<PAGE>

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

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

                                       OR

           [_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                            FOR THE TRANSITION PERIOD
                      FROM ______________ TO ____________.

                          COMMISSION FILE NO. 000-31519

                               CURON MEDICAL, INC.
             (Exact name of registrant as specified in its charter)

                   Delaware                               77-0470324
        (State or other jurisdiction of                (I.R.S. Employer
        incorporation or organization)                Identification No.)

                               735 Palomar Avenue
                               Sunnyvale, CA 94085
          (Address of principal executive offices, including zip code)

                                 (408) 733-9910
              (Registrant's telephone number, including area code)

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

As of May 10, 2002, 19,672,210 shares of the Registrant's Common Stock were
outstanding.

<PAGE>

                               CURON MEDICAL, INC.
                                      INDEX

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION                                                                       Page
-------   ---------------------                                                                       ----
<S>                                                                                                   <C>
Item 1.   Financial Statements (unaudited)

          Condensed Consolidated Balance Sheets as of
            March 31, 2002 and December 31, 2001 ...................................................    3

          Condensed Consolidated Statements of Operations for the
            three month periods ended March 31, 2002 and 2001 ......................................    4

          Condensed Consolidated Statements of Cash Flows for the
            three month periods ended March 31, 2002 and 2001 ......................................    5

          Notes to Condensed Consolidated Financial Statements .....................................    6

Item 2.   Management's Discussion and Analysis of
            Financial Condition and Results of Operations ..........................................   10

Item 3.   Quantitative and Qualitative Disclosures of
            Market Risk ............................................................................   26

PART II.  OTHER INFORMATION
--------------------------

Item 1.   Legal Proceedings ........................................................................   26

Item 2.   Changes in Securities and Use of Proceeds ................................................   26

Item 6.   Exhibits and Reports on Form 8-K .........................................................   27

Signatures .........................................................................................   28
</TABLE>

                                        2

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

                               CURON MEDICAL, INC.
                      Condensed Consolidated Balance Sheets
                                   (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                       March 31, 2002        December 31, 2001
                                                                                   ------------------       ------------------
<S>                                                                                <C>                      <C>
Assets
Current assets:
        Cash and cash equivalents                                                  $            7,682       $            7,509
        Marketable securities                                                                  23,782                   27,619
        Accounts receivable, net of allowance for doubtful accounts
             of $20 and $20, respectively                                                         691                      666
        Inventories, net                                                                        1,218                    1,410
        Related party notes receivable                                                            523                      144
        Prepaid expenses and other current assets                                                 757                      883
                                                                                   ------------------       ------------------
        Total current assets                                                                   34,653                   38,231

Long term investments                                                                           2,990                    3,048
Related party notes receivable                                                                      -                      354
Property and equipment, net                                                                     1,115                    1,216
Intangible assets, net of amortization of $859 and $771, respectively                              45                      133
Other assets                                                                                       92                       91
                                                                                   ------------------       ------------------
        Total assets                                                               $           38,895       $           43,073
                                                                                   ==================       ==================

Liabilities and Stockholders' Equity
Current liabilities:
        Accounts payable                                                           $              266       $              449
        Accrued liabilities                                                                       993                    1,077
        Notes payable                                                                             104                      207
                                                                                   ------------------       ------------------
        Total current liabilities                                                               1,363                    1,733

Other liabilities                                                                                  55                       52
                                                                                   ------------------       ------------------
        Total liabilities                                                                       1,418                    1,785
                                                                                   ------------------       ------------------

Contingencies (Note 5)

Stockholders' equity:
        Preferred stock                                                                             -                        -
        Common stock                                                                               19                       19
        Additional paid-in capital                                                             90,315                   90,368
        Deferred stock compensation                                                              (720)                    (956)
        Accumulated deficit                                                                   (52,116)                 (48,291)
        Accumulated other comprehensive income (loss)                                             (21)                     148
                                                                                   ------------------       ------------------
        Total stockholders' equity                                                             37,477                   41,288
                                                                                   ------------------       ------------------
        Total liabilities and stockholders' equity                                 $           38,895       $           43,073
                                                                                   ==================       ==================
</TABLE>

      See accompanying notes to condensed consolidated financial statements

                                        3

<PAGE>

                               CURON MEDICAL, INC.
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
                    (in thousands, except per share amounts)

                                                   For the Three Months Ended
                                                  ----------------------------

                                                    March 31,        March 31,
                                                         2002             2001
                                                  -----------      -----------

Revenues                                          $       939      $     1,218
Cost of goods sold                                      1,083            1,299
                                                  -----------      -----------

Gross loss                                               (144)             (81)
                                                  -----------      -----------

Operating expenses:
      Research and development                            789              743
      Clinical and regulatory                             318              490
      Sales and marketing                               1,878            1,323
      General and administrative                          972            1,124
                                                  -----------      -----------

Total operating expenses                                3,957            3,680
                                                  -----------      -----------

Operating loss                                         (4,101)          (3,761)

Interest income                                           278              801
Interest expense                                           (2)               -
                                                  -----------      -----------

Net loss                                          $    (3,825)     $    (2,960)
                                                  ===========      ===========


Net loss per share, basic and diluted             $     (0.20)     $     (0.16)
                                                  ===========      ===========

Shares used in computing net loss per share,
      basic and diluted                                19,407           18,690
                                                  ===========      ===========

      See accompanying notes to condensed consolidated financial statements

                                        4

<PAGE>

                               CURON MEDICAL, INC.
                 Condensed Consolidated Statements of Cash Flows
                                  (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                           For the Three Months Ended,
                                                                                      ------------------------------------
                                                                                      March 31, 2002        March 31, 2001
                                                                                      --------------        --------------
<S>                                                                                   <C>                   <C>
Cash Flows From Operating Activities
Net loss                                                                              $       (3,825)       $       (2,960)
Adjustments to reconcile net loss to net cash used in
          operating activities:
      Depreciation and amortization                                                              169                   178
      Amortization of acquired technology                                                         88                   112
      Amortization of stock-based compensation                                                   177                   437
      Accretion of discount on securities, net                                                   (81)                 (237)
      Changes in assets and liabilities:
          Accounts receivable, net                                                               (25)                 (585)
          Inventories                                                                            192                  (310)
          Prepaid expenses and other current assets                                              126                   108
          Accounts payable                                                                      (183)                   50
          Accrued liabilities                                                                    (84)                 (211)
          Other long-term assets and liabilities                                                   2                    16
                                                                                      --------------        --------------
      Net cash used in operating activities                                                   (3,444)               (3,402)
                                                                                      --------------        --------------

Cash Flows From Investing Activities
Purchase of property and equipment                                                               (68)                 (283)
Purchase of marketable securities                                                             (8,449)              (13,089)
Proceeds from maturities of marketable securities                                             12,256                15,177
                                                                                      --------------        --------------
      Net cash provided by investing activities                                                3,739                 1,805
                                                                                      --------------        --------------

