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

                                    Form 10-Q

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

                For the quarterly period ended July 3, 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 of incorporation)                    (I.R.S. Employer Identification No.)

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

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


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

The number of shares outstanding of the registrant's common stock as of
August  6, 1999 was 9,080,153.















<PAGE>

                    ARTHROCARE CORPORATION

                             INDEX



PART 1:  Financial Information

     Item 1.  Financial Statements (unaudited)

          Condensed Consolidated Balance Sheets as of July  3, 1999
          and January 2, 1999

          Condensed Consolidated Statements of Operations for the
             three and six months ended July 3, 1999 and July  4, 1998

          Condensed Consolidated Statements of Cash Flows
             for the six months ended July 3, 1999 and July 4, 1998

           Notes to Condensed Consolidated Financial Statements

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

     Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II:  Other Information

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

SIGNATURES





















Part 1.  Financial Information
Item 1.   Financial Statements

                             ARTHROCARE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                      July 3,      January 2,
                                                       1999           1999
                                                   -------------  -------------
                                                   (unaudited)
<S>                                                <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                              $2,831         $2,826
  Available-for-sale securities                           4,316          5,232
  Accounts receivables, net of allowance for bad de       7,380          5,972
  Inventory                                               7,632          7,069
  Prepaid expenses and other current assets                 405          1,038
                                                   -------------  -------------
       Total current assets                              22,564         22,137

Property and equipment, net                               5,723          4,560
Related party receivables                                 1,205            723
Other assets                                                272            340
                                                   -------------  -------------
     Total assets                                       $29,764        $27,760
                                                   =============  =============
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                        1,326         $1,797
  Accrued liabilities                                     1,201          1,734
  Accrued compensation                                    1,892          1,056
  Deferred revenue                                          458            517
  Capital lease obligation, current portion                  59             60
                                                   -------------  -------------
          Total current liabilities                       4,936          5,164

Capital lease obligation, less current portion              117            151
Deferred rent                                               135            140
                                                   -------------  -------------
          Total liabilities                               5,188          5,455
                                                   -------------  -------------
Contingencies (Note 6)

Stockholders' equity:
  Common stock                                                9              9
  Additional paid in capital                             50,553         49,901
  Notes receivable from stockholders                          --           (51)
  Deferred compensation                                       --           (68)
  Accumulated other comprehensive income (loss)             (80)           (39)
  Accumulated deficit                                   (25,906)       (27,447)
                                                   -------------  -------------
          Total stockholders' equity                     24,576         22,305
                                                   -------------  -------------
     Total liabilities and stockholders' equity         $29,764        $27,760
                                                   =============  =============
</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
<PAGE>

                             ARTHROCARE CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                               Three Months Ended    Six Months Ended
                                           -------------------   -------------------
                                           July 3,   July 4,     July 3,   July 4,
                                             1999      1998        1999      1998
                                           --------- ---------   --------- ---------
<S>                                        <C>       <C>         <C>       <C>
Revenues:
   Product sales                            $10,100    $5,673     $19,177   $10,544
   License fees and royalty revenue           2,125       375       2,750     2,625
                                           --------- ---------   --------- ---------
      Total revenue:                         12,225     6,048      21,927    13,169
Cost of product sales                         4,310     3,145       8,186     5,995
                                           --------- ---------   --------- ---------
Gross profit                                  7,915     2,903      13,741     7,174
                                           --------- ---------   --------- ---------

Operating expenses:                           1,152     1,155       2,176     2,140
   Research and development                   3,810     2,422       7,146     4,538
   Sales and marketing                        1,679       713       3,028     1,924
   General and administrative              --------- ---------   --------- ---------
        Total operating expenses              6,641     4,290      12,350     8,602
                                           --------- ---------   --------- ---------
Net Income (loss)from operations              1,274    (1,387)      1,391    (1,428)
Interest and other income, net                   81       293         215       587
                                           --------- ---------   --------- ---------
Income before taxes                           1,355    (1,094)      1,606      (841)
Income tax provision                             54         --         65         --
                                           --------- ---------   --------- ---------
Net income (loss)
                                             $1,301   ($1,094)     $1,541     ($841)
                                           ========= =========   ========= =========

Basic net income (loss) per common share
                                              $0.14    ($0.12)      $0.17    ($0.09)
Diluted net income (loss) per common share ========= =========   ========= =========
                                              $0.14    ($0.12)      $0.16    ($0.09)
                                           ========= =========   ========= =========
Shares used in computing basic
net income (loss) per common share
                                              9,036     8,914       8,973     8,902
Shares used in computing diluted           ========= =========   ========= =========
net income(loss) per common share             9,609     8,914       9,547     8,902
                                           ========= =========   ========= =========

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



                           ARTHROCARE CORPORATION
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                            SIx  months ended
                                                      --------------------------
                                                        July 3,       July 4,
                                                          1999          1999
                                                      ------------  ------------
<S>                                                   <C>           <C>
Cash flows from operating activities:
   Net income (loss)                                       $1,541         ($841)
   Adjustments to reconcile net income (loss)
    to net cash used in operating activities:
        Depreciation and amortization                       1,057           282
        Amortization of deferred compensation                  68            80
        Provision for doubtful accounts receivable
          and product returns                                 131            50
        Provision for excess and obsolete inventory           595           186
        Deferred rent                                          (5)           (7)
        Changes in operating assets and liabilities:
          Accounts receivable                              (1,539)       (1,633)
          Inventory                                        (1,158)       (1,911)
          Prepaid expenses and other current assets           633          (334)
          Accounts payable                                   (471)          774
          Accrued liabilities                                 302           660
          Deferred revenue                                    (59)          875
          Other assets                                         68           (13)
                                                      ------------  ------------
   Net cash provided by operating activities                1,163        (1,832)
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment                     (2,220)       (1,035)
   Purchases of available-for-sale securities                 (85)      (22,093)
   Sale or maturities of available-for-sale securities      1,001        26,550
                                                      ------------  ------------
   Net cash provided by (used in) investing activities     (1,304)        3,422
                                                      ------------  ------------

Cash flows from financing activities:
   Issuance of notes receivable to related parties           (575)          (10)
   Repayment of capital leases                                (34)          (15)
   Repayment of notes receivable from related parties         144             9
   Proceeds from exercise of options
      to purchase common stock                                652           537
                                                      ------------  ------------
           Net cash provided by financing activities          187           521
                                                      ------------  ------------

Effect of exchange rate on cash and cash equivalents          (41)           --
                                                      ------------  ------------

Net increase in cash and cash equivalents                       5         2,111
Cash and cash equivalents, beginning of period              2,826         8,188
                                                      ------------  ------------
Cash and cash equivalents, end of period                   $2,831       $10,299
                                                      ============  ============

</TABLE>
               The accompanying notes are an integral part of these
                  condensed consolidated financial statements
<PAGE>
                          ARTHROCARE CORPORATION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.  Basis of Presentation:

        In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of which
are normal and recurring in nature) necessary to present fairly the
financial position, results of operations and cash flows of ArthroCare
Corporation (the "company" or "ArthroCare") for the periods
indicated.  Interim results of operations are not necessarily indicative
of the results to be expected for the full year or any other interim
periods.  The notes to the financial statements contained in the Form
10-K for the year ended January 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.  Diluted net income (loss) per
share is computed using the weighted average number of shares of common
stock and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options.  Common equivalent
shares are excluded from the computation if their effect is anti-
dilutive.

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


<TABLE>
<CAPTION>
                                                        Three Months Ended        Six Months Ended
                                                     ------------------------  ---------------------
                                                       July 3,      July 4,      July 3,    July 4,
                                                        1999         1998         1999       1998
                                                     -----------  -----------  ----------- ---------
<S>                                                      <C>         <C>            <C>      <C>
Net income (loss)                                        $1,301      ($1,094)      $1,541     ($841)
                                                     ===========  ===========  =========== =========
Shares calculation:
   Weighted average basic shares outstanding              9,036        8,914        8,973     8,902

   Options                                                  573            --         574         --
                                                     -----------  -----------  ----------- ---------
      Total shares used to compute
      diluted net income (loss) per share                 9,609        8,914        9,547     8,902
                                                     ===========  ===========  =========== =========

Net income (loss) per basic share                         $0.14       ($0.12)       $0.17    ($0.09)
                                                     ===========  ===========  =========== =========
Net income (loss) per diluted share                       $0.14       ($0.12)       $0.16    ($0.09)
                                                     ===========  ===========  =========== =========
</TABLE>

