<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 SEPTEMBER 30, 2001

                                       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) 773-9910
              (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 November 14, 2001, 19,625,874 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
           September 30, 2001 and December 31, 2000. ........................    3

          Condensed Consolidated Statements of Operations for the
           three month and nine month periods ended
           September 30, 2001 and 2000 ......................................    4

          Condensed Consolidated Statements of Cash Flows for the
           nine month periods ended September 30, 2001 and 2000 .............    5

          Notes to Financial Statements ......................................   6

Item 2.   Management's Discussion and Analysis of
           Financial Condition and Results of Operations. ...................    9

Item 3.   Quantitative and Qualitative Disclosures of
           Market Risk. .....................................................   25

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

Item 1.   Legal Proceedings ..................................................  25

Item 2.   Changes in Securities and Use of Proceeds ..........................  25

Item 6.   Exhibits and Reports on Form 8-K. ..................................  26

Signatures ...................................................................  27
</TABLE>

                                                                             -2-





<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                          September 30, 2001     December 31, 2000
                                                                          ------------------     -----------------
<S>                                                                       <C>                    <C>
Assets
Current assets:
 Cash and cash equivalents                                                   $       13,106      $         16,759
 Marketable securities                                                               27,688                22,447
 Accounts receivable, net of allowance for doubtful accounts
   of $20 and $15, respectively                                                         650                   259
 Inventories, net                                                                     1,497                   866
 Related party notes receivable                                                         144                   250
 Prepaid expenses and other current assets                                              651                   969
                                                                             --------------      ----------------
 Total current assets                                                                43,736                41,550

Long term investments                                                                 1,044                12,882
Related party notes receivable                                                          329                   102
Property and equipment, net                                                           1,327                 1,397
Intangible assets, net                                                                  246                   584
Other assets                                                                             92                   102
                                                                             --------------      ----------------
 Total assets                                                                $       46,774      $         56,617
                                                                             ==============      ================


Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable                                                            $          283      $            319
 Accrued liabilities                                                                  1,174                 1,315
                                                                             --------------      ----------------
 Total current liabilities                                                            1,457                 1,634

Other liabilities                                                                        58                    53
                                                                             --------------      ----------------
 Total liabilities                                                                    1,515                 1,687
                                                                             --------------      ----------------

Contingencies (Note 5)

Stockholders' equity:
 Common stock                                                                            19                    19
 Additional paid-in capital                                                          90,274                90,149
 Deferred stock compensation                                                         (1,253)               (2,451)
 Accumulated deficit                                                                (43,977)              (32,862)
 Accumulated other comprehensive income                                                 196                    75
                                                                             --------------      ----------------
 Total stockholders' equity                                                          45,259                54,930

                                                                             --------------      ----------------
 Total liabilities and stockholders' equity                                  $       46,774      $         56,617
                                                                             ==============      ================
</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)

<TABLE>
<CAPTION>
                                                     For the Three Months Ended              For the Nine Months Ended
                                              ------------------------------------       --------------------------------

                                                        Sept 30,          Sept 30,              Sept 30,         Sept 30,
                                                            2001              2000                  2001             2000
                                              ------------------ -----------------       --------------- ----------------
<S>                                           <C>                <C>                     <C>             <C>
Revenues                                         $          826      $         686          $      2,612     $        856
Cost of goods sold                                        1,282                880                 3,764            1,168
                                              -----------------  -----------------       ---------------  ---------------

Gross loss                                                 (456)              (194)               (1,152)            (312)
                                              -----------------  -----------------       --------------- ----------------

Operating expenses:
 Research and development                                   653                881                 1,977            3,972
 Clinical and regulatory                                    411                428                 1,365            1,340
 Sales and marketing                                      1,717                910                 5,178            2,005
 General and administrative                               1,086              1,013                 3,339            3,085
                                              -----------------  -----------------       ---------------  ---------------

Total operating expenses                                  3,867              3,232                11,859           10,402
                                              -----------------  -----------------       ---------------  ---------------


