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

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**FORM 10-Q**

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(Mark One)

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

**For the quarterly period ended July  1, 2000**

**OR**

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

**For the transition period from ________to _________**

**Commission file number 0-27422**

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



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

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

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

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







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

The number of shares outstanding of the registrant's common stock as of
August 04, 2000 was 22,037,650.







**ARTHROCARE CORPORATION
                                    FORM 10-Q
                                     INDEX**

**Part I.  Financial Information**



|Item 1.   Financial Statements (unaudited):                                                                                             | Page 
|--------------------------------------------------------------------------------------------------------------------------------------- | -----
|                                                                                                                                        |      
|Condended Consolidated Balance Sheets as of
          
July 1, 2000 and January 1 2000                                                  | 3    
|                                                                                                                                        |      
|Condensed Consolidated Statements of Operations
          
    for the three- and six-month periods ended July 1, 2000 and July 3, 1999 | 4    
|                                                                                                                                        |      
|Condensed Consolidated Statements of Cash Flows
          
    for the six-month periods ended July 1, 2000 and July 3, 1999            | 5    
|                                                                                                                                        |      
|Notes to Condensed Consolidated Financial Statements                                                                                    | 6-9  
|                                                                                                                                        |      
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                   | 10-33
|                                                                                                                                        |      
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                    | 32   
|                                                                                                                                        |      

**Part II.  Other Information**



|Item 1.   Legal Proceedings                                   | 32   
|------------------------------------------------------------- | -----
|                                                              |      
|Item 2.   Changes in Securities and Use of Proceeds           | 10-33
|                                                              |      
|Item 3.   Defaults upon Senior Securities                     | 33   
|                                                              |      
|Item 4.   Submission of Matters to a Vote of Security Holders | 32-34
|                                                              |      
|Item 5.   Other Information                                   | 34   
|                                                              |      
|                                                              |      
|Item 6.   Exhibits and Reports on Form 8-K                    | 35-39
|                                                              |      
|**Signatures**                                                | 40   

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**PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements**

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

`July 1,      January 1,
                                                         2000           2000
                                                   -------------  -------------
                                                    (unaudited)
                        ASSETS
Current assets:
  Cash and cash equivalents.....................        $45,652        $47,875
  Available-for-sale securities.................         17,222         22,582
  Accounts receivable, net of allowances........         17,116         13,917
  Inventories, net..............................         12,704          6,960
  Prepaid expenses and other current assets.....            878            719
                                                   -------------  -------------
       Total current assets                              93,572         92,053

Available-for-sales securities..................         21,132          9,150
Property and equipment, net.....................          8,252          7,366
Related party receivables.......................          1,205          1,205
Other assets....................................            265            265
                                                   -------------  -------------
     Total assets...............................       $124,426       $110,039
                                                   =============  =============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..............................         $3,668         $2,930
  Accrued liabilities...........................          1,643          1,256
  Accrued compensation..........................          3,032          2,689
  Capital lease obligation, current portion.....             60             60
                                                   -------------  -------------
          Total current liabilities                       8,403          6,935

Capital lease obligation, less
   current portion..............................             52             87
Deferred rent...................................            111            134
                                                   -------------  -------------
          Total liabilities.....................          8,566          7,156
                                                   -------------  -------------
Contingencies (Note 6)

Stockholders' equity:
  Common stock..................................             11             11
  Additional paid in capital....................        129,312        125,200
  Notes receivable from stockholders............              --          (273)
  Accumulated other comprehensive
   (loss).......................................           (200)          (151)
  Accumulated deficit...........................        (13,263)       (21,904)
                                                   -------------  -------------
          Total stockholders' equity............        115,860        102,883
                                                   -------------  -------------
     Total liabilities and stockholders' equity.       $124,426       $110,039
                                                   =============  =============`

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

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

`Three Months Ended      Six Months Ended
                                 ----------------------- -----------------------
                                  July 1,     July 3,     July 1,     July 3,
                                    2000        1999        2000        1999
                                 ----------- ----------- ----------- -----------
Revenues:
   Product sales................    $17,156     $10,100     $32,847     $19,177
   License fees and royalties...      1,213       2,125       3,282       2,750
                                 ----------- ----------- ----------- -----------
      Total revenues............     18,369      12,225      36,129      21,927
   Cost of product sales........      6,589       4,310      12,953       8,186
                                 ----------- ----------- ----------- -----------
      Gross profit..............     11,780       7,915      23,176      13,741
                                 ----------- ----------- ----------- -----------
Operating expenses:
   Research and development.....      1,839       1,152       3,596       2,176
   Sales and marketing..........      5,561       3,810      10,457       7,146
   General and administrative...        961       1,679       2,200       3,028
                                 ----------- ----------- ----------- -----------
      Total operating expenses..      8,361       6,641      16,253      12,350
                                 ----------- ----------- ----------- -----------

        Income from operations..      3,419       1,274       6,923       1,391
Interest and other income, net..      1,103          81       2,174         215
                                 ----------- ----------- ----------- -----------
Income before taxes.............      4,522       1,355       9,097       1,606
Income tax provision............        227          54         456          65
                                 ----------- ----------- ----------- -----------
Net income .....................     $4,295      $1,301      $8,641      $1,541
                                 =========== =========== =========== ===========

Basic net income per
   share.......................       $0.20       $0.07       $0.40       $0.09
                                 =========== =========== =========== ===========
Diluted net income per
   share.......................       $0.18       $0.07       $0.37       $0.08
                                 =========== =========== =========== ===========
Shares used in computing basic
 net income per share...........     21,960      18,072      21,790      17,946
                                 =========== =========== =========== ===========
Shares used in computing
 diluted net income per share...     24,166      19,218      23,494      19,094
                                 =========== =========== =========== ===========`

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

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

`Three Months Ended
                                                      --------------------------
                                                        July 1,       July 3,
                                                          2000          1999
                                                      ------------  ------------
Cash flows from operating activities:
   Net income .......................................      $8,641        $1,541
   Adjustments to reconcile net income
    to net cash provided by operating activities:
        Depreciation and amortization................       1,817         1,057
        Amortization of deferred and stock
          compensation expense.......................         500            68
        Provision for doubtful accounts receivable
          and product returns........................         (79)          131
        Provision for excess and obsolete inventory..        (445)          595
        Deferred rent................................         (23)           (5)
        Changes in operating assets and liabilities:
          Accounts receivable                              (3,120)       (1,539)
          Inventory..................................      (5,299)       (1,158)
          Prepaid expenses and other current assets..        (159)          633
          Accounts payable...........................         738          (471)
          Accrued liabilities........................         730           302
          Deferred revenue...........................         --            (59)
          Other assets...............................         --             68
                                                      ------------  ------------
   Net cash provided by operating activities                3,301         1,163
                                                      ------------  ------------
Cash flows from investing activities:
   Purchases of property and equipment...............      (2,703)       (2,220)
   Purchases of available-for-sale securities........     (28,546)          (85)
   Sale or maturities of available-for-sale
     securities......................................      21,924         1,001
                                                      ------------  ------------
   Net cash provided by (used in) investing
     activities......................................      (9,325)       (1,304)
                                                      ------------  ------------
Cash flows from financing activities:
   Issuance of notes receivable to related
     parties.........................................         --           (575)
   Repayment of capital leases.......................         (35)          (34)
   Repayment of notes receivable from related
     parties.........................................         273           144
   Proceeds from exercise of options
     to purchase common stock........................       3,612           652
                                                      ------------  ------------
           Net cash provided by financing
               activities............................       3,850           187
                                                      ------------  ------------