Cash Flows From Financing Activities
Principal payments on notes payable                                                             (103)                    -
(Payments) proceeds from related party
          notes receivable, net                                                                  (25)                   74
Proceeds from issuance of common stock, net of issuance costs                                      6                    17
                                                                                      --------------        --------------
      Net cash provided by (used in) financing activities                                       (122)                   91
                                                                                      --------------        --------------
Net increase (decrease) in cash and cash equivalents                                             173                (1,506)

Cash and cash equivalents at beginning of period                                               7,509                16,759
                                                                                      --------------        --------------
Cash and cash equivalents at end of period                                            $        7,682        $       15,253
                                                                                      ==============        ==============


Supplemental Disclosure of Non-Cash Investing and Financing Information
Deferred stock-based compensation                                                     $          (59)       $           24
</TABLE>

    See accompanying notes to the condensed consolidated financial statements

                                        5

<PAGE>

                               CURON MEDICAL, INC.
                         NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS

   (Unaudited, tabular amounts in thousands, except share and per share data)

March 31, 2002

NOTE 1. The Company and Summary of Significant Accounting Policies

The Company

Curon Medical, Inc. (the "Company") was incorporated in the State of Delaware on
May 1, 1997. The Company develops, manufactures and markets proprietary products
for the treatment of gastrointestinal disorders.

The Company has sustained operating losses and negative cash flows from
operations and expects such losses to continue in the foreseeable future. The
Company intends to finance its operations primarily through its cash and cash
equivalents, marketable securities, future financing and future revenues,
however, there can be no assurance that such efforts will succeed or that
sufficient funds will be made available.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all intercompany
balances and transactions. Certain reclassifications have been made to prior
year amounts in order to conform to current year presentation.

The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission ("SEC"). Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The unaudited
interim condensed consolidated financial statements have been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, 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 the Company 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.

These condensed consolidated financial statements should be read in conjunction
with the audited financial statements included in the Annual Report on Form 10-K
for the year ended December 31, 2001, as filed with the SEC.

                                        6

<PAGE>

Net Loss Per Share

Basic and diluted net loss per share is calculated as follows:

<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,
                                                              ------------------------------
                                                                       2002            2001
                                                              -------------    ------------
<S>                                                           <C>              <C>
Numerator:
       Net loss                                               $      (3,825)   $     (2,960)
                                                              =============    ============

Demoninator:
       Weighted average shares outstanding                       19,650,000      19,241,000

       Weighted average unvested common shares
                   subject to repurchase                           (243,000)       (551,000)
                                                              -------------    ------------

       Weighted average shares used in basic and diluted
                   net loss per share                            19,407,000      18,690,000
                                                              =============    ============

Net loss per share                                            $       (0.20)   $      (0.16)
                                                              =============    ============
</TABLE>

During 1999, the Company granted to certain employees and non-employees, options
which were immediately exercisable into common stock, subject to repurchase by
the Company based on the same remaining vesting schedule as the related option.
Shares are subject to repurchase at the original option exercise price.

Equity instruments that could dilute basic earnings per share in the future,
that were not included in the computation of diluted earnings per share as their
effect is antidilutive, are as follows:

<TABLE>
<CAPTION>
                                                                 March 31, 2002      March 31, 2001
                                                               ----------------    ----------------
<S>                                                            <C>                 <C>
Unvested common shares (shares subject to repurchase)                       232                 487
Shares issuable upon exercise of stock options                            2,035               1,605
Shares issuable upon exercise of warrants                                   569                 569
                                                               ----------------    ----------------
Total                                                                     2,836               2,661
                                                               ================    ================
</TABLE>

Revenue Recognition

Revenue from product sales is recognized on product shipment against a signed
purchase order or sales quote provided no significant obligations remain and
collection of the receivables is deemed probable for both sales of control
modules and catheters. Revenues for extended warranty contracts are recognized
over the extended warranty period. To date, post-sale customer support and
training have not been significant.

The Company may sell products under a purchase commitment, with delivery of the
control module at inception of the contract and catheters generally delivered
over a period of six months. Revenue for the control module is deferred and
recognized ratably over shipment of catheters under contract. Revenue on the
catheters is recognized upon shipment at an amount representing their fair value
based on verifiable objective evidence of such.

                                        7

<PAGE>

Shipping and handling costs charged to customers are recognized as revenue and
the associated costs incurred by the Company are expensed under cost of goods
sold.

Recent Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles such as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The adoption of SFAS 142 did not have a material impact
on the Company's financial position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for fiscal years beginning after December 15, 2001
and interim periods within those fiscal periods. This Statement supersedes FASB
Statement No. 121 and APB 30, however, this Statement retains the requirement of
Opinion 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, by abandonment, or in a distribution to owners)
or is classified as held for sale. This Statement addresses financial accounting
and reporting for the impairment of certain long-lived assets and for long-lived
assets to be disposed of. The adoption of SFAS 144 did not have a material
impact on the Company's financial position and results of operations.

NOTE 2.  Inventories

                                      March 31, 2002       December 31, 2001
                                    ------------------   ---------------------
Inventories:
Raw material                                 $   679                 $ 1,033
Work-in-process                                  151                       7
Finished goods                                   388                     370
                                    ------------------   ---------------------
                                             $ 1,218                 $ 1,410
                                    ==================   =====================

                                        8

<PAGE>

NOTE 3.  Deferred Stock Compensation

Stock-based compensation included in the Condensed Consolidated Statements of
Operations is as follows:

                                          Three Months Ended March 31,
                                       -----------------------------------
                                            2002               2001
                                       ----------------   ----------------

Cost of goods sold                               $  18              $  29
Research and development                            28                 74
Clinical and regulatory                             18                 42
Sales and marketing                                 23                107
General and administrative                          90                185

                                       ----------------   ----------------
                                                 $ 177              $ 437
                                       ================   ================

NOTE 4.  Related Party Transactions

In May and September 2001, the Company entered into promissory note agreements
with two officers of the Company. The notes were $68,500 and $75,000, and had
interest rates of 4.8% per annum and 3.9% per annum, respectively. Principal and
interest on these notes were repaid in April 2002.

NOTE 5.  Contingencies

In June 2001, a civil action was filed against the Company in the United States
District Court, Western District of Kentucky, Louisville Division, alleging that
the Plaintiff sustained a nerve injury and damage to his gastrointestinal tract
during a Stretta procedure caused by the defective design and manufacture of the
Company's product. Plaintiff's allegations against the Company include strict
liability for a product that was in a defective and unreasonably dangerous
condition, negligence in the design and manufacturing of the product, breach of
implied warranty of merchantibility, and loss of consortium. Plaintiff was a
subject in a randomized clinical trial and had given Informed Consent to the
treating institution for the procedure. Plaintiff is seeking a trial by jury and
unspecified damages. The Company believes Plaintiff's claim is without merit.