        Options to purchase 62,631 shares of common stock at prices
ranging from $18.25-$24.25 per share were outstanding during the periods
ended July 4, 1998, but were not included in the computation of diluted
net loss per share because inclusion of such options would have been
anti-dilutive. Options to purchase 93,700 and 331,681 shares of common
stock at prices ranging from $17.625-$24.25 per share were outstanding
during the three and six-month periods ending July 3, 1999,
respectively, 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. The company's unrealized gains and losses on
available for sale marketable securities have been insignificant for all
periods presented.  ArthroCare's total comprehensive income (loss) was
as follows (in thousands):
<TABLE>
<CAPTION>
                                      Three Months Ended    Six  Months Ended
                                   --------------------  --------------------
                                    July 3,    July 4,    July 3,    July 4,
                                     1999       1998       1999       1998
                                   ---------  ---------  ---------  ---------
'<S>                                     <C>         <C>      <C>      <C>

Net income (loss)                     $1,301   ($1,094)     $1,541      ($841)

  Other comprehensive income (loss):

    Unrealized gain and losses on
    available for sale marketable
    securities                            --        (7)         --         (7)

    Foreign translation adjustment        (4)       --         (41)        --
                                   ---------  ---------   ---------  ---------
  Comprehensive net income (loss)      1,297    (1,087)      1,500       (834)
                                   =========  =========   =========  =========
</TABLE>

4.  Balance sheet detail (in thousands):

<TABLE>
<CAPTION>
                                          July 3,        January 2,
                                            1999            1999
                                        ------------    ------------
                                        (Unaudited)
<S>                                     <C>             <C>
Inventory:
   Raw materials                             $3,292          $3,127
   Work-in-process                            1,546           1,852
   Finished goods                             2,794           2,090
                                        ------------    ------------
Total                                        $7,632          $7,069
                                        ============    ============


Other accrued liabilities:
   Accrued professional fees                   $188            $150
   Accrued warranty                             302             302
   Other                                        711           1,282
                                        ------------    ------------
Total                                        $1,201          $1,734
                                        ============    ============
</TABLE>













ARTHROCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS (Unaudited)

5. Line of Credit:

        In June 1999, the company entered into a $7.0 million revolving
line of credit that expires in June 2000.  Borrowings under the line of
credit bear interest at the bank's prime rate plus one-quarter of one
percentage point.  Borrowings under this line are secured by certain of
the company's assets and are subject to certain covenants related to
financial ratios and profits.  At July 3, 1999 the company was in
compliance with these covenants.  No borrowings were outstanding as of
July 3, 1999.

6.   Litigation:

On February 13, 1998, the company filed a lawsuit against Ethicon,
Inc., Mitek Surgical Products, a division of Ethicon, Inc., and
GyneCare, Inc. ("the Defendants") in the United States District Court
for the Northern District of California. The lawsuit alleged, among
other things, that the Defendants have been and are currently infringing
four patents issued to the company in December 1997. Specifically, the
Defendants use, market and sell two separate electrosurgical systems
under the names of VAPR(R) and  VersaPoint(R) which the company believes
infringe these patents.  The Company settled this patent litigation with
the Defendants on June 24, 1999.  Under the terms of the settlement,
Ethicon, Inc. has licensed the company's United States patents in the
arthroscopy and gynecology markets and ArthroCare has dismissed the
legal action.  Both companies will remain active in the marketplace.
Ethicon, Inc. has paid ArthroCare a license fee and will pay 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 future intellectual
property disputes in these two markets without litigation.

On February 4, 1999, Xomed Surgical Products ("Xomed") of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999.  In addition, the company 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
ArthroCare by Xomed.

On March 24, 1999, a former employee of the company filed a complaint
of action for sexual harassment in violation of the Fair Employment and
Housing Act and retaliation in violation of the Fair Employment and Housing
Act.  The company filed a response to the complaint on June 23, 1999, and
had a case management conference July 27 at which the parties stipulated
mediation.  According to the complaint, the demand exceeds $25,000.


7.  Recent Accounting Pronouncements:

        In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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. The company must adopt this standard no later than fiscal year
2001. To date, the company does not engage in hedging activities.

8. Segment Information:

        The company is organized into four business units based on product
markets:  arthroscopy, ear nose and throat, cosmetic surgery and
cardiology.  To date, substantially all the company's product sales were
related to the Arthroscopy segment.  Licensing fees are primarily
attributable to the Arthroscopy segment. However, during the three- and
six- month periods ended July 3, 1999, approximately $0.1 million and
$0.3 million, respectively, of the company's license revenue was
attributable to the AngioCare(TM) segment and $0.5 million and $1.0
million, respectively, was attributable to the Visage segment.  During
the three-and six-month periods ended July 4, 1998, approximately $0.2
million and $2.3 million, respectively, of the company's license revenue
was attributable to the AngioCare segment.













PART 1. FINANCIAL INFORMATION

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

Overview

Statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which express that
ArthroCare Corporation (the "company" or "ArthroCare") "believes",
"anticipates", "expects" or "plans to", as well as other statements
which are not historical fact, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
events or results may differ materially as a result of the risks and
uncertainties described herein and elsewhere including, in particular,
those factors described under "Business" set forth in Part I of the
company's Annual Report on Form 10-K for the year ended January 2, 1999
and "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS" set forth below.

ArthroCare has developed a broad technology platform for operating
on soft tissue.  The technology is based on a patented method of tissue
removal, called Coblation(TM) technology, that is designed to improve the
effectiveness and safety of standard surgical methods.  Coblation (TM)
technology uses radio frequency ("RF") energy to remove tissue through
a significantly cooler process than is possible with traditional electro
or laser-surgery.  Coblation-assisted surgery has the potential to
improve operative precision and efficiency compared with many standard
surgical techniques and thereby reduce pain and speed recovery.
ArthroCare's Coblation Systems replace the multiple surgical tools
traditionally used in soft-tissue surgery procedures with one multi-
purpose, surgical system that consists of a controller unit and a series
of disposable surgical tools that are specialized for particular types
of surgery.  The disposable surgical tool ablates (removes) soft tissue
with minimal damage to surrounding healthy tissue and simultaneously
achieves hemostasis (sealing of small bleeding vessels).  Although the
company's Coblation technology is most commonly used in arthroscopic
procedures, ArthroCare has developed Coblation technology for use in
cosmetic surgery, ear, nose and throat ("ENT") surgery, and
cardiology.  The company's long-term strategy includes applying its
patented technology to other soft-tissue surgery fields.

During the year ended January 2, 1999, the company formed a
business unit, AngioCare(TM), for the purpose of commercializing the
company's technology in the cardiac medicine market.
As part of those efforts, in February 1998, the company entered
into a license and OEM agreement under which Boston Scientific
Corporation ("BSC") will provide input into the development of, obtain
regulatory approval for and market products based on the company's
Coblation technology for myocardial revascularization procedures. The
company believes that there may be additional applications within
cardiology for which the company's technology could be utilized.

In April 1998, the company announced that it had entered the
cosmetic surgery market, and that it had formed a business unit called
Visage(R) to commercialize Coblation technology in this field.  In January
1999, the company entered into a license and distribution agreement with
Collagen Aesthetics ("Collagen"), which was expanded in February 1999.
Under this agreement, Collagen acquired exclusive, worldwide marketing
rights for the company's Visage line of products for the dermatology and
cosmetic surgery markets. In August 1999, a tender offer was made for
Collagen. The company anticipates that there will be no significant
changes to the agreement based upon the acquisition.

In May 1998, the company announced that it had entered the
otorhinolaryngology (ear, nose and throat) market, and that it had
formed a business unit called ENTec(TM) to commercialize Coblation
technology in this field.  In June 1998, the company entered into a
license and OEM agreement with Xomed Surgical Products ("Xomed") to
market the Coblation products in the otorhinolaryngology market. This
agreement was terminated by the company in February 1999, following
which the company has been pursuing direct marketing and distribution of
the ENTec product line.  Xomed has filed suit against the company alleging
brach of contract and seeking monetary damages.


The company received clearance of its 510(k) premarket
notification from the United States Food and Drug Administration
("FDA") in March 1995 to market its Arthroscopic Electrosurgery System
in the United States for use in arthroscopic surgery of the knee,
shoulder, elbow and ankle. The company has since received FDA clearance
for use of this system in the wrist and hip. In May 1999, the company
received notification of approval by the Japanese Ministry of Health and
Welfare to market the company's Coblation-based arthroscopy products in
Japan. The company applied the CE mark for marketing the Visage System
in Europe for general dermatology, cosmetic surgery, skin resurfacing
and wrinkle reduction procedures and has received 510(k) clearance for
use in general dermatology procedures in the United States. The company
is pursuing additional clearances that will allow the system to be
marketed in the United States specifically for skin resurfacing and
wrinkle reduction. The company applied the CE mark for marketing the
ENTec System in Europe and has received 510(k) clearances for use in
general head and neck surgical procedures and functional endoscopic
sinus surgery in the United States. In addition, the company may pursue
FDA clearance for the use of Coblation technology in other indications.

