<PAGE>

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

                                   FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 ___ No X
                                             ---

As of May 15, 2001, 19,477,302 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 Balance Sheets as of
           March 31, 2001 and December 31, 2000........................    3

           Condensed Statements of Operations for the
           Three month periods ended March 31, 2001 and 2000...........    4

           Condensed Statements of Cash Flows for the
           Three month periods ended  March 31, 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.................................................   22


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

Item 2.    Changes in Securities and Use of Proceeds...................   22


Item 6.    Exhibits and Reports on Form 8-K............................   23

Signatures.............................................................   24
</TABLE>

                                      -2-
<PAGE>

PART I - FINANCIAL INFORMATION
------------------------------

Item 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                March 31, 2001           December 31, 2000
                                                                                --------------           -----------------
<S>                                                                             <C>                         <C>
Assets
Current assets:
        Cash and cash equivalents                                                  $ 15,253                    $ 16,759
        Marketable securities                                                        27,727                      22,447
        Accounts receivable, net of allowance for doubtful accounts
          of $20 and $15, respectively                                                  844                         259
        Inventories, net                                                              1,176                         866
        Related party notes receivable, net                                               -                         250
        Prepaid expenses and other current assets                                       861                         969
                                                                                -----------               -------------
        Total current assets                                                         45,861                      41,550

Long term investments                                                                 5,841                      12,882
Related party note receivable                                                           278                         102
Property and equipment, net                                                           1,502                       1,397
Intangible assets, net                                                                  472                         584
Other assets                                                                             91                         102
                                                                                -----------               -------------
        Total assets                                                               $ 54,045                    $ 56,617
                                                                                ===========               =============

Liabilities and Stockholders' Equity
Current liabilities:
        Accounts payable                                                              $ 369                       $ 319
        Accrued liabilities                                                           1,104                       1,315
                                                                                -----------               -------------
        Total current liabilities                                                     1,473                       1,634

Other liabilities                                                                        58                          53
                                                                                -----------               -------------
        Total liabilities                                                             1,531                       1,687
                                                                                -----------               -------------

Stockholders' equity:
        Common stock                                                                     19                          19
        Additional paid-in capital                                                   90,190                      90,149
        Deferred stock compensation                                                  (2,038)                     (2,451)
        Accumulated deficit                                                         (35,822)                    (32,862)
        Accumulated other comprehensive income                                          165                          75
                                                                                -----------               -------------
        Total stockholders' equity                                                   52,514                      54,930
                                                                                -----------               -------------
        Total liabilities and stockholders' equity                                 $ 54,045                    $ 56,617
                                                                                ===========               =============
</TABLE>

                See accompanying notes to financial statements

                                      -3-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             For the Three Months Ended
                                                                      March 31, 2001          March 31, 2000
                                                                      ---------------         ---------------
<S>                                                                   <C>                     <C>
Revenues                                                                    $  1,218                 $    43
Cost of goods sold                                                             1,299                      23
                                                                           ----------               ---------

Gross profit (loss)                                                              (81)                     20
                                                                           ----------               ---------

Operating expenses:
      Research and development                                                   743                   1,756
      Clinical and regulatory                                                    490                     410
      Sales and marketing                                                      1,323                     339
      General and administrative                                               1,124                     929
                                                                           ----------               ---------

Total operating expenses                                                       3,680                   3,434
                                                                           ----------               ---------

Operating loss                                                                (3,761)                 (3,414)

Interest income                                                                  801                     114
Interest expense                                                                   -                      (9)
                                                                           ----------               ---------

Net loss                                                                    $ (2,960)                $(3,309)
                                                                           ==========               =========


Net loss per share, basic and diluted                                       $  (0.16)                $ (1.49)
                                                                           ==========               =========

Shares used in computing net loss per share,
      basic and diluted                                                       18,690                   2,222
                                                                           ==========               =========
</TABLE>