Operating loss                                           (4,323)            (3,426)              (13,011)         (10,714)


Interest income                                             506                267                 1,894              521
Interest expense                                              -             (3,033)                                (4,085)
Other income, net                                             5                  1                     2                7
                                              -----------------  -----------------       ---------------  ---------------


Net loss before extraordinary                            (3,812)            (6,191)              (11,115)         (14,271)
item                                          -----------------  -----------------       ---------------  ---------------

Extraordinary gain - early
 extinguishment of debt                                       -              1,596                     -            1,596
                                              -----------------  -----------------       ---------------  ---------------

                                                 $       (3,812)     $      (4,595)         $    (11,115)    $    (12,675)
Net loss                                      =================  =================       ===============  ===============


Net loss per common share, basic and
diluted:

 Net loss before extraordinary item              $        (0.20)     $       (1.38)         $      (0.59)    $      (4.53)

 Extraordinary gain - early
 extinguishment of debt                                       -               0.36                     -             0.51
                                              -----------------  -----------------       ---------------  ---------------

Net loss per share, basic and
 diluted                                         $        (0.20)     $       (1.02)         $      (0.59)    $      (4.02)
                                              =================  =================       ===============  ===============

Shares used in computing net loss per
 share, basic and diluted                                19,210              4,483                18,995            3,149
                                              =================  =================       ===============  ===============
</TABLE>

      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 Nine Months Ended
                                                                               September 30, 2001          September 30, 2000
                                                                              --------------------        --------------------
<S>                                                                           <C>                         <C>
Cash Flows From Operating Activities
Net loss                                                                           $      (11,115)              $     (12,675)
Adjustments to reconcile net loss to net cash used in operating
activities:
           Depreciation and amortization                                                      565                         423
           Amortization of acquired technology                                                338                         205
           Extraordinary gain on extinguishment of debt, net                                    -                      (1,596)
           Note payable issued in exchange for services received                                -                          45
           Amortization of stock-based compensation                                         1,072                       2,762
           Amortization of discounts on notes payable                                           -                       3,724
           Common stock and stock options issued in exchange for
           services received                                                                    -                         243
           Loss on disposal of fixed assets                                                    15                           -

Changes in current assets and liabilities:
           Accounts receivable, net                                                          (391)                       (502)
           Inventories, net                                                                  (631)                       (341)
           Prepaid expenses and other current assets                                          318                        (166)
           Other  assets                                                                       10                         (13)
           Accounts payable                                                                   (36)                       (400)
           Accrued liabities                                                                 (141)                        512
           Other long-term liabilities                                                          5                          33
                                                                                  ---------------              --------------
        Net cash used in operating activities                                              (9,991)                     (7,746)
                                                                                  ---------------              --------------

Cash Flows From Investing Activities
Purchase of property and equipment                                                           (510)                       (427)
Purchase of marketable securities and long term investments                               (33,479)                     (8,024)
Proceeds from maturities of marketable securities and long term
  investments                                                                              40,197                       1,510
Purchase of acquired technology                                                                 -                         (72)
                                                                                  ---------------              --------------

        Net cash provided by (used in) investing activities                                 6,208                      (7,013)
                                                                                  ---------------              --------------


Cash Flows From Financing Activities

Proceeds from issuance of convertible notes payable                                             -                      11,045
Repayment of convertible notes                                                                  -                     (11,090)
Principal payments on notes payable                                                             -                        (478)
Proceeds from related party notes receivable                                                  250                           -
Payments from related party notes receivable                                                 (371)                        (77)
Proceeds from issuance of common stock, net of issuance costs                                 251                      50,432
                                                                                  ---------------              --------------
        Net cash provided by financing activities                                             130                      49,832
                                                                                  ---------------              --------------
Net increase (decrease)  in cash and cash equivalents                                      (3,653)                     35,073
Cash and cash equivalents at beginning of period                                           16,759                       7,988
                                                                                  ---------------              --------------
Cash and cash equivalents at end of period                                         $       13,106               $      43,061
                                                                                  ===============              ==============