In December 1995, the company first commercially introduced its
Arthroscopic System through a network of distributors in the United
States. The company's strategy includes placing controller units that
are intended to generate future disposable revenue with arthroscopic
surgeons. The company's long-term strategy includes applying its
patented platform technology to a range of other soft-tissue surgical
procedures including the newly introduced products in the fields of
cosmetic surgery and ear, nose and throat surgery. The company has
received 510(k) clearance for use of its technology in several other
fields. There can be no assurance that any of the company's clinical
studies will lead to 510(k) applications or that the applications will
be cleared by the FDA on a timely basis, if at all, or that the
products, if cleared for marketing, will ever achieve commercial
acceptance.





Results of Operations

Revenues:

Product sales for the three months ended July 3, 1999 were $10.1
million, an increase of  $4.4 million or 78% from $5.7 million for the
prior year period. For the six months ended July 3, 1999 product sales
were $19.2 million, representing an 82% increase, from $10.5 million for
the same period of the prior year.  The increase in product sales was
primarily due to an increase in the number of sales of both controllers
and disposable units.  The higher unit volume of sales resulted
primarily from increased activity for newly introduced styles of
disposables for arthroscopy, and sales of disposables for new product
lines. Another factor contributing to the increase in products sales was
the increase in international product sales during 1999.

International product sales for the three months ended July 3,
1999 increased to 16% of total product sales when compared to 9% of
product sales for the same period of the prior year.  International
product sales for the six months ended July 3, 1999 increased to 11%
compared to 9% of product sales for the same period in 1998.  The
increase in international sales are primarily attributable to increasing
sales in the Pacific Rim since the company received approval by the
Japanese Ministry of Health and Welfare to market arthroscopic products
in Japan and increased sales in Europe.

The company believes that, to date, it has penetrated 30% of
hospitals and surgical centers that perform arthroscopic procedures in
the United States. The company's strategy in arthroscopy has been, and
continues to be, to increase future disposables sales by increasing the
installed base of controllers through promotional programs. Disposables
are consistently sold at or near list price except for sales to
international distributors and marketing partners, which are currently,
and are expected in the future to be, sold at discounted prices.

Based on the estimated number of procedures performed each year,
the company believes that knee procedures represent the largest segment
of the arthroscopic market.  In order to achieve increasing disposable
sales over time, the company believes it must continue to penetrate the
market in knee procedures, expand physicians' education with respect to
Coblation technology, continue working on articular cartilage
applications and focus product development efforts specifically on knee
applications. During the second half of fiscal year 1998, the company
introduced new disposable styles, including the Saber(TM) and Covac(TM), that
are designed primarily to be used in arthroscopic knee procedures.
Sales of these disposables specifically designed for use in the knee
accounted for approximately 16% of the arthroscopy disposables sold.

License fees and royalty revenue increased to $2.1 million for the
three months ended July 3, 1999 from $0.4 million for the three months
ended July 4, 1998 and increased to $2.8 million for the six months
ended July 3, 1999 from $2.6 million for the six months ended July
4,1998.  The increases are primarily due to the timing of licensing
payments received as the result of settlement of a patent infringement
suit initiated by the company, offset by the timing of licensing fees
received from its business partners. In February 1998, the company
entered into a license agreement under which BSC was granted an
exclusive right to develop and market products based on the company's
Coblation technology for myocardial revascularization procedures. BSC
pays license fees, a portion of which will be classified as prepaid
royalties, to the company upon achievement of designated milestones and
royalties on sales of resulting products, if any.  Licensing fees are
primarily attributable to the Arthroscopy segment, however, during the
three- and six-month periods ending July 3, 1999 the company recognized
$0.1 million and $0.3 million, respectively, of such payments as license
fees and royalty revenue.  The company received a license payment from
BSC of $3.0 million in February of 1998, of which $0.2 million and $2.3
million was recognized as revenue during the three- and six-month
periods ended July 4, 1998, respectively.

In January 1999, the company 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 the company's 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 product
to end-users. During the three-and six-month periods ended July 3, 1999,
the company recognized $0.5 million and $1.0 million, respectively, of
such payments as license fees and royalty revenue.

There can be no assurance that the company 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 the company may continue to receive licensing and royalty
revenues from its business partners.

Cost of Product Sales

        Cost of product sales for the three months ended July 3, 1999 was
$4.3 million or 43% of product sales, as compared with $3.2 million or
56% of product sales for the three months ended July 4, 1998.  For the
six months ended July 3, 1999, cost of product sales was $8.2 million or
43% of product sales, as compared with $6.0 million or 57% of product
sales for the comparable period of the prior year. The absolute dollar
increase in cost of product sales for the three-and six-month periods
ended July 3, 1999 compared to the same period of the prior year is
attributable to increasing unit sales of both controllers and
disposables. The decrease in absolute dollars in cost of product sales
and as a percentage of sales for the six months ended July 3, 1999 as
compared to the prior year period ended July 4, 1998 is attributable to
increased manufacturing efficiency and increased production volume along
with additional controller placement programs whereby the company
maintains ownership of the controller.

There can be no assurance 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 due to new product
introductions.

Operating Expenses

Research and development expense was $1.2 million, for the three
months ended July 3, 1999 and July 4, 1998.   For the six months ended
July 3, 1999, and July 4, 1998, research and development expense was
$2.2 million and $2.1 million, respectively.   In general, overall
spending in research and development increased slightly as the company
continues to develop new products in its currently commercialized market
as well as development effort for potential additional products.
Increases in research and development expense have been partially offset
by funding received from business partners for continued product
development.  The company believes that investment in its platform
technology is essential for the company to maintain its competitive
position. The company expects to increase the dollar amount of research
and development spending through continued expenditures on new product
development, regulatory affairs, clinical studies and patents, but
anticipates expenses to continue to decrease as an overall percentage of
product sales.

Sales and marketing expense increased to $3.8 million or 38% of
product sales during the three months ended July 3, 1999, as compared to
$2.4 million or 43% of product sales during the same period of the
previous fiscal year. For the six months ended July 3, 1999, and July 4,
1999 sales and marketing expense increased to $7.1 million or 37% of
product sales from $4.5 million or 43% of product sales, respectively.
The increase in spending in absolute dollars for the three-and six-month
periods was primarily due to higher dealer commissions resulting from
increased sales, increased staffing and increased trade-show related
expense.  Additional sales and marketing expenses were incurred during
the current-year periods as the company expanded operations in Europe.

The company anticipates that sales and marketing spending will
continue to increase due to higher dealer commissions from increased
sales, the additional cost of penetrating international markets, higher
promotional, demonstration and sample expenses, and additional
investments in the sales, marketing and support staff necessary to
market the company's current products and commercialize future products.

General and administrative expense increased to $1.7 million or
17% of product sales during the three months ended July 3, 1999, as
compared to $0.7 million or 13% of product sales during the same period
of the previous fiscal year.  For the six months ended July 3, 1999, and
July 4, 1999 general and administrative expense increased to $3.0
million or 16% of product sales from $1.9 million or 18% of product
sales, respectively. Overall, the most significant increase was
attributable to legal expenses related to the patent infringement claims
brought by the company against certain competitors. The company expects
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 $0.1 million during
the three months ended July 3, 1999 from $0.3 million for the three
months ended July 4, 1998. For the six months ended July 3, 1999, and
July 4, 1999 interest and other income, net decreased to $0.2 million
from $0.6 million, respectively.  The decreases were primarily due to a
decrease in interest income from investments due to the declining
balance of cash and investments.

Income Tax Provision

        The provision for income taxes was $54,000 and $65,000 for the
three-and six- month periods ended July 3, 1999, respectively.  The
company's tax rate is below the statutory rate due to the utilization of
net operating loss carryforwards incurred in prior years.  The company
has 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. The company is 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 $1.3 million for the three months ended July 3, 1999
compared to a loss of $1.1 million for the period ended July 4,
1998.  For the six months ended July 3, 1999, net income increased to
$1.5 million from a net loss of $0.8 million for the same period of the
prior year.  Net income for the current periods reflect an increase in
product sales, license fees and gross margin primarily offset by
increased spending in sales and marketing and legal expenses.  Although
the company has experienced substantial revenue growth since its
inception, and has been profitable on a quarterly basis since the
quarter ended April 3, 1999, due to its short operating history, no
assurance can be given that revenue growth or profitability will be
sustained.