Effect of exchange rate on changes in cash                    (49)          (41)
                                                      ------------  ------------
Net increase(decrease) in cash and cash equivalents..      (2,223)            5
Cash and cash equivalents, beginning of period.......      47,875         2,826
                                                      ------------  ------------
Cash and cash equivalents, end of period.............     $45,652        $2,831
                                                      ============  ============`

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

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**ARTHROCARE CORPORATION****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)**

1. 	Basis of Presentation:

In the opinion of management, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results
of operations and cash flows of ArthroCare Corporation and its subsidiaries ("ArthroCare," "we," "us" or "our") for the periods
indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other
interim periods. The notes to the financial statements contained in our Form 10-K for the year ended January 1, 2000 should be read
in conjunction with these condensed consolidated financial statements. The balance sheet at January 1, 2000 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 Per Share:

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

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

`Three Months Ended      Six Months Ended
                                 ----------------------- -----------------------
                                  July 1,     July 3,     July 1,     July 3,
                                    2000        1999        2000        1999
                                 ----------- ----------- ----------- -----------
Net income .....................     $4,295      $1,301      $8,641      $1,541
                                 =========== =========== =========== ===========
Shares calculation:
   Weighted average basic
    shares outstanding..........     21,960      18,072      21,790      17,946
   Options......................      2,206       1,146       1,704       1,148
                                 ----------- ----------- ----------- -----------
     Total shares used to
      compute diluted net
      income per share..........     24,166      19,218      23,494      19,094
                                 =========== =========== =========== ===========
Net income per share:
   Basic........................      $0.20       $0.07       $0.40       $0.09
                                 =========== =========== =========== ===========
   Diluted......................      $0.18       $0.07       $0.37       $0.08
                                 =========== =========== =========== ===========`

Options to purchase 187,400 and 663,362 shares of common stock at prices
ranging from $17.625-$24.25 per share were outstanding during the three- and six-month periods ended July 3, 1999, respectively, but
were not included in the computation of diluted earnings per share because the option's exercise price was greater than the average
market price of the common stock during the period. Options to purchase 78,780 and 193,613 shares of common stock at prices ranging
from $23.00-$46.625 per share were outstanding during the three- and six-month periods ended July 1, 2000, respectively, but were not
included in the computation of diluted earnings per share because the option's exercise price was greater than the average market
price of the common stock during the period.

3. Comprehensive Income:

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

`Three Months Ended      Six Months Ended
                                 ----------------------- -----------------------
                                  July 1,     July 3,     July 1,     July 3,
                                    2000        1999        2000        1999
                                 ----------- ----------- ----------- -----------
Net income .....................     $4,295      $1,301      $8,641      $1,541

 Other comprehensive income


  Change in unrealized gain and
   losses in available for sale
   marketable securities........         83           --         (2)          --

  Foreign translation
   adjustment...................        (29)         (4)        (47)        (41)
                                 ----------- ----------- ----------- -----------
Comprehensive net income........     $4,349      $1,297      $8,592      $1,500
                                 =========== =========== =========== ===========`

4. 	Balance Sheet Detail (in thousands):

`July 1,   January 1,
                                                2000         2000
                                            ------------ ------------
                                            (unaudited)
Inventory:
   Raw materials.........................        $5,642       $2,870
   Work-in-process.......................         2,106        1,280
   Finished goods........................         4,925        2,810
                                            ------------ ------------
Total....................................       $12,704       $6,960
                                            ============ ============
Other accrued liabilities:
   Accrued professional fees.............          $174          $30
   Accrued warranty......................           264          174
   Other.................................         1,205        1,052
                                            ------------ ------------
Total....................................        $1,643       $1,256
                                            ============ ============`

5. Line of Credit:

In June 1999, we entered into a $7.0 million revolving line of credit that expired, in accordance with its
terms in June 2000. Available borrowings under this line of credit were contingent upon and collateralized by our assets and were
subject to covenants related to financial ratios and profits. Borrowings under the line of credit bear interest at the bank's prime
rate plus one-quarter of one percentage point.

1. Litigation:

We are currently involved in ongoing litigation. On July 25, 2000, we were sued by our former European
distributor Arthrex, Inc. in the Delaware Chancery Court in New Castle County. Arthrex alleges that it was wrongfully terminated by
us and that we have wrongfully solicited Arthrex distributors. The complaint alleges four counts: 1) injunction, 2) declaratory
judgment, 3) breach of contract, and 4) violation of the duty of good faith and fair dealing. Arthrex has moved for a preliminary
injunction seeking to enjoin us from terminating Arthrex pending arbitration. We believe the suit is without merit and plan to
vigorously defend against it.

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

In May 22, 2000 we entered into a settlement agreement with Xomed Surgical Products in connection with their
breach of contract claim against us. Xomed filed a voluntary dismissal of its intentional fraud claims on May 23, 2000, and Xomed and
ArthroCare filed a joint stipulation of dismissal with prejudice of all claims on May 24, 2000.

7. 	Recent Accounting Pronouncements:

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 requires that license and other upfront fees from research collaborators be recognized over the term
of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a
separate earnings process. SAB 101, as amended, is effective for our fourth quarter of 2000. Accordingly, we will report a change in
accounting principle for the fiscal quarter ending December 30, 2000. We are still evaluating the application of SAB 101 and believe
that certain revenue previously recognized may be deferred to future periods. The cumulative effect of this change in accounting
principle may result in an increase of our accumulated deficit.