Supplemental Disclosure of Non-Cash Investing and Financing Information
Deferred stock based compensation                                                  $         (126)              $       2,426
Issuance of warrants with debt                                                     $            -               $       2,100
Issuance of common stock in exchange for intangible assets                         $            -               $         831
Conversion of preferred stock to common stock                                      $            -               $      21,808
</TABLE>


    See accompanying notes to the condensed consolidated financial statements

                                                                             -5-



<PAGE>

                               CURON MEDICAL, INC.
                         NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS

                                   (Unaudited)

September 30, 2001

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.

Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary 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, 2000, as filed with the SEC.

Net Loss Per Share
Basic net loss per share is calculated based on the weighted-average number of
common shares outstanding during the period, excluding those shares that are
subject to repurchase. Diluted net loss per share would give effect to the
dilutive effect of common stock equivalents consisting of stock options,
warrants, and common stock subject to repurchase (calculated using the treasury
stock method). 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 anti-dilutive are as follows (in thousands):

                                                                             -6-

<PAGE>

<TABLE>
                                                                September 30, 2001         September 30, 2000
                                                            ----------------------     ----------------------
<S>                                                         <C>                        <C>
Unvested common shares (shares subject to repurchase)                          317                      1,231
Shares issuable upon exercise of stock options                               1,899                      1,252
Shares issuable upon exercise of warrants                                      569                        722
                                                            ----------------------     ----------------------
Total                                                                        2,785                      3,205
                                                            ======================     ======================
</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. Revenue through international distributors is recognized
upon sale to end-user, and not upon sale to distributor. Revenues for extended
warranty contracts are recognized over the extended warranty period. To date,
post-sale customer support and training has 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.

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. Management does not expect the adoption of SFAS 142 to
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. 121and 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. Management does not expect the adoption of SFAS 144 to
have

                                                                             -7-

<PAGE>

a material impact on the Company's financial position and results of operations.


NOTE 2. Inventories (in thousands)

<TABLE>
<CAPTION>
                                     September 30, 2001             December 31, 2000
                                  ------------------------       ------------------------
<S>                               <C>                            <C>
Raw material                          $              1,115          $                 555
Work-in-process                                        114                            115
Finished goods                                         268                            196

                                  ------------------------       ------------------------
                                      $              1,497          $                 866
                                  ========================       ========================
</TABLE>



NOTE 3. Deferred Stock Compensation

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

<TABLE>
<CAPTION>
                                        Three Months Ended                    Nine Months Ended
                                ----------------------------------   ----------------------------------

                                  September 30,     September 30,      September 30,     September 30,
                                           2001              2000               2001              2000
                                ----------------  ----------------   ----------------  ----------------
<S>                             <C>               <C>                <C>               <C>
Cost of product sold            $             10  $             60   $             66  $             81

Research and development                      70               227                129             1,094
Clinical and regulatory                       27                52                 91               144
Sales and marketing                           66               126                239               296
General and administrative                   193               358                547             1,147

                                ----------------  ----------------   ----------------  ----------------
                                $            366  $            823   $          1,072  $          2,762
                                ================  ================   ================  ================
</TABLE>



Note 4. Related Party Transactions

In January 2001, the Company entered into a promissory note agreement with an
officer of the Company. The note is in the amount of $150,000 and bears interest
at a rate of 6% per annum and principal and interest are payable in January
2003. The note is collateralized by shares of the Company's common stock that
are held by the officer.

                                                                             -8-

<PAGE>

In May and September 2001, the Company entered into promissory note agreements
with two officers of the Company. The notes are $68,500 and $75,000, and bear
interest at a rate of 4.8% per annum and 3.9% per annum, respectively. Principal
and interest are payable in May 2002 and June 2002, respectively. The first note
is collateralized by equity securities, and the second by shares of the
Company's common stock that are owned by the officer involved.