              See accompanying notes to the financial statements

                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       For the Three Months Ended
                                                                                 March 31, 2001          March 31, 2000
                                                                                 --------------          --------------
<S>                                                                              <C>                     <C>
Cash Flows From Operating Activities
Net loss                                                                           $ (2,960)                 $ (3,310)
Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                     178                        37
      Amortization of acquired technology                                               112                        25
      Amortization of stock-based compensation                                          437                     1,109
Changes in current assets and liabilities:
      Accounts receivable, net                                                         (585)                      (16)
      Inventories                                                                      (310)                      (56)
      Prepaid expenses and other current assets                                         108                       (56)
      Other assets                                                                       11                       (12)
      Accounts payable                                                                   50                      (253)
      Accrued liabilities                                                              (211)                     (221)
      Other long-term liabilities                                                         5                         -
                                                                                  ---------                 ---------
               Net cash used in operating activities                                 (3,165)                   (2,753)
                                                                                  ---------                 ---------
Cash Flows From Investing Activities
Purchase of property and equipment                                                     (283)                      (16)
Purchase of marketable securities                                                   (13,326)                        -
Proceeds from maturities of marketable securities                                    15,177                         6
                                                                                  ---------                 ---------
Net cash provided by (used in) investing activities                                   1,568                       (10)
                                                                                  ---------                 ---------
Cash Flows From Financing Activities
Principal payments on notes payable                                                       -                       (54)
Net (payments) proceeds from related party notes receivable                              74                       (27)
Proceeds from exercise of stock options                                                  17                       231
                                                                                  ---------                 ---------
               Net cash provided by financing activities                                 91                       150
                                                                                  ---------                 ---------
Net increase in cash and cash equivalents                                            (1,506)                   (2,613)
Cash and cash equivalents at beginning of period                                     16,759                     7,988
                                                                                  ---------                 ---------
Cash and cash equivalents at end of period                                         $ 15,253                  $  5,375
                                                                                  =========                 =========
Supplemental Disclosure of Non-Cash Investing and Financing Information
Deferred stock based compensation                                                  $     24                  $  1,654
Issuance of common stock in exchange for intangible assets                         $      -                  $    493
</TABLE>

              See accompanying notes to the financial statements

                                      -5-
<PAGE>

                              CURON MEDICAL, INC.
                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------
                                  (Unaudited)

March 31, 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 accompanying unaudited 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. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The unaudited interim financial statements
have been prepared on the same basis as the annual 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 financial statements should be read in conjunction with the
audited financial statements as included in the Annual Report on Form 10-K for
the year ended December 31, 2000, as filed with the Securities and Exchange
Commission.

Stock Split
In September 2000, the Company's Board of Directors effected a 0.57 for 1
reverse stock split. All share and per share amounts in the accompanying
financial statements have been restated to reflect the effect of this reverse
stock split.

Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less at the date of purchase to be cash
equivalents. The Company's cash and cash equivalents include deposit funds,
money market funds and commercial paper.

Marketable Securities
Marketable securities consist primarily of highly liquid debt securities and
commercial paper purchased with a remaining maturity at the date of purchase
greater than three months. Marketable securities are classified as
available-for-sale securities and are stated at market value with any temporary
difference between an investment's amortized cost and its market value recorded
as a separate component of stockholders' equity until such gains or losses are
realized. Gains or losses on the sales of securities are determined on a
specific identification basis. At March 31, 2001, an unrealized gain of $165,000
was recorded.

NOTE 2.  Net Loss Per Share
Basic net loss per share is calculated based on the weighted-average number of
common shares outstanding during the period (19,241,000 and 2,974,000 shares at
March 31, 2001, and 2000, respectively) excluding those shares that are subject
to repurchase (551,000 and 752,000 shares at March 31, 2001 and 2000,
respectively). Diluted net loss per share would give effect to the dilutive
effect of common stock equivalents

                                      -6-
<PAGE>

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 antidilutive are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                             March 31, 2001     March 31, 2000
                                                             --------------     --------------
<S>                                                          <C>                <C>
Unvested common shares (shares subject to repurchase)              487                 716
Shares issuable upon exercise of stock options                   1,605               1,243
Conversion of convertible preferred stock                                            9,597
Shares issuable upon exercise of warrants                          569                 153
                                                             -------------      --------------
Total                                                            2,661              11,709
                                                             =============      ==============
</TABLE>

Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements." Revenue from product sales
is recognized on product shipment against a valid purchase order provided no
significant obligations remain and collection of the receivables is deemed
probable for both sales of control modules and catheters. Revenues for extended
warranty contracts are recognized over the extended warranty period. To date,
post-sale customer support and training 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 until
all catheters under the contract have been purchased, at which time title to the
control modules passes and revenue is recognized. Revenue on the catheters is
recognized upon shipment at an amount representing their fair value based on
verifiable objective evidence of such.

Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
unearned stock compensation is based on the difference, if any, on the date of
grant, between the fair value of the Company's common stock and the exercise
price.

The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The
equity instruments are valued using the Black-Scholes Model. All unvested shares
are marked to market until such options vest.

All deferred stock compensation is amortized and expensed in accordance with
FASB Interpretation No. 28, an accelerated vesting model.