8.	Segment Information:

We are organized into five business units based on product markets: arthroscopy, spinal and neurosurgery,
ear nose and throat surgery, cosmetic surgery and cardiology. Our reportable segments are arthroscopy, cosmetic surgery and other
which includes spinal and neurosurgery, ear nose and throat surgery and cardiology. Total revenues for the three month period ended
July 1, 2000 for the arthroscopy, cosmetic surgery and the other business segments were $14.9 million, $1.4 million and $2.1 million,
respectively. Total revenues for the three month period ended July 3, 1999 for the arthroscopy, cosmetic surgery and other business
segments were $10.4 million, $1.5 million, and $0.3 million, respectively. Total revenues for the six month period ended July 1, 2000
for the arthroscopy, cosmetic surgery and the other business segments were $28.0 million, $6.0 million and $2.1 million,
respectively. Total revenues for the six month period ended July 3, 1999 for the arthroscopy, cosmetic surgery, and other business
segments were $19.2 million, $2.1 and $0.6 million, respectively.

Income (loss) from operations for the three month period ended July 1, 2000, for the arthroscopy, cosmetic surgery
and other business segments was $4.4 million, $0.7 million and $0.2 million, respectively. Income (loss) from operations for the
three month period ended July 3, 1999, for the arthroscopy, cosmetic surgery and other business segments was $3.0 million, $0.8
million and ($0.2) million, respectively. Income (loss) from operations for the six month period ended July 1, 2000, for the
arthroscopy, cosmetic surgery and other business segments was $8.2 million, $3.8 million and ($1.0) million, respectively. Income
(loss) from operations for the six month period ended July 3, 1999, for the arthroscopy, cosmetic surgery and other business segments
was $4.6 million, $1.2 million and ($0.3) million, respectively. Our reportable segments do not include certain corporate expenses
which amounted to $1.9 million and $4.1 million, respectively, for the three- and six-month periods ending July 1, 2000 and $2.3
million and $4.1 million, respectively, for the three- and six-month period ended July 3, 1999, respectively.

9. 	Stock Split:

On March 24, 2000 the Board of Directors approved a two-for-one stock split of our common stock, which was
approved by our stockholders on June 5, 2000. Basic and diluted net income per share amounts have been adjusted to reflect the effect
of the stock split in the financial statements for the periods presented.

PART 1. FINANCIAL INFORMATION

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

Overview

Statements in this Management's Discussion and Analysis of Financial Condition and Results of
Operations which express that ArthroCare Corporation ("ArthroCare" "we," "us," or "our") "believes", "anticipates", "expects" or
"plans to", as well as other statements which are not historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially as a result of the risks and
uncertainties described herein and elsewhere including, in particular, those factors described under "Business" set forth in Part I
of our Annual Report on Form 10-K for the year ended January 1, 2000 and "Additional
factors that might affect future results" set forth below.

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

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

In April 1998, we announced that we had entered the cosmetic surgery market to commercialize Coblation technology
in this field. In early 1999, we entered into a license and distribution agreement with Collagen Aesthetics, Inc., which has been
purchased by Inamed Corporation. Under this agreement, Inamed Corporation acquired exclusive, worldwide, marketing rights for our
cosmetic surgery line of products for the dermatology and cosmetic surgery markets.

In May 1998, we announced that we had entered the ear, nose and throat surgery market and had formed a business
unit called ENTecÒto commercialize Coblation technology
in this field. We are marketing and selling the ENT surgery product line through a network of distributors supported by regional
sales managers.

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

In September 1999, we announced that we had entered the spinal surgery market. We are marketing and selling the
spinal surgery products through a network of independent distributors supported by regional managers worldwide.

In February 2000, we announced that we had entered into the neurosurgery market. In July 2000, we signed an
agreement with Integra NeuroSciences, a division of Integra LifeSciences Holding Corporation, for Integra to become the exclusive
sales and distribution partner in certain countries for our products for the neurosurgical market.

We have received 510(k) clearance to market our Arthroscopic System for use in arthroscopic surgery of the knee,
shoulder, ankle, elbow, wrist and hip, and our Arthroscopic System is CE marked for use in arthroscopic surgery. Our Cosmetic Surgery
System is CE marked, and we have received 510(k) clearance for use in general dermatology procedures and for skin resurfacing for the
purpose of wrinkle reduction in the United States. Our ENT Surgery System is CE marked, and we have received 510(k) clearances for
use of our ENT Surgery System in general head, neck, oral and sinus surgery, including the treatment of snoring, turbinates and
tonsillectomy surgery procedures in the United States. Our Spinal Surgery System is CE marked and we have received 510(k) clearance
in the United States to market this system for spinal surgery. Our neurosurgery products are CE marked. We have received 510(k)
clearance to market Coblation technology for general surgery.

In December 1995, we introduced our Arthroscopic System commercially in the United States and have derived a
significant portion of our sales from this system. Our strategy includes placing controller units, at substantial discounts, to
generate future disposable revenue. Our strategy also includes applying our patented Coblation
technology to a range of other soft-tissue surgical markets including the products we have
introduced in the fields of spinal surgery, neurosurgery in Europe, cosmetic
surgery and ear, nose and throat surgery. We have received 510(k) clearance for use of our technology in several additional fields.
We cannot be sure that any of our clinical studies in other fields will lead to 510(k) applications or that the applications will be
cleared by the FDA on a timely basis, if at all. In addition, we cannot be sure that the products, if cleared for marketing, will
ever achieve commercial acceptance.



Results of Operations

Revenues:

Product sales

International product sales for the three- and six-month periods ended July 1, 2000 were 15% and 13%,
respectively, of total product sales, compared to 16% and 11%, respectively, of product sales, for the same periods of the prior
year. We believe the increase in absolute dollars year over year for product sales is attributable to our increasing marketing
presence overseas and regulatory approval to market our arthroscopic products in Japan.

Based upon the estimated number of arthroscopic procedures performed each year, we believe that knee procedures
represent the largest segment of the arthroscopic market, while shoulder procedures, in units, represent the fastest growing segment.
To achieve increasing disposable device sales in arthroscopy over time, we believe we must continue to penetrate the market in knee
procedures, expand physicians' education with respect to Coblation technology and continue to work on new product development efforts
specifically for knee applications. We believe that, in our four years of product shipments, we have penetrated 35% to 40% of the
hospitals that perform arthroscopic procedures in the United States. We believe that approximately 50% of our arthroscopy disposable
device sales are being generated by the sale of disposable devices for use in shoulder procedures.

License fees and royalty income was $1.2 million and $3.3 million, respectively, for the three-
and six-month periods ended July 1, 2000, as compared to $2.1 million and $2.8 million, respectively, for the three- and six-month
periods ended July 3, 1999. The differences in license fees and royalty revenue in the current three- and six-month periods are
primarily due to the timing of licensing payments and milestones received from our business partners and a litigation settlement
payment in June 1999 resulting from a patent infringement suit initiated by us.