Note 5. Legal Proceedings

In June 2001, Hershel E. Fancher et al ("Plaintiff") 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. Plaintiff'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. 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. We believe Plaintiff's claim is without merit.

In September 2001, Diana Conklin ("Plaintiff") 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. 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, who, it is alleged, were medically negligent in treatment of
Plaintiff. Plaintiff is seeking unspecified damages. We believe Plaintiff's
claim against us is without merit.

Note 6. Subsequent Event

On October 30, 2001, the Company adopted a Preferred Stock Rights Agreement.
Under this agreement, the Company will issue a dividend of one Preferred Share
Purchase Right (a "Right") for each share of common stock held by stockholders
of record as of the close of business on November 20, 2001. Each Right entitles
the registered stockholder to purchase from the Company one one-thousandth of a
share of the Company's Series A Participating Preferred Stock ("Preferred
Stock") at an exercise price of $30.00. The agreement is designed to assure
stockholders fair value in the event of a future unsolicited business
combination or similar transaction. The Rights do not have any voting rights,
and will expire upon the earlier of redemption or November 20, 2011. If the
Rights are exercised, each stockholder receives one one-thousandth of a share of
Preferred Stock, which entitles the holder to one additional vote and dividends
and liquidation equal to that paid on common stock.

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, 2000.

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 handpieces, 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 13, 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

                                                                             -9-

<PAGE>

treatment of gastroesophageal reflux disease ("GERD"). Until December 31, 2000
we were in the development stage and until that time, we had devoted
substantially all of our efforts to developing our products and raising capital.

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 Food and Drug Administration ("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 the 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
data will be reviewed by the investigating team in the fourth quarter of 2001
and we expect it to be published in mid 2002.

In April 1999, we began developing the Secca System for the treatment of fecal
incontinence. In 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 has now been completed and by the fourth quarter of 2001 we intend to
use the results of this trial to support a 510(k) submission to the FDA or, if
required by the FDA, a premarket approval application. 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.

To date, we have generated limited revenues. Our revenues are and will continue
to be derived from the sale of radiofrequency generators and our disposable
devices, such as the Stretta Catheter. 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
to support European distributors' sales, marketing and clinical efforts and
hired a European manager. At September 30, 2001, this subsidiary had three
employees. We do not expect the number of employees to increase significantly in
2001. During the first quarter of 2001, we entered into distribution agreements
in Belgium, the Netherlands, Germany, Italy and Greece, and in August 2001, we
entered into a distribution agreement in South Africa. Our first shipments to
these distributors occurred in April 2001, and to date no shipments have been
made to South Africa. We do not expect to achieve significant revenues from
Europe before 2002. Our gross margins on sales through international third-party
distributors are and are expected to continue to 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

                                                                            -10-

<PAGE>

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 costs, advertising, public relations and attendance at
selected medical conferences. General and administrative expenses consist
primarily of the cost of corporate operations and personnel, legal, accounting
and other general operating expenses of our company. Through September 30, 2001,
we recorded limited product sales while incurring cumulative net losses of $44.0
million. In addition to increasing expenditures related to the 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 the
opportunities arise. As a result, we expect our operating expenses and net
losses to increase.

RESULTS OF OPERATIONS

Periods of three and nine months ended September 30, 2001 and 2000.

Revenues

Revenues for the quarter ended September 30, 2001, were $826,000, compared to
$686,000 for the same quarter in 2000. For the nine months ended September 30,
2001, revenues were $2.6 million, compared to $856,000 for the same period in
2000. Increased revenues are attributable to increased sales of our Stretta
System, including both generators and catheters to customers in the United
States and selected countries in the European Union. Commercial shipments began
in June 2000.

Cost of goods sold

In the quarter ended September 30, 2001, cost of goods sold was $1.3 million and
$880,000 for the same quarter in 2000. Amortization of stock-based compensation
accounted for $10,000 in the quarter ended September 30, 2001, and $60,000 for
the same period in 2000. For the nine months ended September 30, 2001, cost of
goods sold was $3.8 million and $1.2 million for the same period in 2000,
attributable to the increased volume of manufactured product to meet increased
sales. Amortization of stock-based compensation was $66,000 in the nine months
ended September 30, 2001, and $81,000 for the same period in 2000. Commercial
shipments began in June 2000, and manufacturing costs of $1.0 million were
recorded as pilot manufacturing expense in research and development through
September 30, 2000.