Liquidity and Capital Resources

On July 3, 1999, the company had $22.6 million in working capital.
Principal sources of liquidity consisted of $7.1 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, the company had $7.0 million available under a line
of credit. Available borrowings under this line of credit are contingent
upon and secured by certain of the company's asset balances.  Borrowings
under the line of credit bear interest at the Bank's prime rate plus
one-quarter of one percentage point.  Borrowings under this line are
secured by certain of the company's assets and are subject to certain
covenants related to financial ratios and profits.  At July 3, 1999 the
company was in compliance with these covenants.  No borrowings were
outstanding as of July 3, 1999.

Net cash provided by operating activities for the six months ended
July 3, 1999 was $1.2 million. Cash used in operating activities for the
six months ended July 4, 1998 was $1.8 million.  The increase in cash
provided by operating activities year-over-year was primarily due to the
net income of $1.5 million for 1999 compared to a net loss in 1998 of
$0.8 million and a increase in the depreciation amounts year-over-year.

Net accounts receivable increased to $7.4 million as of July 3,
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 offset in part by a decrease in the overall number of days
sales outstanding.

Inventories increased slightly to $7.6 million as of July 3, 1999
from $7.1 million at January 2, 1999, due to higher product sales
activity along with the anticipated ramp-up of new product markets. The
company expects future inventory levels to grow as sales volume
increases.

Net property and equipment increased to $5.7 million as of July 3,
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 company plans to finance its capital needs principally from
cash from product sales, license fees and royalty income, and existing
cash and cash equivalents and related interest.  The company believes
this will be sufficient to fund its operations through fiscal year 1999.
The company has obtained a $7.0 million line of credit that could
provide additional working capital.  As of July 3, 1999, the company had
committed to capital expenditures of approximately $0.3 million. The
company's future liquidity and capital requirements will depend on
numerous factors, including the company's success in commercializing its
products, development and commercialization of products in fields other
than arthroscopy, the ability of the company's suppliers to continue to
meet the demands of the company at current prices, obtaining and
enforcing patents important to the company's business, the status of
regulatory approvals and competition.

Year 2000

The company relies on computers and computer software to run its
business, as do its vendors, suppliers and customers. These computers
and computer software may not be able to properly recognize the dates
commencing in the Year 2000. The company has 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, the
company has not found a material impact that may result from the failure
of its computers and computer software, or that of its vendors,
suppliers, and customers, to recognize dates. The company has completed
an upgrade of its information technology system, including its financial
system, order processing, manufacturing and inventory system, which
included Year-2000 compliance. To date the company has spent
approximately $900,000 upgrading its computer system and related
technology. The company has not yet undertaken the steps to quantify the
effects of noncompliance of its customers, suppliers and/or its service
providers. The company's goal is to complete all phases of its review
and be Year-2000 compliant by December 1999.

Any Year-2000 compliance problems with either the company, its
suppliers, its service providers or its customers could result in a
material adverse effect on the company's financial condition and
operating results. There can be no assurance that further assessment of
the company's suppliers, data processing systems or contingency plans
will address all issues of Year-2000 compliance.


Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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. The company must adopt this standard no later than fiscal year
2001. To date, the company does not engage in hedging activities.


ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

ArthroCare became a public company in February 1996.  Included
here are risk factors as updated from the company's Annual Report on
Form 10-K, filed April 2, 1999 for the year ended January 2, 1999. The
following factors represent current challenges to the company that
create risk and uncertainty. Failure to adequately overcome any of the
following challenges, either singularly or in combination, could have a
material adverse effect on the company's results of operations,
business, or financial position.


Early Stage of Commercialization of Non-Arthroscopic Products;
Uncertainties Associated with Non-Arthroscopic Products.

During the year ended January 2, 1999, the company formed a
business unit, AngioCare(R), for the purpose of commercializing the
company's technology in the cardiac and interventional cardiology
markets. In April 1998, the company announced the creation of its new
business unit, Visage, created for the purpose of commercializing the
company's Coblation technology for use in dermatology and cosmetic
surgery procedures.   In May 1998, the company announced the creation of
its new business unit, ENTec, created for the purpose of commercializing
the company's Coblation technology for use in head and neck surgical
procedures.  During 1998, the company entered into a license and OEM
agreement under which Boston Scientific Corporation ("BSC") will
provide input into the development of, obtain regulatory approval for
and market products based on the company's Coblation technology for
myocardial revascularization procedures. In addition, the company may
pursue additional clearances for certain other indications.  The company
applied the CE mark for marketing of the Visage product line in Europe
for general dermatology, cosmetic surgery, skin resurfacing and wrinkle
reduction procedures and has received 510(k) clearances for use of
Visage products in general dermatology procedures in the United States.
The company is pursuing additional clearances that will allow the Visage
product line to be marketed in the United States specifically for skin
resurfacing and wrinkle reduction. During 1999, the company entered into
a license and distribution agreement with Collagen Aesthetics
("Collagen").  Under this agreement, Collagen acquired exclusive,
worldwide, marketing rights for the company's Visage line of products
for the dermatology and cosmetic surgery markets.  The company has
applied the CE mark certification for marketing the ENTec line of
Coblation-based products in Europe and has received 510(k) clearances
for use of this system in general head and neck surgical procedures, as
well as endoscopic sinus surgery, in the United States.  Both the ENTec
and Visage product lines have only recently been commercially introduced
and, to date, the company has sold only a limited number of units, which
have been utilized by a limited number of doctors. No assurance can be
given that the company or its partners will be able to market the
Visage, ENTec or AngioCare product lines successfully.

A significant investment in additional preclinical and clinical
testing, regulatory and sales and marketing activities may be necessary
in order for the company to commercialize the Visage, ENTec and
AngioCare product lines.  There can be no assurance that the Visage,
ENTec or AngioCare product lines will generate sufficient or sustainable
revenues to enable the company to profitable.  Furthermore, although the
company believes that these products offer certain advantages, there can
be no assurance that these advantages will be realized, or if realized,
that these products will result in any meaningful benefits to current or
future collaborative partners or patients.

Development and commercialization of the Visage, ENTec and
AngioCare product lines are subject to the risks of failure inherent in
the development of new medical devices.  These risks include the
possibility that the company will experience delays in testing or
marketing, that such testing or marketing will result in unplanned
expenditures or in expenditures above those anticipated by the company,
that the Visage, ENTec and AngioCare product lines will not be proven
safe or effective, that such products will not be easy to use or cost-
effective, that third parties will develop and market superior or
equivalent products, that such products will fail to receive necessary
regulatory approvals, that such products will be difficult or
uneconomical to manufacture on a commercial scale, that proprietary
rights of third parties will preclude the company or its collaborative
partners from marketing such products and that such products will not
achieve market acceptance.  As a result of these risks, there can be no
assurance that research  and development efforts conducted by the
company or its collaborative partners will result  in any commercially
viable products.  If required regulatory approvals are not obtained for
the Visage, ENTec and AngioCare product lines or any approved products
are not commercially successful, there may be a material adverse effect
on the company's business, financial condition and results of
operations.

Dependence Upon Arthroscopic System

The company commercially introduced the Arthroscopic System in
December 1995. Since the Arthroscopic System accounts for substantially
all of the company's product sales, the company is highly dependent on
it.  No assurance can be given that the company will be able to
manufacture the Visage, ENTec and AngioCare product lines in commercial
quantities at acceptable costs, or that it will be able to market such
products successfully. Additionally, the company's potential products
for non-arthroscopic indications are in various stages of development,
and the company may be required to undertake time-consuming and costly
development activities and seek regulatory approval of these devices.
There can be no assurance that product development will ever be
successfully completed, that regulatory approval, if applied for, will
be granted by the FDA or foreign regulatory authorities on a timely
basis, if at all, or that the potential products will ever achieve
commercial acceptance.

Currently, a large portion of the company's sales are from its
Arthroscopic System in the United States. The company has established
distribution capability in Europe, Australia, New Zealand, Korea, Japan,
Taiwan, Canada, Mexico, the Caribbean, Russia, South Africa, the Middle
East, Northern Africa and South and Central America. Before the
Arthroscopic System can be sold in some of these regions, the company
will have to obtain additional international regulatory approvals. If
such regulatory approval is obtained, there can be no assurance that the
company will be able to establish a successful distribution capability
in these or in other geographic regions, or for other than the
arthroscopic product line.


Dependence Upon Collaborative Arrangements

In order to successfully develop and commercialize certain
products, the company may enter into collaborative or licensing
arrangements with other medical device companies and other entities to
fund and complete its research and development activities, pre-clinical
and clinical testing and manufacturing, to seek and obtain regulatory
approval and to achieve successful commercialization of future products.
The company has entered into collaborative arrangements with BSC and
Collagen. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" for a discussion of
these arrangements.