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

Cost of Product Sales

Cost of product sales for the three months ended July 1, 2000 was $6.6 million or 38% of product sales, as
compared with $4.3 million or 43% of product sales for the three months ended July 3, 1999. For the six months ended July 1, 2000,
cost of product sales was $13.0 million or 39% of product sales, as compared with $8.2 million or 43% of product sales for the six
months ended July 3,1999. The absolute dollar increase in cost of product sales for the three- and six-month periods ended July 1,
2000, compared to the same periods of the prior year, is attributable to increasing unit sales of both controllers and disposable
devices. The decrease in cost of product sales as a percentage of product sales for the three and six-month periods ended July 1,
2000 as compared to the prior year periods is attributable to increased manufacturing efficiency for established product lines and
increased production volume.

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

Operating Expenses

Research and development expense was $1.8 million and $3.6 million for the three months and six-month
periods ended July 1, 2000, respectively, as compared to $1.2 million and $2.2 million, respectively, for the same periods of the
previous fiscal year. In general, overall spending in research and development for the three and six month periods increased as we
continued to develop new products in our currently commercialized markets, continued our development efforts for potential additional
products and continued to maintain our patent position. The increases are mainly attributable to increasing salaries and related
compensation expenses, including non-cash charges for stock options awarded to non-employees, as we continued to increase headcount
in order to support our increasing research and development efforts along with increasing prototype material costs offset by a
reduction in the expenses incurred in conjunction with research and development efforts on behalf of business partners. We believe
continued investment in Coblation technology is essential for us to maintain our competitive position. We expect to increase the
dollar amount of research and development spending through continued expenditures on new product development, regulatory affairs,
clinical studies and patents, as well as increased non-cash charges for stock options granted to non-employees, but anticipate such
expenses to continue to decrease as a percentage of product sales.

Sales and marketing expense increased to $5.6 million and $10.5 million, or 32% of product sales, during
the three- and six-month periods ended July 1, 2000, respectively, as compared to $3.8 million and $7.1 million, or 38% and 37%,
respectively, of product sales, during the same periods of the previous fiscal year. 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 related expenditures as well as increased trade-show and related activities, including travel and promotional materials.

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

General and administrative expenses were $1.0 million and $2.2 million, or 6% and 7% of product
sales, respectively, during the three- and six-month periods ended July 1, 2000, respectively, as compared to $1.7 million and $3.0
million, or 17% and 16%, of product sales, respectively, during the same periods of the previous fiscal year. The decrease in
spending for the three- and six-month periods ended July 1, 2000 as compared to the three- and six-month periods ended July 3, 1999,
is attributable to a reduction in the amounts spent on legal fees partially offset by an increase in international tax planning
expenses and additional staffing and related expenditures. We expect that general and administrative expenses as a percentage of
product sales will continue to decrease when compared to prior year periods as a result of the settlement of patent litigation,
offset partially by an increase in additional business development activities.

Interest and Other Income, net

Interest and other income, net increased to $1.1 million and $2.2 million, respectively, during the three- and
six-month periods ended July 1, 2000 from $0.1 million, and $0.2 million, respectively, for the three- and six-month periods ended
July 3, 1999. The increases during the current year periods were attributable to the increase in our cash and investment balances as
a result of our secondary offering completed in the fourth quarter 1999 and as a result of our positive cash flow. We anticipate that
interest and other income, net will continue to increase due to our increased cash balances and positive cash flow from operating
activities.

Income Tax Provision

The provision for income taxes was $227,000 and $456,000 for the three- and six-month periods ended July
1, 2000, respectively, compared with $54,000 and $65,000 for the three- and six-month periods ended July 3, 1999, respectively.
Because we use net operating loss carryforwards generated in prior years, our tax rate is below the statutory rate. We have federal
net operating loss carryforwards which expire in the years 2001 through 2018, and state net operating loss carryforwards which expire
in the years 2001 through 2003. We are subject to certain alternative minimum tax requirements in the current year for which an
estimate is made based on the anticipated effective tax rate at the end of the fiscal year.

Net Income

Net income was $4.3 million and $8.6 million, respectively, for the three- and six-month periods ended July 1,
2000, compared to $1.3 million and $1.5 million for the three- and six-month periods ended July 3, 1999. Net income for the current
periods reflects an increase in product sales, license fees and gross margin, partially offset by increased spending in operating
expenses. Although we have experienced substantial revenue growth since inception and have been profitable on a quarterly basis since
the quarter ended April 3, 1999, due to our short operating history and numerous other factors, we cannot be sure that we can sustain
revenue growth or profitability.



Liquidity and Capital Resources

On July 1, 2000, we had $85.2 million in working capital. The principal sources of liquidity consisted
of $62.9 million in cash, cash equivalents and available-for-sale securities. The cash and cash equivalents are highly liquid with
original maturities of ninety days or less. In addition, we had $21.1 million in long-term investments representing cash investments
with original maturity dates of greater than one year.

Net cash provided by operating activities for the six-month period ended July 1, 2000 was $3.3 million, as
compared to $1.2 million for the six-month period ended July 3, 1999. The increase in cash
provided by operating activities year-over-year is primarily due to the net income of $8.6
million for the 2000 period compared to $1.5 million in the prior year,
partially offset by increases in accounts receivable and inventory.

Net accounts receivable increased to $17.1 million as of July 1, 2000 from $13.9 million as of January 1, 2000.
The increase in accounts receivable is mainly attributable to the corresponding increase in product sales along with the timing of
sales and collections during the quarter.

Inventories increased to $12.7 million as of July 1, 2000 from $7.0 million at January 1, 2000, due to the need to
support higher anticipated product sales activity and the introduction of new products. We expect future inventory levels to grow to
support sales volume increases, as a result of our expansion into the markets of spinal surgery, neurosurgery, ear, nose and throat
surgery and cosmetic surgery.

Net property and equipment increased to $8.3 million as of July 1, 2000 from $7.4 million at January 1, 2000. The
increase is primarily attributable to the capitalization of controllers placed under various promotional programs along with an
increase of computer software and equipment.

We believe that our current cash balances, cash equivalents, short and long term investments and cash generated
from our operations will be sufficient to meet our operating and capital requirements through at least the end of 2001. As of July 1,
2000, we had committed to capital expenditures of approximately $0.3million. Our future liquidity and capital requirements
will depend on numerous factors, including our success in commercializing our products, development and commercialization of products
in fields other than arthroscopy, the ability of our suppliers to continue to meet our demands at current prices, obtaining and
enforcing patents important to our business, the status of regulatory approvals and competition.



Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard 133, (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. We must adopt this standard no later than fiscal year 2001. To date,
we have not engaged in hedging activities.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 requires that license and other upfront fees from research collaborators be recognized over the term of the
agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate
earnings process. SAB 101, as amended, is effective for our fourth quarter of 2000. Accordingly, we will report a change in
accounting principle for the fiscal quarter ending December 30, 2000. We are currently evaluating the application of SAB 101 and
believe that certain revenue previously recognized may be deferred to future periods. The cumulative effect of this change in
accounting principle, may result in an increase of our accumulated deficit.



ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

We became a public company in February 1996. Included here are risk factors as updated from our Annual Report
on Form 10-K, filed March 31, 2000 for the year ended January 1, 2000. The following factors represent current challenges to us that
create risk and uncertainty. Failure to adequately overcome any of the following challenges, either singularly or in combination,
could have a material adverse effect on our results of operations, business, or financial position.

We are Dependent Upon Our Arthroscopic System

We commercially introduced our Arthroscopic System in December 1995. Since
our Arthroscopic System accounts for the majority of our product sales, we are highly dependent on its sales. Our spinal surgery,
neurosurgery, cosmetic surgery, and ENT surgery products have only recently become available, and to date, we have sold only a small
number of units. We cannot assure you that we will be able to continue to manufacture arthroscopy products in commercial quantities
at acceptable costs, or that we will be able to continue to market such products successfully.

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

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



Commercial Success of Our Non-Arthroscopic Products Is Uncertain

We have developed several new applications for our Coblation technology in
spinal and neurosurgery, cosmetic surgery and ENT surgery. Additionally we have established a program to explore the application of
our Coblation technology in various areas within cardiology. Our products for these non-arthroscopic indications are in various
stages of commercialization and development, and we may be required to undertake time-consuming and costly commercialization,
development and additional regulatory approval activities. We are awaiting 510(k) clearance in the United States to market our Spinal
Surgery System specifically for use in neurosurgery. If we do not receive this or future clearances we will be unable to market this
and future products for specific indications and our business, financial condition, results of operations and future growth prospects
could be materially adversely affected. We cannot assure you that product development will ever be successfully completed, that
regulatory clearances or approvals, if applied for, will be granted by the FDA or foreign regulatory authorities on a timely basis,
if at all, or that the products will ever achieve commercial acceptance.

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

Development and commercialization of our current and future non-arthroscopic products are subject to the risks of
failure inherent in the development of new medical devices. These risks include the following: that such products will not be easy to
use, will require extensive training or will not be cost-effective; that we will experience delays in testing or marketing; that such
testing or marketing will result in unplanned expenditures or in expenditures above those anticipated by us; that our products will
not be proven safe or effective; that third parties will develop and market superior or equivalent products; that such products will
fail to receive necessary regulatory clearances or approvals; that such products will be difficult or uneconomical to manufacture on
commercial scale; and that proprietary rights of third parties will preclude us and our collaborative partners from marketing such
products.

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

We Have Limited Marketing and Sales Experience

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

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



We May Encounter Manufacturing Difficulties

To be successful, we must manufacture our products in commercial quantities
in compliance with regulatory requirements at acceptable costs. Our manufacturing operations consist of an in-house assembly
operation for the manufacture of disposable devices and controllers. We currently produce 44 models of disposable devices
incorporating different functionalities, including suction and fluid management. As we increase the number of product designs for our
disposable devices, the complexity of our manufacturing processes will increase. We manufacture three different controller models.
Although the manufacturing processes for the controllers designed to date are substantially the same, we cannot be certain that we
will be able to continue to manufacture these controllers without additional expense and capabilities. We could also encounter
difficulties in manufacturing our current or future products which could reduce yields, result in supply disruptions and adversely
affect our gross margins. If we have delays in manufacturing, we will not have adequate finished inventory to meet our needs. If our
quality assurance programs do not continue to meet the demands of the complexity and capacity of the products we manufacture, we may
experience product returns.

We Are Dependent on Key Suppliers

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

In addition, we use a single subcontractor to sterilize the disposable devices. Although this subcontractor has
sterilization facilities in several locations, we cannot assure you that we would be able identify and qualify an alternate
sterilizer. Our inability to secure an alternative sterilizer, if required, would limit our ability to manufacture disposable devices
and could have a material adverse effect on our business, financial condition, results of operations and future growth prospects.

Our Operating Results Will Fluctuate

We only achieved profitability in the period ended April 3, 1999 and, as of July 1, 2000 had an
accumulated deficit of $13.3 million. Results of operations may fluctuate significantly from quarter to quarter due to many factors,
including the following: the introduction of new product lines; increased penetration in existing applications; product returns;
seasonal patterns associated with the timing of surgery; achievement of research and development milestones; the amount and timing of
receipt and recognition of license fees; manufacturing or supply disruptions; timing of expenditures; absence of a backlog of orders;
receipt of necessary regulatory approvals; the level of market acceptance for our products; timing of the receipt of orders and
product shipments; and promotional programs for our products.

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



We Face Intense Competition

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

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

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



We Face Uncertainty Over Reimbursement

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

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

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



Our Business Depends on Attracting and Retaining Collaborators and Licensors

In order to successfully develop and commercialize certain products, we
may enter into collaborative or licensing arrangements with medical device companies and other entities to fund and complete our
research and development activities, pre-clinical and clinical testing, manufacturing, regulatory approval activities and to achieve
successful commercialization of future products. We have signed an exclusive, worldwide distribution agreement with Inamed
Corporation for our cosmetic surgery products. We have entered into a license agreement under which Boston Scientific Corporation
will help develop, obtain regulatory approval for and market products based on our Coblation technology for myocardial
revascularization procedures. We have also entered into a sales and distribution agreement with Intergra NeuroSciences, a division of
Integra LifeSciences Holdings Corporation, for our neurosurgery system in North and South America and certain additional
international markets.

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

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



We May Be Unable to Effectively Protect Our Intellectual Property

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

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

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

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

We May Become Subject to Patent Litigation

The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. We cannot assure you that we will not become subject to patent
infringement claims or litigation or interference proceedings declared by the United States Patent and Trademark Office, the USPTO,
to determine the priority of inventions. On February 13, 1998, we filed a lawsuit against Ethicon, Inc., Mitek Surgical Products, a
division of Ethicon, Inc., and GyneCare, Inc. alleging, among other things, infringement of several of our patents. The parties
subsequently settled this lawsuit. Under the terms of the settlement, Ethicon, Inc. has licensed our U.S. patents for current
products in the arthroscopy and gynecology markets. The settlement agreement also established a procedure for resolution of certain
potential intellectual property disputes in these two markets without litigation. Under this procedure, the licenses granted in the
Ethicon settlement have been extended to Australia and Canada commencing in February 2000.