Research and development expenses

Research and development expenses were $653,000 in the quarter ended September
30, 2001, and $881,000 for the same quarter in 2000. Amortization of stock-based
compensation accounted for $70,000 in the quarter ended September 30, 2001, and
$227,000 for the same quarter in 2000. For

                                                                            -11-

<PAGE>

the nine months ended September 30, 2001, research and development expenses were
$2.0 million, and $4.0 million for the same period in 2000. Amortization of
stock-based compensation was $129,000 for the nine months ended September 30,
2001, and $1.1 million for the same period in 2000. Additionally in the first
nine months of 2000 we spent $500,000 in the first two quarters preparing the
Stretta Catheter for commercial manufacturing.

Clinical and regulatory expenses

Clinical and regulatory expenses were $411,000 in the quarter ended September
30, 2001, and $428,000 for the same period in 2000. Amortization of stock-based
compensation accounted for $27,000 in the quarter ended September 30, 2001 and
$52,000 for the same period in 2000. For the nine months ended September 30,
2001, clinical and regulatory expenses were $1.4 million, and $1.3 million for
the same period in 2000. Amortization of stock-based compensation was $91,000 in
the nine month period ended September 30, 2001, and $144,000 for the same period
in 2000. The remaining increase in spending in 2001 over 2000 was due to hiring
additional clinical personnel, the costs involved in the U.S. Secca trial, and
collecting data from the Stretta randomized control trial.

Sales and marketing expenses

Sales and marketing expenses were $1.7 million in the quarter ended September
30, 2001, and $910,000 for the same period in 2000. Amortization of stock-based
compensation accounted for $66,000 in the quarter ended September 30, 2001, and
$126,000 for the same period in 2000. For the nine months ended September 30,
2001, sales and marketing expenses were $5.2 million, and $2.0 million for the
same period in 2000. Amortization of stock-based compensation was $239,000 in
the nine months ended September 30, 2001, and $296,000 for the same period in
2000. The remaining increase in spending in 2001 over 2000 was primarily due to
an increase in expenditures for field sales and clinical support personnel,
public relations designed to heighten awareness for our product within the
physician community, and activities to promote reimbursement for our products.

General and administrative expenses

General and administrative expenses were $1.1 million in the quarter ended
September 30, 2001 and $1.0 million for the same period in 2000. Amortization of
stock-based compensation accounted for $193,000 in the quarter ended September
30, 2001, and $358,000 for the same period in 2000. For the nine months ended
September 30, 2001, general and administrative expenses were $3.3 million, and
$3.1 million for the same period in 2000. Amortization of stock-based
compensation was $547,000 in the nine months ended September 30, 2001, and $1.1
million for the same period in 2000. The remaining increase in spending in 2001
over 2000 was primarily due to increased personnel costs as our company expanded
and the higher costs relating to being a publicly held company, including legal,
accounting, insurance and investor relations.

Interest Income and Expense

During the quarter ended September 30, 2001, compared to the quarter ended
September 30, 2000, interest income increased by $239,000. For the nine months
ended September 30, 2001, compared to the same period in 2000, interest income
increased by $1.4 million. Increases were due to earnings

                                                                            -12-

<PAGE>

on a greater amount of marketable securities obtained using the cash received
from our initial public offering in September 2000.

During the quarter ended September 30, 2001, compared to the quarter ended
September 30, 2000, interest expense decreased by $3.0 million. For the nine
months ended September 30, 2001, compared to the same period in 2001, interest
expense decreased by $4.1 million. The debt for which the interest was due was
extinguished in the third quarter of 2000, and no further interest expense has
been recorded 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 September 30, 2001, we had $42.3
million in working capital and our primary source of liquidity was $40.8 million
in cash and cash equivalents and marketable securities. In addition, we had $1.0
million invested in long term securities at that date.