Participation in collaborative and licensing arrangements with
third parties subjects the company to a number of risks. Agreements with
collaborative partners typically allow such partners significant
discretion in electing whether to pursue any of the planned activities.
The company cannot control the amount and timing of resources its
collaborative partners may devote to the products and there can be no
assurance that such partners will perform their obligations as expected.
Business combinations or significant changes in a corporate partner's
business strategy may adversely affect such partner's ability to meet
its obligations under the arrangements.  For example, a third party has
recently made a tender offer for Collagen  stock. Although, the company
does not believe that the new partner will have an adverse, if any collaborative
partner were to terminate or breach its agreement with the company, or otherwise
fail to complete its obligations in a timely manner, such conduct could
have a material adverse effect on the company's business, financial
condition and results of operations. To the extent that the company is
not able to establish further collaborative arrangements or that any or
all of the company's existing collaborative arrangements are terminated,
the company would be required to seek new collaborative arrangements or
to undertake commercialization at its own expense, which could
significantly increase the company's capital requirements, place
additional strain on its human resource requirements and limit the
number of products which the company would be able to develop and
commercialize. In addition, there can be no assurance that existing and
future collaborative partners will not  pursue alternative technologies
or develop alternative products either on their own or in collaboration
with others, including the company's competitors.

There can also be no assurance that disputes will not arise in the
future with respect to the ownership of rights to any technology or
products developed with any collaborative partner. Lengthy negotiations
with potential new collaborative partners or disagreements between
established collaborative partners and the company could lead to delays
or termination in the research, development or commercialization of
certain products or result in litigation or arbitration, which would be
time consuming and expensive. Failure by any collaborative partner to
successfully commercialize any product candidate to which it has
obtained rights from the company, or the decision by a collaborative
partner to pursue alternative technologies or commercialize or develop
alternative products, either on their own or in collaboration with
others, could have a material adverse effect on the company's business,
financial condition and results of operations.


Uncertainty of Market Acceptance

Despite the benefits of the company's Coblation technology,
physicians will not use the company's products unless they determine,
based on experience, clinical data and other factors, that these systems
are an attractive alternative to conventional means of tissue ablation.
Only a few, independently published clinical reports exist to support
the company's marketing efforts for its products and technology.  The
company believes that continued recommendations and endorsements by
influential physicians are essential for market acceptance of its
products and technology. If Coblation technology does not continue to
receive broad-based physician acceptance and endorsement by influential
physicians, the company's business, financial condition and results of
operations could be materially adversely affected.

Limited Domestic and International Marketing and Sales Experience

The company has shipped over 5,000 controller units and more than
450,000 disposables through the quarter ended July 3, 1999. The company
is marketing and selling its Arthroscopic and ENTec product lines in the
United States and internationally through a network of independent
distributors and its subsidiary, ArthroCare Europe AB. These
distributors sell orthopedic arthroscopy and ENTec devices for a number
of other manufacturers.  In addition, there can be no assurance that
these distributors will commit the necessary resources to effectively
market and sell the company's Arthroscopic or ENTec product lines, or
that they will be successful in closing sales with doctors and
hospitals.  Collagen is the exclusive and worldwide distributor for the
Visage product line.  The inability to sell sufficient quantities of the
cosmetic surgery products could have a material adverse effect on the
company's business, financial condition and results of operations.

The company has established distribution capability in Europe,
Australia, New Zealand, Korea, Japan, Taiwan, Canada, Mexico, the
Caribbean, Russia, South Africa, the Middle East, Northern Africa and
South and Central America. Before the Arthroscopic System can be sold in
some of these regions, the company will have to obtain additional
international regulatory approvals. If such regulatory approval is
obtained, there can be no assurance that the company will be able to
establish a successful distribution capability in these or in other
geographic regions.  In January 1999, the company entered into a license
agreement with Collagen, whereby Collagen has the exclusive worldwide
distribution rights for Visage.   For a description of additional risks
and uncertainties relating to Collagen's exclusive worldwide
distribution rights for Visage, see "Additional Factors That Might
Affect Future Results - Dependence on Collaborative Arrangements" on
page 20 of this Quarterly Report on Form 10-Q.

No assurance can be given that the company will successfully
market its products directly, or through its distributors or its
business partners, that the company will secure marketing partners for
other international markets, and successfully sell its products in
international markets or that any of its international distributors and
marketing partners will commit the necessary resources to obtain
additional necessary international regulatory approvals on behalf of the
company and successfully sell its products in international markets.

Limited Manufacturing Experience

The company's manufacturing operations consist of an in-house
assembly operation for the manufacture of disposables, and a separate
in-house operation for the manufacture of controllers. The company's
products are manufactured from several components, some of which are
supplied to the company by third parties. Manufacturing of the
controllers, of which an earlier version was manufactured by a third
party, was brought in-house in late 1997 for purposes of maintaining
process control, managing availability, and leveraging fixed costs.

In early 1998, the company started manufacturing its System 5000
controllers for its Visage product line and only a small number of this
model of controllers have been manufactured and sold. In the same time
period, the company began to manufacture limited numbers of disposables
for the ENTec and Visage product lines.  As a result, the company has
limited experience manufacturing ENTec and Visage product lines in
volumes necessary for the company to achieve additional commercial
sales, and there can be no assurance that reliable, high-volume
manufacturing can be achieved at a commercially reasonable cost. In
addition, there can be no assurance that the company or its suppliers
will not encounter any manufacturing difficulties, including problems
involving regulatory compliance, product recalls, production yields,
quality control and assurance, supplies of components or shortages of
qualified personnel.

The company and its component suppliers are required to operate in
conformance with FDA Quality System Regulation ("QSR") requirements in
order to produce products for sale in the United States, and ISO 9001
standards in order to produce products for sale in Europe. In addition,
the company must conform to the Medical Device Directive ("MDD") for
sale in Europe. There can be no assurance that the company or its
component suppliers will remain in compliance with the QSR, ISO 9001 or
MDD standards. Any failure by the company or its component suppliers to
remain in compliance with the QSR, ISO 9001 or MDD standards could have
a material adverse effect on the company's business, financial condition
and results of operations.

In addition, the disposables are sterilized by a single
subcontractor.  There can be no assurance that an alternate sterilizer
can be identified and qualified for sterilizing the disposables. The
company's inability to secure an alternative sterilizer, if required,
would limit its ability to manufacture the company's disposables and
could have a material adverse effect on the company's business,
financial condition and results of operations.

History of Losses; Fluctuations in Operating Results

The company has experienced significant operating losses since
inception and, as of July 3, 1999, had an accumulated deficit of $25.9
million. Results of operations may fluctuate significantly from quarter
to quarter due to the timing of expenditures, receipt of license fees
and/or milestone payments, absence of a backlog of orders, timing of the
receipt of orders, and promotional programs for the company's products.
The company's revenues and profitability will be critically dependent on
whether or not it can successfully continue to market its Coblation-
based technology product lines. There can be no assurance that
significant profitability will ever be achieved.

Patents and Proprietary Rights

The company's ability to compete effectively depends in part on
developing and maintaining the proprietary aspects of its platform
Coblation technology. The company owns 19 issued United States
("U.S.") patents, more than 60 pending U.S. patent applications, 10
issued international patents and over 40 international patent
applications corresponding to 20 of the U.S. filings.  The initial U.S.
patent is currently set to expire in 2008, three issued U.S. patents are
currently expected to expire between 2008 and 2012 and the other 15 U.S.
patents are expected to expire between 2014 and 2016. The company
believes that the issued patents cover both the core technology used in
the company's Soft-tissue Surgery Systems, including both multi-
electrode and single-electrode configurations of its disposable tools,
as well as the use of Coblation technology in specific surgical
procedures.

The issued patents cover, among other things, systems and methods
for applying radio frequency energy to tissue in the presence of
electrically conductive fluid such as isotonic saline; disposables
having an electrode array and a means to supply current independently to
individual electrodes; and systems and methods for employing radio
frequency energy in arthroscopy, urology, gynecology, ENT, cosmetic
surgery and cardiac procedures (e.g. transmyocardial revascularization
of the heart). The pending patent applications include coverage for the
fundamental tissue ablation and cutting technology as well as methods
and apparatus for specific procedures.

There can be no assurance that the patents that have been issued
to the company or any patents that may be issued as a result of the
company's United States or international patent applications will
provide any competitive advantages for the company's products or that
they will not be successfully challenged, invalidated or circumvented in
the future. In addition, there can be no assurance that competitors,
many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and
obtain patents that will prevent, limit or interfere with the company's
ability to make, use and sell its products in in the United States or
international markets.

A number of medical device and other companies, universities and
research institutions have filed patent applications or have issued
patents relating to monopolar and/or bipolar electrosurgical methods and
apparatus. If third-party patents or patent applications contain claims
infringed by the company's technology and such claims are ultimately
determined to be valid, there can be no assurance that the company would
be able to obtain licenses to those patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology, either of
which would have a material adverse effect on the company's business,
financial condition and results of operations. There can be no assurance
that the company will not be obligated to defend itself in court against
allegations of infringement of third-party patents.