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



The Market Price of Our Stock May Be Highly Volatile

Within the last 12 months, our common stock closing price has ranged
between $20.68 and $61.75 per share.The market price of our common stock could continue to fluctuate substantially due to a
variety of factors, including: quarterly fluctuations in results of our operations; our ability to successfully commercialize our
products; announcements regarding results of regulatory approval filings, clinical studies or other testing; technological
innovations or new commercial products by us or our competitors; developments concerning government regulations, proprietary rights
or public concern as to the safety of our technology; the execution of new collaborative agreements and material changes in our
relationships with our business partners; market reaction to acquisitions and trends in sales, marketing, and research and
development; changes in earnings estimates by analysts; sales of common stock by existing stockholders or other speculative activity
in our stock and economic and political conditions.

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

We Are Involved In Legal Proceedings

We are currently involved in ongoing litigation. On July 25, 2000, we were sued by our former European
distributor Arthrex, Inc. in the Delaware Chancery Court in New Castle County. Arthrex alleges that it was wrongfully terminated by
us and that we have wrongfully solicited Arthrex distributors. The complaint alleges four counts: 1) injunction, 2) declaratory
judgment, 3) breach of contract, and 4) violation of the duty of good faith and fair dealing. Arthrex has moved for a preliminary
injunction seeking to enjoin us from terminating Arthrex pending arbitration. We believe this suit is without merit and plan to
vigorously defend against it.

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

If these or new legal proceedings are adversely adjudicated or settled on terms not favorable to us, they
could have a material adverse effect on our financial condition, results of operations and future growth prospects. The defense of
litigation may be expensive and may divert management's attention from the core business.

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

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



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



United States

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

Noncompliance with applicable regulatory requirements can result in enforcement action, which may include: warning
letters; fines, injunctions and civil penalties against us; recall or seizure of our products; operating restrictions, partial
suspension or total shutdown of our production; refusing our requests for premarket clearance or approval of new products;
withdrawing product approvals already granted; and criminal prosecution.

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

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

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

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

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

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

International

International sales of our products are subject to strict regulatory requirements. The regulatory review process
varies from country to country. We are continually applying for regulatory approval in a variety of countries. We have obtained
regulatory clearance to market our Arthroscopic System in Europe, Japan, Australia, Taiwan, Korea, Canada, South America, the Middle
East, Israel and Mexico, to market our cosmetic surgery products in Europe, Canada, Australia, the Middle East and South America and
to market our ENT surgery products in Europe, Canada, Australia, China, Israel, the Middle East, South America and Taiwan, our spinal
surgery products in and currently we are applying for additional international regulatory approvals in other international markets.
We cannot assure you that we will obtain such clearances and approvals on a timely basis, or at all.

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

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

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

We May Be Unable to Attract and Retain Personnel

We are dependent upon a number of key management and technical personnel. The loss of the services of one
or more key employees or consultants could have a material adverse effect on our business, financial condition, results of operations
and future growth prospects. Our success will also depend on our ability to attract and retain additional highly qualified management
and technical personnel. We face intense competition for qualified personnel, many of whom are often subject to competing employment
offers, and we cannot assure you we will be able to attract and retain such personnel. Furthermore, our scientific advisory board
members are all otherwise employed on a full-time basis. As a result, the scientific advisory board members are not available to
devote their full time or attention to our business.

Lack of Dividends

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



Item 3. Quantitative and Qualitative Disclosures About Market Risk

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



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are currently involved in ongoing litigation. On July 25, 2000, we were sued by our former European
distributor Arthrex, Inc. in the Delaware Chancery Court in New Castle County. Arthrex alleges that it was wrongfully terminated by
us and that we have wrongfully solicited Arthrex distributors. The complaint alleges four counts: 1) injunction, 2) declaratory
judgment, 3) breach of contract, and 4) violation of the duty of good faith and fair dealing. Arthrex has moved for a preliminary
injunction seeking to enjoin us from terminating Arthrex pending arbitration. We believe the suit is without merit and plan to
vigorously defend against it.

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

If these or new legal proceedings are adversely adjudicated or settled on terms not favorable to us, they
could have a material adverse effect on our financial condition, results of operations and future growth prospects. The defense of
litigation may be expensive and may divert management's attention from the core business.

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

The annual meeting of stockholders was held on June 5, 2000. Matters voted on at that meeting were (I) the
election of six directors, (II) Approval of an amendment to the Company's Certificate of Incorporation to increase the authorized
number of shares of Common Stock by 55,000,000 shares to a total of 75,000,000 shares of Common Stock authorized for issuance. (III)
Approval of an amendment to the Company's Certificate of Incorporation to effect a two-for-one stock split of the Company's
outstanding Common Stock, (IV) Approval of an amendment to the Company's 1993 Stock Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 400,000 shares (without giving effect to the approval of Proposal No. 3 above), (V) Approve
an amendment to the 1995 Director Option Plan to (i) Approve an increase in the number of shares of Common Stock reserved for
issuance thereunder by 145,000 shares (without giving effect to the approval of Proposal No. 3 above), (ii) increase the number of
options for shares of Common Stock automatically granted to non-employee directors upon election and re-election to 25,000 and 7,500,
respectively (without giving effect to the approval of Proposal No. 3 above). and (iii) provide for accelerated vesting of directors'
options upon a change of control of the Company, (VI) The ratification of the appointment of PricewaterhouseCoopers LLP as the our
independent accountants for the 2000 fiscal year. Tabulation for each proposal and individual directors were as follows:

PROPOSAL I. ELECTION OF DIRECTORS



|**Nominee** | **Votes** | **Votes Withheld**
|----------- | --------- | ------------------



PROPOSAL II. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES
OF COMMON STOCK BY 55,000,000 SHARES TO A TOTAL OF 75,000,000 SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE.





|FOR: | 6,422,376 | AGAINST: | 823,032 | ABSTAIN: | 1,930
|---- | --------- | -------- | ------- | -------- | -----

PROPOSAL III. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO EFFECT A TWO-FOR-ONE STOCK SPLIT OF THE
COMPANY'S OUTSTANDING COMMON STOCK.



|FOR: | 7,244,956 | AGAINST: | 1,022 | ABSTAIN: | 1,360
|---- | --------- | -------- | ----- | -------- | -----

PROPOSAL IV. AMENDMENT TO COMPANY'S 1993 STOCK PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED
FOR ISSUANCE THERUNDER BY 400,000 SHARES (WITHOUT GIVING EFFECT TO THE APPROVAL OF THE STOCK SPLIT).



|FOR: | 3,970,451 | AGAINST: | 1,385,232 | ABSTAIN: | 1,891,655
|---- | --------- | -------- | --------- | -------- | ---------