Cash used in operating activities was $10.0 million in the nine month period
ended September 30, 2001, which consisted of a net loss adjusted for non-cash
items of $9.1 million, increased by increases in accounts receivable and
inventories of $1.0 million and an decrease in accrued liabilities of $141,000,
and partially offset by a decrease in prepaid expenses and other current assets
of $318,000.

Cash provided by investing activities amounted to $6.2 million in the nine
months ended September 30, 2001, which consisted of proceeds from net maturities
and sales of marketable securities of $6.7 million, partially offset by
expenditures of $510,000 for property and equipment. As of September 30, 2001,
we had no material commitments for capital expenditures.

Cash provided by financing activities was $130,000 in the nine months ended
September 30, 2001, of which $251,000 was received from the issuance of common
stock. This was partially offset by net increases of $121,000 in related party
notes receivable.

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 2001. 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 financing, or to obtain it on acceptable terms, we
may be unable to execute our business plan.

                                                                            -13-

<PAGE>

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. Management does not expect the adoption of SFAS 142 to
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. 121and 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. Management does not expect the adoption of SFAS 144 to
have a material impact on the Company's financial position and results of
operations.

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 $3.0 million in 1998, $14.1 million in
1999, $15.8 million in 2000 and $11.1 million for the nine months ended
September 30, 2001. As of September 30, 2001, we had an accumulated deficit of
approximately $44.0 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. Even if we do achieve significant revenues from our
product sales, we expect to incur significant net losses over the next two years
and these losses may increase. It is possible that we will never achieve
profitable operations.

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
depend on Stretta System sales because the Stretta System accounts for
substantially all our revenue, and we anticipate that it will continue to do so
through at least 2002. To achieve increasing sales, our product must gain
increasing 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

                                                                            -14-

<PAGE>

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 is one
peer-reviewed journal article, 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 recall which occurred early in the launch of the
Stretta System. Future adverse events or recall would also impact future
acceptance rates. If physicians do not generally adopt our Stretta System for
the treatment and GERD, 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 nine-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.

Our clinical studies of the Secca System are in the early stages. The Secca
System has undergone a 10-patient pilot study. You should not draw any
conclusion about the safety or efficacy of the Secca System based upon data from
the pilot study because this study involved only a small patient group. The FDA
approved our application to conduct a U.S. multi-center clinical study, which we
began in July 2000. In April 2001, we completed the U.S. clinical trial of the
Secca System, and expect to submit to the FDA the results thereof during the
fourth quarter of 2001. If patient studies or clinical experience do not meet
our expectations regarding the benefits of the Secca System, we may not obtain
U.S. regulatory clearance or approval to sell the product domestically and 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 the Stretta System. We rely on physicians to spend their
time and money to attend our pre-sale educational sessions. Positive results
using the Stretta System are highly dependent upon proper physician technique.
If physicians use the Stretta System improperly, they may have unsatisfactory
patient outcomes or cause patient injury, which may give rise to
publicly-available Medical Device Reports filed with the FDA, negative publicity
or lawsuits against us, any of which could have a material adverse effect on our
sales and profitability.

                                                                            -15-

<PAGE>

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 ("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.

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 generally 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.

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 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

                                                                            -16-

<PAGE>

$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. C.R. Bard announced on May 30,
2001, that it had received an offer to be acquired by Tyco International, Inc.,
one of whose divisions is U.S. Surgical. 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.

These larger companies enjoy several competitive advantages over us, including:

      .    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 more effective, adopted more readily, 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, expires in 2001, although pending lawsuits may delay
the appearance of competition until at least the second quarter of 2002, after
which time companies may manufacture less expensive generic versions of the
drug. 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 October 1, 2001, we relied
on 16 direct sales employees to sell our Stretta System in the United States. We
must manage and expand 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. 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 System effectively;

                                                                            -17-

<PAGE>

      .    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 are training third-party distributors who will begin selling
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.