In September 2001, a civil action was filed against a number of defendants,
including the Company, in the Superior Court of the State of California in and
for the City and County of Santa Clara, alleging that the Plaintiff sustained
injury when undergoing surgery utilizing the Stretta System, caused by defects
in design and manufacture. Plaintiff also alleges negligence in the design,
manufacture, advertising and sale of the Stretta System and that its warnings,
instructions and directions for use were inadequate. Additional defendants
include the treating physicians and the associated medical institutions, which
it is alleged, were medically negligent in treatment of Plaintiff. Plaintiff is
seeking unspecified damages. The Company believes Plaintiff's claim is without
merit.

These matters are currently in the early stages and the Company believes that
the resolution of any of these matters will not have a material effect, if any,
on its business, financial position, and results of operations and cash flows.

                                        9

<PAGE>

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

The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with our audited financial
statements and notes thereto for the fiscal year ended December 31, 2001.

This quarterly report, including the following sections, contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements relating to
our expectations as to the timing and success of our clinical trials and
regulatory submissions, the mix of our sales and revenues derived from
generators and disposable devices, the rate of growth and success of our
international sales and marketing efforts, our expectations regarding increased
operating expenses and net losses as our business expands, the timing of new
product introductions, and our ability to maintain current and planned
operations through at least the next 12 months without raising additional funds.
These forward-looking statements involve risks and uncertainties. The cautionary
statements set forth below and those contained in "Factors That May Affect
Future Results," commencing on page 14, identify important factors that could
cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
failure to obtain regulatory approvals as anticipated, a slower rate of market
acceptance of our products than expected, increased competition, continued
adverse changes in general economic conditions in the United States and
internationally, including adverse changes in the specific markets for our
products, adverse changes in customer order patterns, pricing pressures, risks
associated with foreign operations, failure to reduce costs or improve operating
efficiencies, and our ability to attract, hire and retain key and qualified
employees.

Overview

We were incorporated in May 1997. Business activities before January 1998 were
negligible. In 1998, our primary activity was developing the Curon Control
Module and Stretta Catheter for the treatment of gastroesophageal reflux disease
("GERD"). Prior to December 31, 2000 we were in the development stage and until
that time, we had devoted substantially all of our efforts to raising capital
and developing, marketing and selling our products.

In early 1999, we began a multi-center clinical trial of the Stretta System in
the United States. We also developed our manufacturing capability to support the
production of Stretta Catheters and Curon Control Modules for the clinical
trial. Based on the data acquired in the trial, we submitted a 510(k)
notification to the FDA in January 2000 for clearance to market the Stretta
System for treatment of GERD. We received 510(k) clearance in April 2000. In May
2000, we launched the Stretta System commercially at Digestive Disease Week, a
large gastroenterology professional conference. Also, in May 2000, we initiated
a randomized controlled trial of the Stretta System in the United States. In
this trial, patients received either the Stretta procedure or a placebo
procedure, and results were compared. The data generated will be used to
influence physician adoption rates, facilitate reimbursement approvals and
enhance marketing activity. The active clinical portion of this trial was
completed in the quarter ended March 31, 2001. The abstracted data was published
in April 2002.

In April 1999, we began developing the Secca System for the treatment of fecal
incontinence. In

                                       10

<PAGE>

November 1999, we conducted a 10-patient human clinical pilot study outside the
United States and, in July 2000, we began a U.S. multi-center clinical trial of
the Secca System under an Investigational Device Exemption. This trial was
completed, and the results were used to support a 510(k) submission to the FDA
in December 2001. In September 2001, we received CE Mark approval of the Secca
System, indicating that the Secca System meets European medical device standards
allowing us to market it within the European Union. We received 510(k) clearance
from the FDA in March 2002 to market the system for the treatment of fecal
incontinence in patients who have failed more conservative therapies such as
diet modification and biofeedback.

To date, we have generated limited revenues. Our revenues are, and will be,
derived from the sale of radiofrequency generators and our disposable devices,
such as the Stretta Catheter and Secca Handpiece. We expect that disposables
will form the basis of a recurring revenue stream and have priced catheters to
generate greater margins than generators. We expect the percentage of revenue
from disposables to increase over time as our installed base of generators
grows.

Initially, we are focusing our sales efforts in the United States through a
direct sales force. In international markets, we rely primarily on third-party
distributors. In November 2000, we incorporated a subsidiary company in Belgium
and hired a European manager to support European distributors' sales, marketing
and clinical efforts. At March 31, 2002, this subsidiary had four employees. We
do not expect the number of employees to increase in 2002. During the first
quarter of 2001, we entered into distribution agreements covering sales in
Belgium, the Netherlands, Germany, Italy and Greece. In August 2001, we entered
into a distribution agreement in South Africa, and in December 2001, we entered
into distribution agreements covering sales in Portugal, Sweden, Denmark, Norway
and Finland. In March 2002, we entered into a distribution agreement in Egypt.
First shipments have been made to all distributors except South Africa. Our
gross margins on sales through international third-party distributors will be
lower than our gross margins on U.S. sales as a result of distributor discounts.

Our costs of revenues represent the cost of producing generators and disposable
devices. We also license a technology used in the generators that we sell. In
addition to the up-front payment to license the technology, we are required to
pay licensing fees based on the sales price of the units. We believe that there
are alternative technologies that could be utilized should we choose to do so.
Research and development expenses consist primarily of personnel costs,
professional services, patent application and maintenance costs, materials,
supplies and equipment. Clinical and regulatory expenses consist primarily of
expenses associated with the costs of clinical trials, clinical support
personnel, the collection and analysis of the results of these trials, and the
costs of submission of the results to the FDA. Sales and marketing expenses
consist of personnel related costs, advertising, public relations and attendance
at selected medical conferences. General and administrative expenses consist
primarily the cost of corporate operations and personnel, legal, accounting and
other general operating expenses of our company. Through March 31, 2002, we
recorded limited product sales while incurring cumulative net losses of $52.1
million. In addition to increasing expenditures related to continuing selling
activities of the Stretta System, we anticipate that our expenses will increase
as we continue to develop new products, conduct clinical trials, commercialize
our products and acquire additional technologies as opportunities arise. As a
result, we expect our operating expenses and cumulative net losses to increase.

                                       11

<PAGE>

RESULTS OF OPERATIONS

Period of three months ended March 31, 2002 and 2001.

Revenues

Revenues for the quarter ended March 31, 2002, were $939,000, compared to
$1,218,000 for the same quarter in 2001. International sales accounted for
approximately $78,000 for the first quarter of 2002, compared to $16,000 for the
same quarter in 2001.

Cost of goods sold

In the quarter ended March 31, 2002, cost of goods sold was $1.1 million and
$1.3 million for the same quarter in 2001. As sales volume increases, we expect
gross margins to become positive and increase accordingly. Amortization of
stock-based compensation accounted for $18,000 in the quarter ended March 31,
2002, and $29,000 for the same period in 2001.

Research and development expenses

Research and development expenses were $789,000 in the quarter ended March 31,
2002, and $743,000 for the same quarter in 2001. Amortization of stock-based
compensation accounted for $28,000 in the quarter ended March 31, 2002, and
$74,000 for the same quarter in 2001.