PROPOSAL V. AMENDMENT TO COMPANY'S 1995 DIRECTOR OPTION PLAN TO (i) INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE THERUNDER BY 145,000 SHARES (WITHOUT GIVING EFFECT TO THE APPROVAL OF THE STOCK SPLIT), (ii) INCREASE THE
NUMBER OF OPTIONS FOR SHARES OF COMMON STOCK AUTOMATICALLY GRANTED TO NON-EMPLOYEE DIRECTORS UPON ELECTION AND RE-ELECTION TO 25,000
AND 7,500 RESPECTIVELY (WITHOUT GIVING EFFECT TO THE APPROVAL OF THE STOCK SPLIT), AND (iii) PROVIDE FOR ACCELERATED VESTING OF
DIRECTORS' OPTIONS UPON A CHANGE OF CONTROL OF THE COMPANY.



|FOR: | 4,718,117 | AGAINST: | 637,495 | ABSTAIN: | 1,891,726
|---- | --------- | -------- | ------- | -------- | ---------

PROPOSAL VI. RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.



|FOR: | 7,242,904 | AGAINST: | 1,923 | ABSTAIN: | 2,511
|---- | --------- | -------- | ----- | -------- | -----

Item 5. Other Information



None

Item 6. Exhibits and Reports on Form 8 - K

a) Exhibits

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

|        |                                                                                                                                                                                                                                                                                                                                                                                 
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1     | Restated Certificate of Incorporation of ArthroCare Corporation, the "Registrant",.
(Incorporated herein by reference to the same-numbered exhibit filed previously with the Registrant's Registration Statement on Form
8-A (Registration No. 000-27422)).                                                                                                                     
|3.2     | Amended and Restated Bylaws of the Registrant. (Incorporated herein by reference to the same-
numbered Exhibit filed previously with the Registrant's Quarterly Report on Form 10-Q for the period ended October 3,
1998).                                                                                                                                                      
|4.1     | Specimen Common Stock Certificate. (Incorporated herein by reference to the same-numbered
Exhibit filed previously with the Registrant's Registration Statement on Form 8-A (Registration No. 000-27422)).                                                                                                                                                                      
|10.1    | Form of Indemnification Agreement between the Registrant and each of its directors and
officers. (Incorporated herein by reference to the same-numbered Exhibit filed previously with the Registrant's Registration
Statement on Form S-1 (Registration No. 33-80453)).                                                                                                         
|10.2    | Incentive Stock Plan and form of Stock Option Agreement thereunder. (Incorporated herein by
reference to the same-numbered Exhibit filed previously with the Registrant's Registration Statement on Form S-1 (Registration No.
33-80453)).                                                                                                                                      
|10.3    | Director Option Plan and form of Director Stock Option Agreement thereunder. (Incorporated
herein by reference to the same-numbered Exhibit filed previously with the Registrant's Registration Statement on Form S-1
(Registration No. 33-80453)).                                                                                                                             
|10.4    | Employee Stock Purchase Plan and forms of agreements thereunder. (Incorporated herein by
reference to the same-numbered Exhibit filed previously with the Registrant's Registration Statement on Form S-1 (Registration No.
33-80453)).                                                                                                                                         
|10.5    | Form of Exclusive Sales Representative Agreement, (Incorporated herein by reference to the
same-numbered Exhibit filed previously with the Registrant's Registration Statement on Form S-1 (Registration No. 33-
80453))                                                                                                                                                        
|10.6    | Form of Exclusive Sales Representative Agreement. (Incorporated herein by reference to the
same-numbered Exhibit filed previously with the Registrant's Registration Statement on Form S-1 (Registration No. 33-
80453)).                                                                                                                                                       
|10.7    | Consulting Agreement, dated May 10, 1993, between the Registrant and Philip E. Eggers, and
amendment thereto. (Incorporated herein by reference to the same-numbered Exhibit filed previously with the Registrant's Registration
Statement on Form S-1 (Registration No. 33-80453)).                                                                                            
|10.8    | Consulting Agreement, dated May 20, 1993, between the Registrant and Eggers & Associates,
Inc., and amendment thereto. (Incorporated herein by reference to the same-numbered Exhibit filed previously with the Registrant's
Registration Statement on Form S-1 (Registration No. 33-80453)).                                                                                   
|10.9    | Lease Agreement, dated September 15, 1994, between Registrant and The Arrillaga Foundation and
the Perry Foundation for the Registrant's facility located at 595 North Pastoria Avenue, Sunnyvale, California 94086. (Incorporated
herein by reference to Exhibit 10.10 filed previously with the Registrant's Registration Statement on Form S-1 (Registration No. 33-
80453)).
|10.10   | Employment Letter Agreement, dated July 18, 1995, between the Registrant and Robert T. Hagan.
(Incorporated herein by reference to Exhibit 10.16 filed previously with the Registrant's Registration Statement on Form S-1
(Registration No. 33-80453)).                                                                                                                        
|10.11   | Restricted Stock Purchase and Security Agreement, dated August 1, 1995, between the Registrant
and Robert T. Hagan. (Incorporated herein by reference to Exhibit 10.17 filed previously with the Registrant's Registration Statement
on Form S-1 (Registration No. 33-80453)).                                                                                                  
|10.12+  | Radiation Services Agreement, dated September 13, 1995, between the Registrant and SteriGenics
International. (Incorporated herein by reference to Exhibit 10.19 filed previously with the Registrant's Registration Statement on
Form S-1 (Registration No. 33-80453)).                                                                                                        
|10.13   | Amended and Restated Stockholder Rights Agreement, dated October 16, 1995, between the
Registrant and certain holders of the Registrant's securities. (Incorporated herein by reference to Exhibit 10.20 filed previously
with the Registrant's Registration Statement on Form S-1 (Registration No. 33-80453)).                                                                
|10.14   | Contribution Agreement, dated March 31, 1995, by and among Philip E. Eggers, Robert S. Garvie,
Anthony J. Manlove, Hira V. Thapliyal and the Registrant. (Incorporated herein by reference to Exhibit 10.21 filed previously with
the Registrant's Registration Statement on Form S-1 (Registration No. 33-80453)).                                                             
|10.15   | Amended and Restated Stockholder Rights Agreement, dated October 2, 1998, between the
Registrant and Norwest Bank Minnesota, N.A. (Incorporated herein by reference to Exhibit 10.20 filed previously with the Registrant's
Registration Statement on Form 8-A filed October 21, 1998 (Registration No. 000-27422)).                                                            
|10.16   | Exclusive Distributor Agreement, dated April 15, 1997, between the Registrant and Arthrex,
GmbH. and Amendment dated October 2, 1998. (Incorporated herein by reference to Exhibit 10.20 filed previously with the Registrant's
Quarterly Report on Form 10-Q for the period ended April 3, 1999).                                                                              
|10.17   | Employment Letter Agreement, dated June 20, 1997, between the Registrant and Michael A. Baker.
(Incorporated herein by reference to Exhibit 10.24 filed previously with the Registrant's Quarterly Report on Form 10-Q for the
period ended June 28, 1997).                                                                                                                     
