhibit 10.28 previously filed
>           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 previously filed
>           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 the 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, between the Registrant and
>           Collagen Aesthetics dated February 9, 1999. (Incorporated herein
>           by reference to Exhibit  10.30 filed previously
>           with the Registrant's Annual Report on Form 10-K /A
>           for 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 previously filed
>           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 E. Hanni dated May 12, 1999. (Incorporated herein
>           by reference to the same-numbered Exhibit 10.31 previously filed
>           with the Registrant's Quarterly Report on Form 10-Q for the period
>           ended April 3, 1999).
> 
> 10.29     Employment Letter Agreement, between the Registrant
>           and Bruce Prothro amended May 19, 1999. (Incorporated herein
>           by reference to Exhibit 10.32 previously filed
>           with the Registrant's Quarterly Report on Form 10-Q  for the period
>           ended April 3, 1999).
> 
> 10.30   + Litigation Settlement Agreement, between the Registrant and
>           ETHICON, Inc. dated June 24, 1999. (Incorporated herein
>           by reference to Exhibit 10.33 previously filed
>           with the Registrant's Quarterly Report on Form 10-Q  for the period
>           ended July 3, 1999).
> 
> 10.31     Relocation Loan Agreement, between the Registrant and John R.
>           Tighe dated  May 1,1999. (Incorporated herein
>           by reference to Exhibit 10.34 previously filed
>           with the Registrant's Quarterly Report on Form 10-Q  for the period
>           ended July 3, 1999).
> 
> 
> 10.32     Line of Credit Agreement with Silicon Valley Bank dated
>           June 11, 1999.  (Incorporated herein by reference to Exhibit 10.35
>           previously filed with the Registrant's Quarterly Report on Form 10-Q
>           for the period ended July 3, 1999).
> 
> 10.33     Amendment to License Agreement between ArthroCare Corporation
>           and Inamed Corporation dated October 1, 1999.  (Incorporated herein
>           by reference to Exhibit 10.33 previously filed with the Registrant's
>           Registration Statement on Form  S-3. (file no. 333-87187))
> 
> 
> 
> 24.1    Power of Attorney.
> 
> 27.1    Financial Data Schedule.
> 
> 
> +       Confidential treatment granted.
> ++      Confidential treatment requested.
> 
> b)  Reports on Form 8-KNone

---

**ARTHROCARE CORPORATION
                                   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.

Dated: November 16, 1999



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | ARTHROCARE CORPORATION
                                    a Delaware corporation

| |             
| | ------------
| | (Registrant)

Date: November 16, 1999



| |     |                       
| | --- | ----------------------
| | By: | /s/ CHRISTINE E. HANNI

| |                                                                           
| | --------------------------------------------------------------------------
| |                                                                           
| | Christine E. Hanni                                                        
| | Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
| | (Principal Financial Officer
and Accounting Officer)                      

Date: November 16, 1999



| |     |                      
| | --- | ---------------------
| | By: | /s/  MICHAEL A. BAKER

| |                                                   
| | --------------------------------------------------
| |                                                   
| | Michael A. Baker                                  
| | President, Chief Executive
Officer and Director   
| | Officer and Director
(Principal Executive Officer)

---

**EXHIBIT INDEX**

> Exhibit
> Number                          Exhibit Description
> 
> 
> 24.1      Power of Attorney.
> 27.1      Financial Data Schedule.