In addition to patents, the company relies on trade secrets and
proprietary know-how which it seeks to protect, in part, through
confidentiality and proprietary information agreements. The company
requires its key employees and consultants to execute confidentiality
agreements upon the commencement of an employment or consulting
relationship with the company. These agreements generally provide that
all confidential information developed or made known to the individual
by the company during the course of the individual's relationship with
the company is to be kept confidential and not disclosed to third
parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to the
company shall be the exclusive property of the company. There can be no
assurance that such agreements will not be breached, that the company
would have adequate remedies for any breach or that the company's trade
secrets will not otherwise become known to or be independently developed
by competitors.

Patent Litigation

The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual
property litigation to gain a competitive advantage. There can be no
assurance that the company will not become subject to patent
infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office ("USPTO") to
determine the priority of inventions. On February 13, 1998, the company
filed a lawsuit (the "Lawsuit") against Ethicon, Inc. Mitek Surgical
Products, a division of Ethicon, Inc., and GyneCare, Inc. alleging,
among other things, infringement of several of the company's patents.
This lawsuit has been settled. See Part II, Item I of this Quarterly
Report on Form 10-Q. The defense and prosecution of the Lawsuit and
intellectual property suits, generally, USPTO interference proceedings
and related legal and administrative proceedings are all costly and
time-consuming. The company believes that the Lawsuit was necessary and
if others violate the proprietary rights of the company, further
litigation may be necessary to enforce patents issued to the company, to
protect trade secrets or know-how owned by the company or to determine
the enforceability, scope and validity of the proprietary rights of
others. Any such further litigation or interference proceedings may
result in substantial expense to the company and significant diversion
of effort by the company's technical and management personnel. An
adverse determination, other litigation or interference proceedings to
which the company may become a party could subject the company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the company to cease using such
technology. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to the company on
satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the company from manufacturing and selling its products, which
would have a material adverse effect on the company's business,
financial condition and results of operations.

Competition

The arthroscopic medical device industry is intensely competitive.
The company's Coblation technology is beginning to replace older tissue
removal technology, such as laser systems, conventional electrosurgical
systems, manual instruments and power shavers in certain arthroscopic
procedures. Consequently, the company competes indirectly with the
providers of such tissue removal systems because the company must
convert customers to its Coblation technology. Many of these competitors
have significantly greater financial, manufacturing, marketing,
distribution and technical resources than the company. Smith & Nephew
Endoscopy (which owns Acufex Microsurgical, Inc. and Dyonics, Inc.),
Conmed Corporation (including its Linvatec unit) and Stryker Corporation
each have large shares of the market for manual instruments, power
shavers and arthroscopes. These companies offer broad product lines
which they may offer as a single package; have substantially greater
resources and name recognition than the company; and frequently offer
significant discounts as a competitive tactic. There can be no assurance
that the company can effectively convince surgeons and physicians to
adopt the company's Coblation technology. In addition, there can be no
assurance that these or other companies will not succeed in developing
technologies and products that are more effective than the company's or
that would render the company's technology or products obsolete or
uncompetitive.

Johnson & Johnson (including Mitek, a division of its Ethicon unit)
is marketing a bipolar electrosurgical tool developed by Gyrus Medical
Ltd., a company based in the United Kingdom.  The bipolar
electrosurgical tool marketed by Mitek & Linvatec competes directly with the
company's tissue ablation and shrinkage technology in arthroscopy.  In addition,
the Linvatec unit of Conmed is marketing a monopolar electrosurgical tool
for tissue ablation in arthroscopy.  In order to successfully compete
against Mitek, the company anticipates that it may have to continue
 to offer substantial discounts on its controller in order to increase
demand for the disposables, and that such competition could have a material
adverse effect on the company's business, financial condition and
results of operation.  Furthermore, certain of the company's competitors
including Ethicon, utilize purchasing contracts that link discounts
on the purchase of one product to purchases of other products in
to their broad product lines.  Many of the hospitals in the United States
have purchasing contracts with such competitors of the company.
Accordingly, customers may be dissuaded from purchasing the
company's products rather than the products of such competitors to the extent
the purchase would cause them to lose discounts on products
that they regularly purchase from such competitors.


Oratec Interventions Inc., a company based in Menlo Park, California,
manufactures and sells a monopolar tissue shrinkage system that competes
directly with the company's tissue shrinkage products.  The tissue
shrinkage market represents a small portion of the overall potential
market for the company's products in arthroscopy.

The ear, nose and throat ("ENT") medical device industry is
rapidly becoming more competitive. The company recently cancelled its
exclusive license and distribution agreement with Xomed Surgical
Products, which is currently the largest company focused solely on the
ENT market. (see "Additional Factors That Might Affect Future Results -
Dependence on Collaborative Arrangements" on page 20 of this Quarterly
Report on Form 10-Q). However, other large companies, such as Smith &
Nephew, Stryker Corporation and Conmed Corporation, each have shares of
the market for manual instruments, such as microdebriders for endoscopic
sinus surgery. In ENT, the company faces competition from large laser
companies, such as ESC Medical Systems ("ESC") of Tel Aviv, Israel,
which develops and markets lasers for certain ENT applications, such as
laser-assisted uvuloplasty ("LAUP"). The company expects that
competition from these and other well-established competitors will
increase as will competition from start-up and small cap medical device
companies, such as Somnus Medical Technologies, a company based in
Sunnyvale, California, Elmed Inc. of Addison, Illinois and Ellman
International, Inc. of Hewlett, New York. Somnus Medical Technologies
manufactures and sells medical devices that utilize RF technology for
the treatment of upper airway disorders, such as snoring, enlarged
turbinates, and obstructive sleep apnea. Elmed Inc. and Ellman
International, Inc. both manufacture and sell a variety of medical
devices that use conventional RF technology for tissue dissection,
cutting and/or coagulation in turbinate surgery, the treatment of
snoring and other ENT procedures.

The company has entered into an exclusive license and distribution
agreement with Collagen, which is currently one of the largest company's
focused on the cosmetic surgery market. The cosmetic surgery industry
includes a number of large and well established companies that provide
devices for rejuvenating skin, hair removal, scar removal, the treatment
of vascular and pigmented lesions and other applications, including
companies that manufacture and sell dermabrasion equipment or chemical
peels, and companies that manufacture and sell carbon dioxide and Er:YAG
lasers. In skin resurfacing, the company will directly compete with much
larger companies that manufacture lasers for medical use, such as
Coherent Medical Group of Santa Clara, California and ESC Medical
Systems of Tel Aviv, Israel. ESC recently merged with Laser Industries,
Ltd., already one of the largest medical laser manufacturers in the
world. The combined entity develops and markets lasers for a broad range
of cosmetic applications including the non-invasive treatment of
varicose veins and other benign vascular lesions, hair removal, skin
resurfacing and others. In addition, other large companies manufacture
and sell medical devices that use RF energy for certain applications in
dermatology and cosmetic surgery. One such company is Conmed
Corporation, which currently sells medical devices for
electrodessication, fulguration and coagulation in office-based
dermatology procedures.

The company has received 510(k) premarket notifications for
clearance to market tissue ablation products to treat other surgical
fields that the company may enter. These fields are intensely
competitive and no assurance can be given that these potential products,
if approved, would be successfully marketed.

Uncertainty of Approvals; Extensive Governmental Regulation

United States

The company's products are regulated in the United States by the
Food and Drug Administration ("FDA") as medical devices under the
Federal Food, Drug, and Cosmetic Act ("FDC Act") and require premarket
clearance or approval by the FDA prior to commercialization. In
addition, certain material changes or modifications to medical devices
also are subject to FDA review and clearance or approval. Pursuant to
the FDC Act, the FDA regulates the research, testing, manufacture,
safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices in the United States. Noncompliance with
applicable requirements can result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, and criminal
prosecution. Failure to comply with the regulatory requirements could
have a material adverse effect on the company's business, financial
condition and results of operations.

If human clinical trials of a device are required and if the
device presents a "significant risk," the manufacturer or the
distributor of the device is required to file an Investigational Device
Exemption ("IDE") application prior to commencing human clinical
trials. The IDE application must be supported by data, typically
including the results of animal and, possibly, mechanical testing.
Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study, provided such costs do
not exceed recovery of the costs of manufacture, research, development
and handling. The clinical trials must be conducted under the auspices
of an independent Institutional Review Board ("IRB") established
pursuant to FDA regulations, and with appropriate informed consent of
the patient.