Clinical and regulatory expenses

Clinical and regulatory expenses were $318,000 in the quarter ended March 31,
2002, and $490,000 for the same period in 2001. The decrease in spending in 2002
over 2001 was due to costs involved in the U.S. Secca trial and the Stretta
randomized control trial, which were ongoing in 2001, and have been completed as
of 2002. Amortization of stock-based compensation accounted for $18,000 in the
quarter ended March 31, 2002 and $42,000 for the same period in 2001.

Sales and marketing expenses

Sales and marketing expenses were $1.9 million in the quarter ended March 31,
2002, and $1.3 million for the same period in 2001. The increase in spending in
2002 over 2001 was primarily due to headcount increases in the field sales and
clinical support personnel, marketing expense related to preparations for the
Secca launch, and developing our European presence. Amortization of stock-based
compensation accounted for $23,000 in the quarter ended March 31, 2002, and
$107,000 for the same period in 2001.

General and administrative expenses

General and administrative expenses were $972,000 in the quarter ended March 31,
2002 and $1.1 million for the same period in 2001. Amortization of stock-based
compensation accounted for $90,000 in the quarter ended March 31, 2002, and
$185,000 for the same period in 2001.

                                       12

<PAGE>

Interest Income and Expense

During the quarter ended March 31, 2002, compared to the quarter ended March 31,
2001, interest income decreased by $523,000. The decrease was due to an
approximate cash and investment decrease of $14.1 million, and a decrease in
investment interest rates from approximately 7% to 4%.

Interest expense during the quarter ended March 31, 2002 was $2,000, related to
the note payable for the Directors' and Officers' Liability Insurance policy,
incurred in the third quarter of 2001, and representing the only debt for that
year. There was no interest expense for the same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations and capital investments with the
proceeds from our initial public offering completed in September 2000 totaling
$55.0 million, the partial exercise of the underwriter's over-allotment
provision totaling $5.2 million, the private sale of equity securities totaling
$22.0 million, the issuance of convertible notes totaling $11.8 million and bank
equipment line financing totaling $780,000. At March 31, 2002, we had $33.3
million in working capital and our primary source of liquidity was $31.5 million
in cash and cash equivalents and marketable securities. In addition, we had $3.0
million invested in long term securities at that date. We intend to finance our
operations primarily through our cash and cash equivalents, marketable
securities, future financing and future revenues. We believe we have enough cash
to fund operations for at least three years, and that alternative financing is
available, if needed, however, there can be no assurance that such efforts will
succeed or that sufficient funds will be made available.

Cash used in operating activities was $3.4 million in the three month period
ended March 31, 2002, and also $3.4 million for the same period in 2001. There
were no material changes in cash spending by expense category between the first
quarter of 2002 and the first quarter of 2001.

Cash provided by investing activities amounted to $3.7 million in the three
months ended March 31, 2002, which consisted of proceeds from net maturities and
sales of marketable securities of $3.8 million, partially offset by expenditures
of $68,000 for property and equipment. As of March 31, 2002, we had no material
commitments for capital expenditures.

Cash used in financing activities was $122,000 in the three months ended March
31, 2002, primarily related to payments on our note payable, offset by the
proceeds from exercise of stock options.

We expect to acquire additional capital equipment on an ongoing basis as we add
staff, increase capacity and improve capabilities. We have not planned any
significant capital expenditures during fiscal 2002. We expect that our existing
capital resources and interest income will enable us to maintain current and
planned operations through at least the next 12 months. In the event that we
require additional funding at any point in the future, we will seek to raise
such additional funding from other sources, including the public equity market,
private financings, collaborative arrangements and debt. If additional capital
is raised through the issuance of equity or securities convertible into equity,
our stockholders may experience dilution, and such securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available to us on favorable terms, if at all.
If we are unable to obtain

                                       13

<PAGE>

financing, or to obtain it on acceptable terms, we may be unable to execute our
business plan.

Factors That May Affect Future Results

We may never achieve or maintain significant revenues or profitability.

We have only a limited operating history upon which you can evaluate our
business. We have incurred losses every year since we began operations. In
particular, we incurred net losses of $15.4 million in 2001, $15.8 million in
2000 and $14.1 million in 1999 and $3.8 million for the three months ended March
31, 2002. As of March 31, 2002, we had an accumulated deficit of approximately
$52.1 million. We have generated limited revenues from the sale of our products,
and it is possible that we will never generate significant revenues from product
sales in the future. Even if we do achieve significant revenues from our product
sales, we expect to incur significant net losses over the next several years and
these losses may increase. It is possible that we will never achieve profitable
operations.

If we fail to take adequate action to remedy problems that have adversely
affected our operations our future performance may be harmed.

In 2001, we became aware of some issues that negatively impacted our earnings.
For example, we learned that it is time consuming to obtain purchase commitments
for our products because of the number of individuals at hospitals who need to
approve the purchase. As a result, we changed our sales and marketing models to
more effectively address this issue. We also became aware of misinformation in
the marketplace regarding past adverse events associated with our procedure. In
response, we dedicated resources to educating physicians regarding the use of
our products to

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<PAGE>

combat this misinformation. Our efforts to rectify these situations may not be
sufficient. In addition, the cost of our efforts in addressing these matters
diverts resources that could be allocated to increasing revenues. In the future,
we may experience similar problems and if we are unable to take appropriate
action and take it quickly our results of operations and our financial
performance will be harmed.

The Stretta System is currently our only marketed product. If physicians do not
generally adopt our Stretta System, we will not achieve future sales growth.

We commercially introduced our Stretta System, which consists of a
radiofrequency generator and a disposable handheld device, in May 2000. We are
highly dependent on Stretta System sales because we anticipate that the Stretta
System will account for substantially all our revenue through at least 2002. To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents a
significant departure from conventional GERD treatment methods. We believe that
physicians will not use our Stretta System unless they determine, based on
published peer-reviewed journal articles, long-term clinical data and their
professional experience, that the Stretta System provides an effective and
attractive alternative to conventional means of treatment for GERD. Currently,
there are two peer-reviewed journal articles, limited peer-reviewed clinical
reports and 12-month clinical follow-up data on our Stretta System. Physicians
are traditionally slow to adopt new products and treatment practices, partly
because of perceived liability risks and uncertainty of third-party
reimbursement. For example, we believe that physician adoption rates were
negatively impacted by adverse events and a voluntary market withdrawal, which
occurred early in the launch of the Stretta System. Future adverse events or
recalls would also impact future acceptance rates. If physicians do not adopt
our Stretta System, we may never achieve significant revenues or profitability.

If the effectiveness and safety of our products are not supported by long-term
data, our sales could decline and we could be subject to liability.

If we do not produce clinical data supported by the independent efforts of
clinicians, our products may never be accepted. We received clearance from the
FDA for the use of the Stretta System to treat GERD based upon the study of 47
patients. Safety and efficacy data presented to the FDA for the Stretta System
was based on six month follow-up studies on 44 of these patients. Although the
twelve-month follow-up data supports the six-month data, we may find that data
from longer-term patient follow-up studies is inconsistent with those indicated
by our relatively short-term data. However, if longer-term patient studies or
clinical experience indicate that treatment with the Stretta System does not
provide patients with sustained benefits or that treatment with our product is
less effective or less safe than our current data suggests, our sales could
decline and we could be subject to significant liability. Further, we may find
that our data is not substantiated in studies involving more patients, in which
case we may never achieve significant revenues or profitability.