|10.18+  | Exclusive Distributor Agreement, dated August 21, 1997, between the Registrant and Kobayashi
Pharmaceutical Company, Ltd. (Incorporated herein by reference to Exhibit 10.25 filed previously with the Registrant's Quarterly
Report on Form 10-Q for the period ended September 27, 1997).                                                                                     
|10.19+  | License Agreement dated February 9, 1998, between the Registrant and Boston Scientific
Corporation. (Incorporated herein by reference to Exhibit 10.26 filed previously with the Registrant's Annual Report on Form 10-K for
the period ended January 3, 1998).                                                                                                                 
|10.20+  | Development and Supply Agreement, dated February 9, 1998, between the Registrant and Boston
Scientific Corporation. (Incorporated herein by reference to Exhibit 10.27 filed previously with the Registrant's Annual Report on
Form 10-K for the period ended January 3, 1998).                                                                                                 
|10.21   | Lease Agreement date March 25, 1998 between the Registrant and Aetna Life Insurance Company for
the Registrant's facility located at 840 Del Rey Avenue, Sunnyvale, California 94086. (Incorporated herein by reference to Exhibit
10.28 filed previously with the Registrant's Annual Report on Form 10-K for the period ended January 3, 1998).                               
|10.22+  | Term sheet for License and Distribution Agreement between Xomed Surgical Products and the
Registrant dated June 25, 1998. (Incorporated herein by reference to Exhibit 10.29 filed previously with the Registrant's Quarterly
Report on Form 10-Q for the period ended October 3, 1998).                                                                                        
|10.23+  | License Agreement dated February 9, 1999 between the Registrant and Collagen Aesthetics.
(Incorporated herein by reference to Exhibit 10.27 filed previously with the Registrant's Annual Report on Form 10-K for the period
ended January 2, 1999).                                                                                                                            
|10.24   | Change of Control Agreement between the Registrant and Michael Baker, CEO. (Incorporated herein
by reference to Exhibit 10.28 filed previously with the Registrant's Annual Report on Form 10-K for the period ended January 2,
1999).                                                                                                                                          
|10.25   | The Form of "VP Continuity Agreement" between the Registrant and its Vice Presidents.
(Incorporated herein by reference to Exhibit 10.29 filed previously with the Registrant's Annual Report on Form 10-K for the period
ended January 2, 1999).                                                                                                                               
|10.26   | Letter Agreement dated February 9, 1999 between the Registrant and Collagen Aesthetics.
(Incorporated herein by reference to Exhibit 10.30 filed previously with the Registrant's Annual Report on Form 10-K/A for the period
ended January 2, 1999).                                                                                                                           
|10.27   | Employment Letter Agreement, between the Registrant and John R. Tighe dated January 26,1999.
(Incorporated herein by reference to Exhibit 10.30 filed previously with the Registrant's Quarterly Report on Form 10-Q for the
period ended April 3, 1999).                                                                                                                       
|10.28   | Employment Letter Agreement, between the Registrant and Christine E. Hänni amended May 19,
1999. (Incorporated herein by reference to Exhibit 10.31 filed previously with the Registrant's Quarterly Report on Form 10-Q for the
period ended April 3, 1999).                                                                                                                   
|10.29   | Employment Letter Agreement, between the Registrant and Bruce Prothro amended May 19, 1999.
(Incorporated herein by reference to Exhibit 10.32 filed previously with the Registrant's Quarterly Report on Form 10-Q for the
period ended April 3, 1999).                                                                                                                        
|10.30+  | Litigation Settlement Agreement, between the Registrant and ETHICON, Inc. dated
June 24, 1999 (Incorporated herein by reference to Exhibit 10.33 previously filed with the Registrant's Quarterly Report on Form 10-Q
for the period ended July 3, 1999).                                                                                                                       
|10.31   | Relocation Loan Agreement, between the Registrant and John R. Tighe dated May
1, 1999. (Incorporated herein by reference to Exhibit 10.34 previously filed with the Registrant's Quarterly Report on Form 10-Q for
the period ended July 3, 1999).                                                                                                                              
|10.32   | Line of Credit Agreement with Silicon Valley Bank dated June 11, 1999. (Incorporated herein by
reference to Exhibit 10.35 previously filed with the Registrant's Quarterly Report on Form 10-Q for the period ended July 3,
1999.)                                                                                                                                              
|10.33+  | Amendment to License Agreement between ArthroCare Corporation and Inamed Corporation dated
October 1, 1999. (Incorporated herein by reference to Exhibit 10.33 previously filed with the Registrant's Registration Statement on
Form S-3 (registration no. 333-87187))                                                                                                          
|10.34   | First Amendment to Rights Agreement between ArthroCare Corporation and Norwest Bank Minnesota,
N.A. (the "Rights Agent") dated March 10, 2000. (Incorporated herein by reference to Exhibit 99.1 previously filed with the
Registrant's Form 8-K filed March 10, 2000.)                                                                                                         
|10.35   | Nonstatuatory Stock Option Plan and form of Stock Option Agreement thereunder. (Incorporated
herein by reference to the same-numbered exhibit filed previously with the Registrant's Annual Report on Form 10-K for the period
ended January 1, 2000.)                                                                                                                          
|10.36++ | License Agreement between ArthroCare Corporation and Stryker Corporation, dated June 28, 2000.
(Incorporated herein by reference to the same-numbered exhibit filed previously with the Registrant's Annual Report on Form 10-Q for
the period ended July 1, 2000.)                                                                                                             
|24.1    | Power of Attorney(see Page 39).                                                                                                                                                                                                                                                                                                                                                 
|27.1    | Financial Data Schedule.                                                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                 

+	Confidential treatment granted.

++	Confidential treatment requested.



1. Reports on Form 8-K

None



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**ARTHROCARE CORPORATION
                                   SIGNATURES**

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



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

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

Date: August 15, 2000



| |     |                     
| | --- | --------------------
| | By: | /s/ Michael A. Baker

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

Date: August 15, 2000



| |     |                    
| | --- | -------------------
| | By: | /s/ Christine Hänni

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

---

EXHIBIT INDEX



|**Exhibit Number** | **Exhibit Description**                                                                       
|------------------ | ----------------------------------------------------------------------------------------------
|10.36++            | License Agreement between ArthroCare Corporation and Stryker Corporation, dated June 28, 2000.
|27.1               | Financial Data Schedule.                                                                      

++ confidential treatment requested.

---