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ArthroCare Reports Second Quarter 2011 Financial Results

INCOME FROM OPERATIONS

Income from operations for the second quarter of 2011 was $15.0 million compared to $12.6 million for the same period in 2010, an increase of $2.4 million.

Gross profit was $6.6 million higher in the second quarter of 2011, a result of higher revenue and higher gross product margin as discussed above.

Offsetting the improvement in operating profit from higher gross profit was a $4.1 million increase in operating expenses in the second quarter of 2011 compared to the same period in 2010. The Company incurred exit costs of $2.5 million during the second quarter of 2011, primarily related to one-time compensation benefits offered to certain employees at the Company’s Sunnyvale, California facility. General and administrative expenses increased $1.3 million during the quarter ended June 30, 2011 compared to the second quarter of 2010, primarily due to accelerated amortization of leasehold improvement costs associated with the facilities affected by the relocation of the Sunnyvale, California activities and increased legal fees associated with indemnification agreements for certain former executives of the Company. Investigation and restatement related costs increased $1.7 million during the second quarter of 2011 compared to the same period in 2010. Investigation and restatement related expenses in the second quarter of 2010 were reduced by insurance recoveries for legal fees of $0.6 million.

The above increases in operating expenses were partially offset by a $1.8 million decrease in research and development (R&D) costs incurred during the quarter ended June 30, 2011 compared to the same period in 2010 as a higher proportion of the Company’s engineering activities were associated with the manufacturing process in the second quarter of 2011, which increased the allocation of R&D costs to inventory and cost of goods sold.

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

In the second quarter of 2011, net income applicable to common stockholders was $11.5 million or $0.34 per diluted share, compared to $7.3 million, or $0.22 per diluted share, for the second quarter of 2010. For the quarter ended June 30, 2011, net income available to common stockholders includes $1.6 million in income from discontinued operations, which includes a $1.3 million after-tax gain from the sale of the related assets.

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