A study was performed to determine whether magnetic resonance (MR) imaging is cost-effective and reduces the need for diagnostic arthroscopy of the knee. During a 9-month period, 103 consecutive patients with knee injury that justified diagnostic arthroscopy underwent MR imaging. The MR images were interpreted by means of consensus of three radiologists and reviewed with the referring sports medicine orthopedists. After the examination, 44 patients (42.7%) underwent immediate arthroscopy. The 59 other patients (57.3%) did not undergo arthroscopy; follow-up was performed in 55 of these 59 patients (93%) at a mean of 22 months. The outcome was successful in 49 of 55 patients (89%); 40 patients had normal function and no limitation in activity, six patients with chronic injury of the anterior cruciate ligament underwent reconstruction, and three patients underwent arthroscopy with negative findings. Without the use of MR imaging, all patients in this study would have undergone diagnostic arthroscopy. Because of the diagnoses based on MR images, 53 patients (51.4%) avoided a potentially unnecessary diagnostic arthroscopy, and, as a result, the net savings was $103,700 in the 103 patients.