Generally, before a new device can be introduced into the market
in the United States, the manufacturer or distributor must obtain FDA
clearance of a 510(k) notification or approval of a Pre-Market
Application ("PMA"). If a medical device manufacturer or distributor
can establish that a device is "substantially equivalent" to a legally
marketed Class I or Class II device, or to a Class III device for which
the FDA has not called for PMAs, the manufacturer or distributor may
seek clearance from the FDA to market the device by filing a 510(k)
notification. The 510(k) notification will need to be supported by
appropriate data establishing the claim of substantial equivalence to
the satisfaction of FDA. The FDA has recently been requiring a more
rigorous demonstration of substantial equivalence.

Following submission of the 510(k) notification, the manufacturer
or distributor may not place the device into commercial distribution
until an order is issued by the FDA. No law or regulation specifies the
time limit by which FDA must respond to a 510(k) notification. At this
time, the FDA typically responds to the submission of a 510(k)
notification within 90 to 120 days, but it may take longer. An FDA order
may declare that the device is substantially equivalent to another
legally marketed device and allow the proposed device to be marketed in
the United States. The FDA, however, may determine that the proposed
device is not substantially equivalent or require further information,
including clinical data, to make a determination regarding substantial
equivalence. Such determination or request for additional information
could delay market introduction of the products that are the subject of
the 510(k) notification.

The company has received clearance of 510(k) premarket
notifications to market its Arthroscopic System for surgery of the knee,
shoulder, elbow, wrist, hip and ankle joints. In addition, the company
has received 510(k) premarket notifications to market Visage in general
dermatology procedures and is pursuing additional clearances that will
allow Visage to be marketed in the United States specifically for skin
resurfacing and wrinkle reduction. With respect to ENTec, the company
has received clearance of 510(k) premarket notifications to market the
ENTec product line in general head and neck surgical procedures, as well
as endoscopic sinus surgery. There can be no assurance that the company
will be able to obtain necessary clearances or approvals to market any
other products on a timely basis, if at all, and delays in receipt or
failure to receive such clearances or approvals, the loss of previously
received clearances or approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
the company's business, financial condition and results of operations.

If a manufacturer or distributor of medical devices cannot
establish that a proposed device is substantially equivalent to a
legally marketed device, the manufacturer or distributor must seek
premarket approval of the proposed device through submission of a PMA
application. A PMA application must be supported by extensive data,
including, in many instances, preclinical and clinical trial data, as
well as extensive literature to prove the safety and effectiveness of
the device. Following receipt of a PMA application, if the FDA
determines that the application is sufficiently complete to permit a
substantive review, the FDA will "file" the application. Under the FDC
Act, the FDA has 180 days to review a PMA application, although the
review of such an application more often occurs over a protracted time
period, and generally takes approximately two years or more from the
date of filing to complete.

The PMA application approval process can be expensive, uncertain
and lengthy. A number of devices for which premarket approval has been
sought have never been approved for marketing. The review time is often
significantly extended by the FDA, which may require more information or
clarification of information already provided in the submission. In
addition, the FDA will inspect the manufacturing facility to ensure
compliance with the FDA's Good Manufacturing Practice ("GMP") or QS
Regulations ("QSR") requirements prior to approval of an application.
If granted, the approval of the PMA application may include significant
limitations on the indicated uses for which a product may be marketed.

If necessary, the company will file a PMA application with the FDA
for approval to sell its potential products commercially in the United
States when it has developed such products. There can be no assurance
that the company will be able to obtain necessary PMA application
approvals to market such products on a timely basis, if at all, and
delays in receipt or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
the company's business, financial condition and results of operations.

The company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the California
Department of Health Services ("CDHS") and to list its products with
the FDA. As such, the company is subject to inspections by both the FDA
and the CDHS for compliance with the FDA's QSR requirements and other
applicable regulations. These regulations require that the company
maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the company and
the third party manufacturers of its products are required to comply
with various FDA requirements for design, safety, advertising and
labeling. There can be no assurance that the company or its component
suppliers will not encounter any manufacturing difficulties, or that the
company and any of its subcontractors or component suppliers will not
experience similar difficulties, including problems involving regulatory
compliance, product recalls, production yields, quality control and
assurance, supplies of components or shortages of qualified personnel.

Regulations regarding the manufacture and sale of the company's
products are subject to change. The company cannot predict the effect,
if any, that such changes might have on its business, financial
condition or results of operations.

International

International sales of the company's products are subject to the
regulatory agency product registration requirements of each country. The
regulatory review process varies from country to country. The company
has obtained regulatory clearance to market the Arthroscopic System in
Australia, Europe, Canada, Japan and Mexico; to market Visage in Europe,
Australia and Canada and to market ENTec in Europe, but has not obtained
any other international regulatory approvals permitting sales of its
products outside of the United States. The company is seeking, and
intends to seek, regulatory approvals in certain other international
markets. There can be no assurance, however, that such approvals will be
obtained on a timely basis or at all.

For European distribution, the company has received ISO
9001/EN46001 certification and the CE mark. ISO 9001/EN46001
certification standards for quality operations have been developed to
ensure that companies know, on a worldwide basis, the standards of
quality to which they will be held. The European Union has promulgated
rules requiring medical products to receive the CE mark, an
international symbol of quality and compliance with applicable European
medical device directives. Failure to maintain the CE mark will prohibit
the company from selling its products in Europe. ISO 9001/EN46001
certification in conjunction with demonstrated performance to the
medical device directive is one of the alternatives available to meet
the CE mark requirements. There can be no assurance that the company
will be successful in maintaining certification requirements.


Uncertainty Relating to Third-Party Reimbursement

In the United States, health care providers, such as day-surgery
facilities, hospitals and physicians, that purchase medical devices,
such as the company's products, generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health
insurance plans, to reimburse all or part of the cost of the procedure
in which the medical device is being used. Reimbursement for
arthroscopic and ENT procedures performed using devices that have
received FDA approval has generally been available in the United States.
Generally, cosmetic procedures are not reimbursed. In addition, certain
health care providers are moving toward a managed care system in which
such providers contract to provide comprehensive health care for a fixed
cost per person. Managed care providers are attempting to control the
cost of health care by authorizing fewer elective surgical procedures.

The company is unable to predict what changes will be made in the
reimbursement methods used by third-party health care payors. The
company anticipates that in a prospective payment system, such as the
diagnosis related group ("DRG") system utilized by Medicare, and in
many managed care systems used by private health care payors, the cost
of the company's products will be incorporated into the overall cost of
the procedure and that there will be no separate, additional
reimbursement for the company's products. The company anticipates that
hospital administrators and physicians will justify the use of the
company's products by the apparent cost savings and clinical benefits
that the company believes will be derived from the use of its products.
However, there can be no assurance that this will be the case.
Furthermore, the company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for
procedures in which the company's products are used. Failure by
physicians, hospitals and other users of the company's products to
obtain sufficient reimbursement from health care payors for procedures
in which the company's products are used or adverse changes in
governmental and private third-party payors' policies toward
reimbursement for such procedures would have a material adverse effect
on the company's business, financial condition and results of
operations.

If the company obtains the necessary international regulatory
approvals, market acceptance of the company's products in international
markets would be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems.
Reimbursement and health care payment systems in international markets
vary significantly by country, and include both government-sponsored
health care and private insurance. The company intends to seek
international reimbursement approvals, although there can be no
assurance that any such approvals will be obtained in a timely manner,
if at all.


Uncertainty of New Product Development

The company has undertaken preliminary animal studies and
development for the use of its Coblation technology in several fields.
The company has received 510(k) clearance for use of its technology in
certain of these fields. The company has received approval of an
Investigational Device Exemption ("IDE") to conduct a clinical study
on a specific indication. Following the completion of this study, the
company may submit a 510(k) application to the FDA.

Each of the company's potential products that may result from
these investigations is in the early stages of development, and the
company may be required to undertake time-consuming and costly
development activities and seek regulatory approval of these devices.
There can be no assurance that product development will ever be
successfully completed, that PMA or 510(k) applications, if applied for,
will be granted by the FDA on a timely basis, if at all, or that the
products will ever achieve commercial acceptance. Failure by the company
to develop, obtain necessary regulatory approval for or to successfully
market new products could have a material adverse effect on the
company's business, financial condition and results of operations.

Product Liability Risk; Limited Insurance Coverage

The development, manufacture and sale of medical products entail
significant risk of product liability claims. The company's current
product liability insurance coverage limits are $7.0 million per
occurrence and $7.0 million in the aggregate. There can be no assurance
that such coverage limits are adequate to protect the company from any
liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the company may
require increased product liability coverage if any potential products
are successfully commercialized. Product liability insurance is
expensive and in the future may not be available to the company on
acceptable terms, if at all. The company has been selling its
Arthroscopic System since December 1995 and recently commenced sales of
the Visage and ENTec, product lines and has not experienced any product
liability claims to date. However, a successful product liability claim
or series of claims brought against the company in excess of its
insurance coverage could have a material adverse effect on the company's
business, financial condition and results of operations.