We received clearance from the FDA for the use of the Secca System to treat
fecal incontinence, for patients who have failed more conservative treatments
such as diet modification or biofeedback. This clearance was based upon the
study of 50 patients. Safety and efficacy data presented to the FDA for the
Secca System was based on six month follow-up studies on these patients. We may
find that data from longer-term patient follow-up studies is inconsistent with
those indicated by our

                                       15

<PAGE>

relatively short-term data. However, if longer-term patient studies or clinical
experience indicate that treatment with the Secca System does not provide
patients with sustained benefits or that treatment with our product is less
effective or less safe than our current data suggests, our sales could decline
and we could be subject to significant liability. Further, we may find that our
data is not substantiated in studies involving more patients, in which case we
may never achieve significant revenues or profitability. If patient studies or
clinical experience do not meet our expectations regarding the benefits of the
Secca System, our expected revenues from this product may never materialize.

Any failure in our physician education efforts could significantly reduce
product sales.

It is important to the success of our sales efforts to educate physicians in the
techniques of using our products. We rely on physicians to spend their time and
money to attend our pre-sale educational sessions. Positive results using the
Stretta and Secca Systems are highly dependent upon proper physician technique.
If physicians use either system improperly, they may have unsatisfactory patient
outcomes or cause patient injury, which may give rise to negative publicity or
lawsuits against us, any of which could have a material adverse effect on our
sales and profitability.

If health care providers are not adequately reimbursed for the procedures that
use our products, or for the products themselves, we may never achieve
significant revenues.

Although the Center for Medicare and Medicaid Services, or CMS, granted a new
specific APC code providing higher reimbursement levels for the Stretta
Procedure for Medicare purposes on October 1, 2001, there is no assurance that
private, third-party payors will conform to this. Physicians, hospitals and
other health care providers are unlikely to purchase our products if they are
not adequately reimbursed for the Stretta procedure or the products. To date,
only a limited number of private third-party payors have agreed to reimburse for
the cost of the Stretta procedure or products. Until a sufficient amount of
positive peer-reviewed clinical data has been published, insurance companies and
other payors may refuse to provide reimbursement for the cost of the Stretta
procedure or may reimburse at levels that are not acceptable to providers. Some
payors may refuse adequate reimbursement even upon publication of peer-reviewed
data. If users of our products cannot obtain sufficient reimbursement from
health care payors for the Stretta procedure or the Stretta System disposables,
then it is unlikely that our product will ever achieve significant market
acceptance. The Secca procedure has not yet received any coding decision and no
tests have yet been made of the willingness of third party health care payors to
reimburse the costs of the procedure. We cannot assure you that the procedure
will ever be reimbursed. Failure to achieve reimbursement will have a serious
negative effect on our revenues.

Reimbursement from third-party health care payors is uncertain due to factors
beyond our control.

Even if third-party payors provide adequate reimbursement for the Stretta
procedure, adverse changes in third-party payors' policies toward reimbursement
could preclude market acceptance for our products and have a material adverse
effect on our sales and revenue growth. We are unable to predict what changes
will be made in the reimbursement methods used by third-party health care
payors.

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For example, some health care payors are moving toward a managed care system in
which providers contract to provide comprehensive health care for a fixed cost
per person. We cannot assure you that in a prospective payment system, which is
used in many managed care systems, the cost of our products will be incorporated
into the overall payment for the procedure or that there will be adequate
reimbursement for our products separate from reimbursement for the procedure.

Internationally, market acceptance of our products will be dependent upon the
availability of adequate 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. Although we intend to seek international reimbursement
approvals, we cannot assure you that any such approvals will be obtained in a
timely manner or at all. If foreign third-party payors do not adequately
reimburse providers for the Stretta procedure and the products used with it,
then our sales and revenue growth may be limited.

We face competition from more established GERD treatments and from competitors
with greater resources, which will make it difficult for us to achieve
significant market penetration.

The market for the treatment of GERD is dominated by companies that have
well-established products, reputations and resources. We primarily compete with
large pharmaceutical companies such as AstraZeneca, Takeda Abbott
Pharmaceuticals and Merck, which collectively generate over $6 billion in annual
U.S. revenues from sales of medication for the treatment of GERD symptoms. We
also compete with large medical device companies such as Johnson &
Johnson/Ethicon, which makes instrumentation for fundoplication surgery, and
C.R. Bard, which received FDA clearance for an endoscopic suturing device for
the treatment of GERD in April 2000. Boston Scientific has recently signed an
agreement with Enteric to market a liquid polymer that is injected into the
lower esophageal sphincter for the treatment of GERD. In December 2001,
Medtronic announced that it had purchased Endonetics, Inc., a developer of
biomaterial that can be endoscopically placed in the wall of the lower
esophagus, improving performance of the esophageal sphincter for treatment of
GERD.

These larger companies enjoy several competitive advantages over us, which may
include:

        .   existing widely-adopted medications and procedures for the treatment
            of GERD;

        .   established reputations within the medical community;

        .   established distribution networks that permit these companies to
            introduce new products and have such products accepted by the
            medical community promptly;

        .   established relationships with health care providers and payors that
            can be used to facilitate reimbursement for new treatments; and

        .   greater resources for product development and sales and marketing.

At any time, these competitors or other companies may develop new competitive
products that are

                                       17

<PAGE>

more effective or less expensive than ours. For example, AstraZeneca has
developed a new product, Nexium, for the treatment of GERD, which doctors may
prescribe in lieu of recommending our Stretta Procedure. Less expensive, generic
drugs will be introduced to treat GERD as AstraZeneca's patent for Prilosec, the
leading prescription medication for the treatment of GERD, expired in 2001,
although pending lawsuits may delay the significant availability of competition
until later in 2002. If we cannot compete effectively in this highly competitive
market, we may not be able to achieve our expected revenue growth.

We have limited sales and marketing experience, and our failure to build and
manage our sales force or to market and distribute our products effectively will
hurt our revenues and profits.

We have limited sales and marketing experience. As of March 31, 2002, we relied
on 14 direct sales employees to sell our Stretta System in the United States. We
must manage this sales team over the next 24 months to achieve our market share
and revenue growth goals. Since we have only recently launched the Stretta
System, our sales force has little experience marketing the product, and we
cannot predict how successful they will be in selling the product. Since we have
not yet commercially launched our Secca System, our sales force has no
experience marketing that product. There are significant risks involved in
building and managing our sales force and marketing our products, including our:

        .   Inability to hire a sufficient number of qualified sales people
            with the skills and understanding to sell the Stretta and Secca
            Systems effectively;

        .   Failure to adequately train our sales force in the use and benefits
            of our products, making them less effective promoters; and

        .   Failure to accurately price our products as attractive alternatives
            to conventional treatments.

