The arthritis section on here is very good at explaining what it all means and how it can be treated - starts here
http://www.kneeguru.co.uk/KNEEnotes/node/1846This is quite helpful too, providing the grading
or Wiki...
The International Cartilage Repair Society has set up an arthroscopic grading system by which cartilage defects can be ranked:
grade 0: (normal) healthy cartilage
grade 1: the cartilage has a soft spot or blisters
grade 2: minor tears visible in the cartilage
grade 3: lesions have deep crevices (more than 50% of cartilage layer)
grade 4: the cartilage tear exposes the underlying (subchronal) bone
Depending on what country you are in, it may be worth seeking out a further opinion from a knee surgeon with a special interest in cartilage as mentioned. Articular cartilage itself doesn't have nerve endings, the pain usually comes from the bone below. Repairs can be done, or depending on the alignment of the bones, an osteotomy can help by shifting the forces within the joint
Good luck with finding a solution