Dependence on Key Personnel and Key Consultants

The company is dependent upon a number of key management and
technical personnel.  The loss of the services of one or more key
employees or consultants could have a material adverse effect on the
company.  The company's success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel.  The company faces intense competition for qualified
personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the company will be able to
attract and retain such personnel.  Furthermore, the company's
scientific advisory board members all are otherwise employed on a
full-time basis.  As a result, the scientific advisory board members are
not available to devote their full time or attention to the company's
affairs.

Year 2000

The company relies on computers and computer software to run its
business as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates
commencing in the Year 2000. The company has 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, the company has
not found a material impact that may result from the failure of its
computers and computer software or that of its vendors, suppliers, and
customers, to recognize dates. The company has completed an upgrade of
its information technology system including its financial system, order
processing, manufacturing and inventory system which included Year-2000
compliance. To date the company has spent approximately $900,000
upgrading its computer technology. The company has not yet undertaken
the steps to quantify the effects of noncompliance of its customers,
suppliers and/or its service providers. The company's goal is to
complete all phases of its review and be Year-2000 compliant by December
1999.

Any Year-2000 compliance problem with either the company, its
suppliers, its service providers or its customers could result in a
material adverse effect on the company's financial condition and
operating results. There can be no assurance that further assessment of
the company's suppliers, data processing systems or contingency plans
will address all issues of Year-2000 compliance.


Significant Influence by Directors, Executive Officers and Affiliated
Entities

As of July 3, 1999, the company's directors, executive officers
and entities affiliated with them, in the aggregate, beneficially own
approximately 15% of the company's outstanding common stock. These
stockholders, if acting together, may have significant influence over
matters requiring approval by the stockholders of the company, including
the election of directors and the approval of mergers or other business
combination transactions.

Potential Volatility of Stock Price

The stock markets have experienced price and volume fluctuations
that have particularly affected small-cap medical device companies
resulting in changes in the market prices of the stocks of many
companies that may not have been directly related to the operating
performance of those companies. Such broad market fluctuations may
adversely affect the market price of the company's common stock. In
addition, the market price of the company's common stock may be highly
volatile. Factors, such as variations in the company's financial
results, comments by security analysts, announcements of technological
innovations or new products by the company or its competitors, changing
government regulations and developments with respect to FDA submissions,
patents, proprietary rights or litigation may have a significant adverse
effect on the market price of the common stock.

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

In November 1996, the company's Board of Directors adopted a
Stockholder Rights Plan. The Stockholder Rights Plan provides for a
dividend distribution of one Preferred Shares Purchase Right (a "Right")
on each outstanding share of the company's common stock. Each Right
entitles shareholders to buy 1/1000th of a share of the company's Series
A participating preferred stock at an exercise price of $50.00. The
Rights will become exercisable following the tenth day after a person or
group announces acquisition of 15 percent or more of the company's
common stock, or announces commencement of a tender offer, the
consummation of which would result in ownership by the person or group
of 15 percent or more of the company's common stock. The company will be
entitled to redeem the Rights at $0.01 per Right at any time on or
before the tenth day following acquisition by a person or group of 15
percent or more of the company's common stock.

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

Lack of Dividends

The company has not paid any dividends and does not anticipate
paying any dividends in the foreseeable future.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

        The company has 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.  ArthroCare attempts to limit this exposure by investing
primarily in short-term securities.


 PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

On February 13, 1998, the company filed a lawsuit against Ethicon,
Inc.; Mitek Surgical Products, a division of Ethicon, Inc. and GyneCare,
Inc. ("the Defendants") in the United States District Court for the
Northern District of California. The Company settled this patent litigation with
Ethicon on June 24, 1999.  Under the terms of the settlement, Ethicon
has licensed the Company's United States patents in the arthroscopy and
gynecology markets and ArthroCare has dismissed the legal action.  Both
companies will remain active in the marketplace.  Ethicon has paid
ArthroCare a license fee and will pay ArthroCare 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 ("Xomed") of
Jacksonville, Florida filed a complaint against the company in the
Fourth Judicial Circuit, Duval County, Florida, alleging breach of
contract by the company. In the complaint, Xomed has demanded a full
refund of the amounts paid for certain products bought by Xomed from the
company, and for a portion of an exclusive license fee paid by Xomed
pursuant to an exclusive license and distribution agreement between
Xomed and the company. This license and distribution agreement was
terminated by the company on February 5, 1999. The company believes the
suit is without merit, and filed a Motion to Dismiss and Answer to the
Complaint on May 3, 1999.  In addition, the company 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
ArthroCare by Xomed.

On March 24, 1999, a former employee of the company filed a complaint
of action for sexual harassment in violation of the Fair Employment and
Housing Act and retaliation in violation of the Fair Employment and Housing
Act.  The company filed a response to the complaint on June 23, 1999, and
had a case management conference July 27 at which the parties stipulated
mediation.  According to the complaint, the demand exceeds $25,000.


Item 2.  Changes in Securities and Use of Proceeds

None

Item 3.  Defaults upon Senior Securities

None




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

With respect to stockholder proposals not included in the
company's proxy statement for the 1999 Annual Meeting of Stockholders,
the persons named in management's proxy for the 1999 Annual Meeting of
Stockholders will be entitled to exercise the discretionary voting power
conferred by such proxy under the circumstances` specified in Rule 14a-
4(c) under the Securities Exchange Act of 1934, as amended, including
with respect to proposals received by the Company within forty-five (45)
days of the date of mailing of the proxy statement for the 1999 Annual
Meeting of Stockholders.

The annual meeting of stockholders was held May 21, 1999.
Matters voted on at that meeting were (I) the election of six directors,
(ii) the ratification of the appointment of PricewaterhouseCoopers
L.L.P. as the company's independent auditors for the fiscal year ending
January 1, 2000.  Tabulation for each proposal and individual directors
were as follows:


PROPOSAL I.  ELECTION OF DIRECTORS

                                                                VOTES
           NOMINEE                VOTES                        WITHHELD
----------------------------   ----------                     ---------
Michael A. Baker                5,513,010                       427,049
Hira V. Thapliyal               5,513,310                       426,749
Philip E. Eggers                5,513,310                       426,749
Annette J. Campbell-White       5,513,310                       426,749
C.  Raymond Larkin Jr.          5,512,510                       427,549
John S. Lewis                   5,513,310                       426,749
Robert R. Momsen                5,513,310                       426,749


PROPOSAL II.  RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP


                                                              VOTES
                                                            ---------
        FOR                                                 6,115,130
        AGAINST                                                 4,100
        BROKER NON-VOTE                                            60

Item 5.  Other Information
none

a)  Exhibits

3.2      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))

3.3      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))

10.14     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))

10.15     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))

10.16  +  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))

10.17     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.))

10.18     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))


10.20     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).

10.21   + 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.

10.22  +  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.

10.23   + 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).

10.24   + 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).

10.25   + Development and Supply 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).

10.26     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).

10.28   + 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 July 4, 1998).

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

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

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

10.30     Letter Agreement, between the Registrant and
          Collagen Aesthetics dated February 9, 1999. (Incorporated herein
          by reference to the same-numbered exhibit previously filed
          with the Registrant's Annual Report on Form 10-K /A
          for the period ended January 2, 1999).

10.31     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).

10.32     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).

10.33     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).

10.33  ++ Litigation Settlement Agreement, between the Registrant and
          ETHICON, Inc. dated June 24, 1999 filed herewith.

10.34     Relocation Loan Agreement, between the Registrant and John R.
          Tighe dated  May 1,1999 filed herewith.

10.35     Line of Credit Agreement with Silicon Valley Bank dated
          June 11, 1999 filed herewith.


27.1    Financial Data Schedule.


+       Confidential treatment granted.
++      Confidential treatment requested.

b)  Reports on Form 8-K
None


<PAGE>











                            SIGNATURE

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


ARTHROCARE CORPORATION
a Delaware corporation

Date: August 13, 1999

/s/ CHRISTINE E. HANNI
Christine E. Hanni
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer
and Accounting Officer)

Date: August 13, 1999

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



<PAGE>


                                    EXHIBIT INDEX

Exhibit
Number                          Exhibit Description

10.33  ++ Litigation Settlement Agreement, between the Registant and
          Ethicon, Inc dated June 24, 1999.

10.34     Relocation Agreement, between the Registrant
          and John R. Tighe dated May 1, 1999.

10.35  ++ Line of Credit  Agreement, between the Registant and
          Silicon Valley Bank dated June 11, 1999.

24.1      Power of Attorney.
27.1      Financial Data Schedule.