Internationally, we rely on third-party distributors to sell our products, and
we cannot assure you that these distributors will commit the necessary resources
to effectively market and sell our products or that they will be successful in
selling our products.

Internationally, we rely on a network of distributors to sell our products. We
depend on these distributors in such markets and we will need to attract
additional distributors to grow our business and expand the territories into
which we sell our products. Distributors may not commit the necessary resources
to market and sell our products to the level of our expectations. If current or
future distributors do not perform adequately, we may not realize expected
international revenue growth.

We have limited experience manufacturing our products in commercial quantities,
which could adversely impact the rate at which we grow.

Because we have only limited experience in manufacturing our products in
commercial quantities, we may encounter unforeseen situations that would result
in delays or shortfalls. For example, in

                                       18

<PAGE>

December 2000, we voluntarily withdrew certain of our catheters from the market
because of manufacturing issues. We may encounter difficulties and delays in
manufacturing our products for the following additional reasons:

        .   We have limited experience manufacturing our products in compliance
            with the FDA's Quality System Regulation;

        .   To increase our manufacturing output significantly, we will have to
            attract and retain qualified employees, who are in short supply,
            for the assembly and testing operations; and

        .   Some of the components and materials necessary for manufacturing our
            products are currently provided by a single supplier.

Although we believe that our current manufacturing facility will be adequate to
support our commercial manufacturing activities for the foreseeable future, we
may be required to expand our manufacturing facilities to begin large-scale
manufacturing. If we are unable to provide customers with high-quality products
in a timely manner, we may not be able to achieve market acceptance for our
Stretta or Secca Systems. Our inability to successfully manufacture or
commercialize our devices could have a material adverse effect on our product
sales.

If we lose our relationship with any individual suppliers of product components,
we will face regulatory requirements with regard to replacement suppliers that
could delay the manufacture of our products.

Third-party suppliers provide materials and components used in our products. If
these suppliers become unwilling or unable to supply us with our requirements,
replacement or alternative sources might not be readily obtainable due to
regulatory requirements applicable to our manufacturing operations. Obtaining
components from a new supplier may require a new or supplemental filing with
applicable regulatory authorities and clearance or approval of the filing before
we could resume product sales. This process may take a substantial period of
time, and we cannot assure you that we would be able to obtain the necessary
regulatory clearance or approval. This could create supply disruptions that
would reduce our product sales and revenue.

If we or our suppliers fail to comply with the FDA quality system regulation,
manufacturing operations could be delayed and our business could be harmed.

Our manufacturing processes are required to comply with the quality system
regulation, or QSR, which covers the methods and documentation of the design,
testing, production, control, quality assurance, labeling, packaging and
shipping of our products. The FDA enforces the QSR through inspections. In May
2001, we received the report on our first QSR inspection, which was completed in
March 2001. There were no significant findings. If we fail any future QSR
inspections, our operations could be disrupted and our manufacturing delayed.
Failure to take corrective action in response to a QSR inspection could force a
shut-down of our manufacturing operations and a recall of our products, which
would have a material adverse effect on our product sales, revenues, and
expected revenues and profitability. Furthermore, we cannot assure you that our
key component

                                       19

<PAGE>

suppliers are, or will continue to be, in compliance with applicable regulatory
requirements, will not encounter any manufacturing difficulties, or will be able
to maintain compliance with regulatory requirements. Any such event could have a
material adverse effect on our available inventory and product sales.

Our failure to obtain or maintain necessary FDA clearances or approvals could
hurt our ability to commercially distribute and market our products in the
United States.

Our products are considered medical devices and are subject to extensive
regulation in the United States and in foreign countries where we intend to do
business. Unless an exemption applies, each medical device that we wish to
market in the United States must first receive either 510(k) clearance or
premarket approval from the FDA. Either process can be lengthy and expensive.
The FDA's 510(k) clearance process usually takes from four to twelve months, but
may take longer. The premarket application ("PMA") approval process is much more
costly, lengthy and uncertain. It generally takes from one to three years or
even longer. Delays in obtaining regulatory clearance or approval will adversely
affect our revenues and profitability.

Although we have obtained 510(k) clearance for both the Stretta System, for use
in treating GERD, and the Secca System, for treatment of fecal incontinence in
patients who have failed more conservative therapies such as diet modification
and biofeedback, our clearance can be revoked if postmarketing data demonstrates
safety issues or lack of effectiveness. Moreover, we will need to obtain 510(k)
clearance or PMA approval to market any other new products. We cannot assure you
that the FDA will not impose the more burdensome PMA approval process upon this
technology in the future. More generally, we cannot assure you that the FDA will
ever grant 510(k) clearance or premarket approval for any product we propose to
market. If the FDA withdraws or refuses to grant approvals, we will be unable to
market such products in the United States.

If we market our products for uses that the FDA has not approved, we could be
subject to FDA enforcement action.

Our Stretta and Secca Systems are cleared by the FDA; the Stretta System for the
treatment of GERD and the Secca System for the treatment of fecal incontinence
in patients who have failed more conservative therapies such as diet
modification and biofeedback. FDA regulations prohibit us from promoting or
advertising either system, or any future cleared or approved devices, for uses
not within the scope of our clearances or approvals, and prohibit us from making
unsupported safety and effectiveness claims. These determinations can be
subjective, and the FDA may disagree with our promotional claims. If the FDA
requires us to revise our promotional claims or takes enforcement action against
us based upon our labeling and promotional materials, our sales could be
delayed, our profitability could be harmed and we could be required to pay
significant fines or penalties.

Modifications to our marketed devices may require new 510(k) clearances or PMA
approvals or require us to cease marketing or recall the modified devices until
such clearances are obtained.

Any modification to an FDA 510(k)-cleared device that could significantly affect
its safety or effectiveness, or that would constitute a major change in its
intended use, requires a new FDA

                                       20

<PAGE>

510(k) clearance or, possibly, PMA approval. The FDA requires every manufacturer
to make this determination in the first instance, but the FDA can review any
such decision. We have modified aspects of our Stretta System, but we believe
that new 510(k) clearances are not required. We may modify future products after
they have received clearance or approval, and, in appropriate circumstances, we
may determine that new clearance or approval is unnecessary. We cannot assure
you that the FDA would agree with any of our decisions not to seek new clearance
or approval. If the FDA requires us to seek 510(k) clearance or PMA approval for
any modification to a previously cleared product, we also may be required to
cease marketing or recall the modified device until we obtain such clearance or
approval. Also, in such circumstances, we may be subject to significant
regulatory fines or penalties.

Complying with FDA and other regulations is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties.

Our products are medical devices that are subject to extensive regulation. FDA
regulations are wide-ranging and govern, among other things:

        .   product design, development, manufacture and 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 recalling products, ceasing product marketing, paying
significant fines and penalties, and similar FDA actions which could limit
product sales, delay product shipment, and adversely affect our profitability.

We face risks related to our international operations, including the need to
obtain necessary foreign regulatory approvals.