We currently have a total of five distribution agreements: one each in Germany,
Italy, Greece and South Africa and one covering sales in the region of Belgium,
the Netherlands and Luxembourg (Benelux). If we fail to adequately build and
manage our domestic and foreign sales force, or to effectively market and
distribute our products domestically and internationally, then our revenues and
our profitability will be materially and negatively impacted.

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 could result
in delays or shortfalls. For example, in December 2000 we voluntarily recalled
certain of our catheters because of a manufacturing issue. We may encounter
difficulties 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 System. 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

                                                                            -18-

<PAGE>

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 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, or 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 the Stretta System for use in
treating GERD, 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 premarket ("PMA") approval to market the Secca System for fecal
incontinence and for any other new products we wish to market. If the FDA
concludes that the Secca System does not meet the requirements to obtain 510(k)
clearance, then we would have to seek PMA approval. 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.

                                                                            -19-

<PAGE>

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

Our Stretta System is cleared by the FDA for the treatment of GERD. FDA
regulations prohibit us from promoting or advertising the Stretta System, or any
future cleared or approved devices, for uses not within the scope of our
clearances or approvals or 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 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.

                                                                            -20-

<PAGE>

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. 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 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 foreign
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 involve 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. We maintain product liability insurance at coverage levels which we believe
to be

                                                                            -21-

<PAGE>

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 reevaluate annually whether we need to obtain
additional product liability insurance. Even if we obtain additional product
liability insurance there can be no assurance that a lawsuit 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.

As of November 1, 2001, we had 34 issued or allowed U.S. patents and 34 pending
U.S. patent applications; this includes 16 issued U.S. patents and 17 pending
U.S. patent applications licensed in from third-parties. We rely on patent,
copyright, trade secret and trademark laws to protect our products, including
our Stretta Catheter 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 generally. Because we rely on
unique technology to develop and manufacture innovative products, we are
especially sensitive to the risk of infringing intellectual

                                                                            -22-

<PAGE>

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 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 Somnus allows us to manufacture and sell our products using
their radiofrequency generator technology. Somnus has been acquired by Gyrus
Group PLC, a public limited company incorporated and existing under the laws of
England and Wales. As a result of this merger, our license agreement may be
modified or terminated. In addition, the University of Kansas license allows us
to apply radiofrequency energy to tissue. To the extent these licensed 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

                                                                            -23-

<PAGE>

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 approximately 56% 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.

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

Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These 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.

                                                                            -24-

<PAGE>

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.

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 ("Plaintiff") 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. Plaintiff'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. 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. We believe Plaintiff's claim is without merit.

In September 2001, Diana Conklin ("Plaintiff") 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. 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, who, it is alleged, were medically negligent in treatment of
Plaintiff. Plaintiff is seeking unspecified damages. We believe Plaintiff'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 September 30, 2001, we have used approximately $12.0 million
for the repayment of debt and accrued interest, $4.0 million for research and
development, $2.9 million for the manufacture of products, $1.7 million for
clinical expense and reimbursement efforts, $5.5 million for sales and marketing
initiatives to support the commercialization of the Stretta System and $4.3
million for general corporate purposes. All amounts represent estimates of
direct or indirect payments of amounts to third parties.

We have made a $150,000 loan to David S. Utley, M.D., our Chief Medical Officer,
which has a two-year maturity date, a $68,000 loan to James Goode, our Vice
President of Sales, which has a one year maturity date, and a $75,000 loan to
John Gaiser, our Vice President of Engineering, Research and Development, which
has a nine-month maturity. 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.

                                                                            -25-

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

     (a)  10.19 Security Agreement with John Gaiser, Vice President of
     Engineering, Research and Development.

     (b)  There were no reports on Form 8-K during the quarter ended September
     30, 2001.

                                                                            -26-

<PAGE>

                               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: November 14, 2001                  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)

                                                                            -27-