In February 2001, we entered into a total of four distribution agreements: one
each in Germany, Italy, and Greece and one covering sales in the region of
Belgium, the Netherlands, and Luxembourg (Benelux). In August 2001, we entered
into a distribution agreement in South Africa, and in December 2001, we entered
into distribution agreements in Portugal and one covering sales in the region of
Denmark, Sweden, Norway and Finland (Scandinavia). In March 2002, we entered
into a distribution agreement in Egypt. We are training these distributors and
only began selling our products in international markets in April 2001. To
successfully market our products internationally, we must address many issues
with which we have little or no experience. We have obtained regulatory
clearance to market the Stretta System in the European Union, Australia and
Canada and

                                       21

<PAGE>

to market the Secca System in the European Union, but we have not obtained any
other international regulatory approvals for other markets or products. We
cannot assure you that we will be able to obtain or maintain such approvals.
Furthermore, although contracts already signed with European distributors
specify payment in U.S. dollars, future international sales may be made in
currencies other than the U.S. dollar. As a result, currency fluctuations may
impact the demand for our products in countries where the U.S. dollar has
increased compared to the local currency. Engaging in international business
involves the following additional risks:

     .    export restrictions, tariff and trade regulations, and foreign tax
          laws;

     .    customs duties, export quotas or other trade restrictions;

     .    economic or political instability;

     .    shipping delays; and

     .    longer payment cycles.


In addition, contracts may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system, and the protection of
intellectual property in foreign countries may be more difficult to enforce.
Once we begin selling our products internationally, any of these factors could
cause our international sales to decline, which would impact our expected sales
and growth rates.

Product liability suits against us could result in expensive and time-consuming
litigation, payment of substantial damages and an increase in our insurance
rates.

The development, manufacture and sale of medical products involves a significant
risk of product liability claims. The use of any of our products may expose us
to liability claims, which could divert management's attention from our core
business, be expensive to defend, and result in sizable damage awards against
us. For example, we are currently a party to two product liability lawsuits
where there are allegations that our products are defectively designed and that
we were negligent in manufacturing our products. We maintain product liability
insurance at coverage levels which we believe to be commercially acceptable;
however there can be no assurance that product liability or other claims will
not exceed such insurance coverage limits or that such insurance will continue
to be available on the same or substantially similar terms, or at all. We
re-evaluate annually whether we need to obtain additional product liability
insurance. Even if we obtain additional product liability insurance there can be
no assurance that it would not have a material adverse effect on our business,
financial condition, and results of operations. Any product liability claims
brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing any coverage in the future. Even in
the absence of a claim, our insurance rates may rise in the future to a point
where we decide not to carry any insurance.

We have limited protection for our intellectual property. If our intellectual
property does not sufficiently protect our products, third parties will be able
to compete against us more directly and more effectively.

                                       22

<PAGE>

As of March 31, 2002, we had 34 issued or allowed U.S. patents and 41 pending
U.S. patent applications; this includes 16 issued U.S. patents and 17 pending
U.S. patent application licensed in from third-parties. We rely on patent,
copyright, trade secret and trademark laws to protect our products, including
our Stretta Catheter, our Secca Handpiece and our Curon Control Module, from
being duplicated by competitors. However, these laws afford only limited
protection. Our patent applications and the notices of allowance we have
received may not issue as patents or, if issued, may not issue in a form that
will be advantageous to us. Patents we have obtained and may obtain in the
future may be challenged, invalidated or legally circumvented by third parties.
We may not be able to prevent the unauthorized disclosure or use of our
technical knowledge or other trade secrets by consultants, vendors, former
employees or current employees, despite the existence of nondisclosure and
confidentiality agreements and other contractual restrictions. Furthermore, the
laws of foreign countries may not protect our intellectual property rights to
the same extent as the laws of the United States. If our intellectual property
rights do not adequately protect our commercial products, our competitors could
develop new products or enhance existing products to compete more directly and
effectively with us and harm our product sales and market position.

Because, in the United States, patent applications are secret unless and until
issued as patents, or corresponding applications are published in other
countries, and because publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be certain that we
were the first to file patent applications for such inventions. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty,
may also be necessary to enforce patent or other intellectual property rights or
to determine the scope and validity of other parties' proprietary rights. There
can be no assurance that we will have the financial resources to defend our
patents from infringement or claims of invalidity.

Because of our reliance on unique technology to develop and manufacture
innovative products, we depend on our ability to operate without infringing or
misappropriating the proprietary rights of others.

There is a substantial amount of litigation over patent and other intellectual
property rights in the medical device industry. Because we rely on unique
technology to develop and manufacture innovative products, we are especially
sensitive to the risk of infringing intellectual property rights. While we
attempt to ensure that our products do not infringe other parties' patents and
proprietary rights, our competitors may assert that our products and the methods
they employ may be covered by patents held by them or invented by them before
they were invented by us. Although we may seek to obtain a license or other
agreement under a third party's intellectual property rights to bring an end to
certain claims or actions asserted against us, we may not be able to obtain such
an agreement on reasonable terms or at all. If we were not successful in
obtaining a license or redesigning our products, our product sales and
profitability could suffer, and we could be subject to litigation and
potentially sizable damage awards.

Also, one or more of our products may now be infringing inadvertently on
existing patents. As the number of competitors in our markets grows, the
possibility of a patent infringement claim against us increases. Whether a
product infringes a patent involves complex legal and factual issues, the
determination of which is often uncertain. Infringement and other intellectual
property claims, with

                                       23

<PAGE>

or without merit, can be expensive and time-consuming to litigate and divert
management's attention from our core business. If we lose in this kind of
litigation, a court could require us to pay substantial damages or grant
royalties, and prohibit us from using technologies essential to our products.
This kind of litigation is expensive to all parties and consumes large amounts
of management's time and attention. In addition, because patent applications can
take many years to issue, there may be applications now pending of which we are
unaware and which may later result in issued patents that our products may
infringe.

If we lose our rights to intellectual property that we have licensed we may be
forced to develop new technology and we may not be able to develop that
technology or may experience delays in manufacturing as a result.

Our license with Gyrus Group PLC, a public company incorporated and existing
under the laws of England and Wales, allows us to manufacture and sell our
products using their radiofrequency generator technology. In addition, the
University of Kansas license allows us to apply radiofrequency energy to tissue.
To the extent these license interests become jeopardized through termination or
material breach of the license agreements, our operations may be harmed. We may
have to develop new technology or license other technology. We cannot provide
any assurance that we will be able to develop such technology or that other
technology will be available for license. Even if such technology is available,
we may experience delays in our manufacturing as we transition to a different
technology.

If we are unable to attract and retain qualified personnel, we will be unable to
expand our business.

We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers and other highly
skilled personnel. Our employees are at-will employees and, with the exception
of our chief executive officer, are not subject to employment contracts. The
loss of services of one or more key employees could materially adversely affect
our growth. In addition, hiring qualified management and technical personnel
will be difficult due to the intense competition for qualified professionals
within the medical device industry. In the past, we have experienced difficulty
in recruiting qualified personnel. Failure to attract and retain personnel,
particularly management and technical personnel, would materially harm our
ability to grow our business rapidly and effectively.

Our directors, executive officers and principal stockholders have significant
voting power and may take actions that may not be in the best interests of our
other stockholders.

Our officers, directors and principal stockholders holding more than 5% of our
common stock together control over 50% of our outstanding common stock. As a
result, these stockholders, if they act together, will be able to control the
management and affairs of our company and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interest of our other stockholders.

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<PAGE>

Our stockholder rights plan, certificate of incorporation, bylaws and Delaware
law contain provisions that could discourage a takeover.

In November 2001, we adopted a stockholder rights plan. The purpose of the plan
is to assure fair value in the event of a future unsolicited business
combination or similar transaction involving Curon. If an individual or entity
accumulates 15% of our stock, or 20% in the case of certain existing
stockholders, the rights become exercisable for additional shares of our common
stock or, if followed by a merger or other business combination where Curon does
not survive, additional shares of the acquiror's common stock. The intent of
these rights is to force a potential acquiror to negotiate with the Board to
increase the consideration paid for our stock. The existence of this plan,
however, may deter a potential acquiror, which could negatively impact
shareholder value.

In addition, our basic corporate documents and Delaware law contain provisions
that might enable our management to resist a takeover. Any of the above
provisions might discourage, delay or prevent a change in the control of our
company or a change in our management. The existence of these provisions could
adversely affect the voting power of holders of common stock and limit the price
that investors might be willing to pay in the future for shares of our common
stock.

We expect that the price of our common stock will fluctuate substantially.

The market price for the common stock may be affected by a number of factors,
including:

     .    the announcement of new products or product enhancements by us or our
          competitors;

     .    quarterly variations in our or our competitors' results of operations;

     .    changes in earnings estimates or recommendations by securities
          analysts, or our failure to achieve analyst earnings estimates;

     .    developments in our industry; and

     .    general market conditions and other factors, including factors
          unrelated to our operating performance or the operating performance of
          our competitors.

In addition, the stock prices of many companies in the medical device industry
have experienced wide fluctuations that have often been unrelated to the
operating performance of such companies. Such factors and fluctuations may
materially and adversely affect the market price of our common stock, which, in
turn, may negatively affect our ability to raise capital and to acquire
technologies in the future.

A sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.

If our stockholders sell substantial amounts of our common stock in the public
market, including shares issued upon the exercise of outstanding options, the
market price of our common stock could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem reasonable or appropriate.

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Item 3.  Quantitative and Qualitative Disclosures of Market Risk

We invest our excess cash primarily in U.S. government securities and marketable
debt securities of financial institutions and corporations with strong credit
ratings. These instruments have maturities of eighteen months or less when
acquired with an average maturity date of less than three months. We do not
utilize derivative financial instruments, derivative commodity instruments or
other market risk sensitive instruments, positions or transactions in any
material fashion. Accordingly, we believe that while the instruments we hold are
subject to changes in the financial standing of the issuer of such securities,
we are not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments.

PART II  -  OTHER INFORMATION

Item 1.  Legal Proceedings

In June 2001, Hershel E. Fancher et al ("Fancher") filed a civil action against
us in the United States District Court, Western District of Kentucky, Louisville
Division, alleging that he sustained a nerve injury and damage to his
gastrointestinal tract during a Stretta procedure caused by the defective design
and manufacture of our product. Fancher's allegations against us include strict
liability for a product that was in a defective and unreasonably dangerous
condition, negligence in the design and manufacturing of the product, breach of
implied warranty of merchantibility, and loss of consortium. Fancher was a
subject in a randomized clinical trial and had given Informed Consent to the
treating institution for the procedure. Fancher is seeking a trial by jury and
unspecified damages. We believe Fancher's claim is without merit.

In September 2001, Diana Conklin ("Conklin") filed a civil action against a
number of defendants, including Curon, in the Superior Court of the State of
California in and for the City and County of Santa Clara, alleging that she
sustained injury when undergoing surgery utilizing the Stretta System, caused by
defects in design and manufacture. Conklin also alleges negligence in the
design, manufacture, advertising and sale of the Stretta System and that its
warnings, instructions and directions for use were inadequate. Additional
defendants include the treating physicians and the associated medical
institutions, who, it is alleged, were medically negligent in treatment of
Conklin. Conklin is seeking unspecified damages. We believe Conklin's claim
against us is without merit.

Item 2.  Changes in Securities and Use of Proceeds

On September 26, 2000, we completed the sale of 5,000,000 shares of our common
stock at a per share price of $11.00 in a firm commitment underwritten public
offering. The offering was effected pursuant to a Registration Statement on Form
S-1 (Registration No. 333-37866), which the United States Securities and
Exchange Commission declared effective on September 21, 2000. On October 24,
2000, we completed the sale of an additional 475,000 shares of our common stock
at a per share price of $11.00 pursuant to the exercise of the over-allotment
option by the underwriters. Of the approximately $54.8 million in net offering
proceeds, through March 31, 2002, we have used approximately $12.0 million for
the repayment of debt and accrued interest, $5.5 million for research

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and development, $5.9 million for the manufacture of products, $2.3 million for
clinical expense and reimbursement efforts, $9.1 million for sales and marketing
initiatives to support the commercialization of the Stretta System and $6.2
million for general corporate purposes. All amounts represent estimates of
direct or indirect payments of amounts to third parties.

We have a loan of $229,500 made to John W. Morgan, our President and Chief
Executive Officer, made in monthly $8,500 mortgage assistance payments. We have
also made a $150,000 loan to David S. Utley, M.D., our Chief Medical Officer,
which has a two-year maturity date and is outstanding at March 31, 2002, a
$68,500 loan to James Goode, our Vice President of Sales, all of which was
repaid in April 2002, and a $75,000 loan to John Gaiser, our Vice President of
Engineering, Research and Development, which was paid in full in April 2002.
Other than these loans, no amounts were paid directly or indirectly for the
above purposes to directors or officers of the Company, to persons owning ten
percent or more of any class of equity securities of the Company, or to
affiliates of the Company, other than amounts related to the repayment of debt
and accrued interest, which amounts matured less than one year from the date of
issuance. The use of proceeds described above do not represent a material change
in the use of proceeds describe in the Offering prospectus.

Item 6. Exhibits and Reports on Form 8-K

   (a) There were no reports on Form 8-K during the quarter ended March 31,
2002.

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                               CURON MEDICAL, INC.

                                   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.

                                      CURON MEDICAL, INC.
                                         (Registrant)

Date: May 10, 2002                      By: /s/ John W. Morgan
                                        ----------------------

                                        John W. Morgan
                                        President and
                                        Chief Executive Officer
                                        (Principal Executive Officer)

                                        By: /s/ Alistair F. McLaren
                                        ---------------------------

                                        Alistair F. McLaren
                                        Vice President of Finance
                                        Chief Financial Officer and Chief
                                        Information Officer
                                        (Principal Financial Officer)

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