NOTE 3.  Inventories

Inventories consisted of the following (in thousands):

                                      -7-
<PAGE>

<TABLE>
<CAPTION>
                            March 31, 2001    December 31, 2000
                            --------------    -----------------
<S>                         <C>               <C>
Raw material                $          701    $             555
Work-in-process                        145                  115
Finished goods                         330                  196
                            --------------    -----------------
                            $        1,176    $             866
                            ==============    =================
</TABLE>

NOTE 4.  Deferred Stock Compensation

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

<TABLE>
<CAPTION>
                                          Three Months Ended
                                  -----------------------------------
                                        March 31,          March 31,
                                             2001               2000
                                  ----------------   ----------------
<S>                                 <C>                <C>
Cost of goods sold                $            29    $             -
Research and development                       74                585
Clinical and regulatory                        42                 62
Sales and marketing                           107                 46
General and administrative                    185                416
                                  ----------------   ----------------
                                  $           437    $         1,109
                                  ================   ================
</TABLE>

Note 5.   Related Party Transaction

In January 2001, the Company entered into a promissory note agreement with an
officer of the Company.  The note 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>

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.

     The information set forth below contains forward-looking statements
(designated by an *), and our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below under "Factors That May Affect Future Results."

Overview

     We were incorporated in May 1997. Business activities before January 1998
were negligible. In 1998, our primary activity was developing the Curon Control
Module and Stretta Catheter for the treatment of 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 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, the active clinical portion
of which was completed in the quarter ended March 31, 2001. We expect data
collection efforts to be completed and the results of this trial published by
the end of 2001.*

     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 submit a 510(k) to the FDA supported by the results of the trial
or, if required by the FDA, a PMA supported by these results*.

     We generally recognize revenue upon shipment of products to end-use
customers. To date, we have generated limited revenues. Our revenues are and
will be derived from the sale of radiofrequency generators and our disposable
devices, such as the Stretta Catheter*. We intend that disposables will form the
basis of a recurring revenue stream and intend to price catheters, at high
volumes, 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*.

     In December 2000, we initiated a voluntary recall of certain lots of
Stretta catheters in which there was a slight risk of insufficient bonding
between the handle and the shaft of the catheter. In total, 278 catheters in the
affected lots had been shipped to customers of which 81 had been used prior to
the recall. There were no adverse patient events linked with the affected lots.
The manufacturing instructions for the assembly of the shaft to the handle were
immediately corrected and production recommenced. As of March 31, 2001, all
affected catheters had been recalled and replaced. Although the recall adversely
impacted our ability to supply product in December of 2000, we were able to
start replacing recalled catheters almost

                                      -9-
<PAGE>

immediately and, since the beginning of this year, have regained the ability to
supply catheters from stock.

     Initially, we are focusing our sales efforts in the United States through a
direct sales force. In international markets, we expect to 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 May 1, 2001, this subsidiary
had three employees. We do not expect this number to increase significantly in
2001.* During the quarter just ended, we entered into distribution agreements in
Belgium, the Netherlands, Germany, Italy and Greece. Our first shipments to
these distributors occurred in April 2001. 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 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. There are
no additional expected costs to be incurred as part of the licensing agreement.
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 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 March 31, 2001, we
recorded limited product sales while incurring cumulative net losses of $35.8
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*.

     We grant stock options to hire, motivate and retain employees and non-
employee consultants. With respect to these stock options, we may record
deferred stock compensation. For stock options granted to employees, the
difference between the exercise price of the stock options and the fair value of
our stock at the date of grant is recorded as deferred compensation on the date
of grant. For stock options granted to non-employees, the fair value of the
options, estimated using the Black-Scholes valuation model, is initially
recorded on the date of grant. As the non-employee options become exercisable,
we revalue the remaining unvested options, with the change in fair value from
period to period represented as change in the deferred compensation charge.

     We are amortizing these amounts in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" (FIN 28). As a result of
stock options granted through March 31, 2001, we recorded $10.1 million in
deferred stock compensation, including $3.1 million related to the modification
of stock repurchase rights resulting from a mutual agreement to terminate our
employment relationship with our former president and CEO extending the
repurchase right 18 months to April 2001. Unamortized stock based compensation
of approximately $2.0 million remained as of March 31, 2001.

                                      -10-
<PAGE>

RESULTS OF OPERATIONS

Three months ended March 31, 2001 and 2000

Revenue

     In the three months ended March 31, 2001, we generated $1.2 million in
revenues from the sale of generators and catheters to customers in the United
States. Commercial shipments began in June 2000.

Cost of goods sold

     In the three months ended March 31, 2001, the cost of goods sold was $1.3
million, of which approximately $600,000 represented excess manufacturing
capacity.

Research and development expenses

     Research and development expenses were $743,000 in the three months ended
March 31, 2001 and $1.8 million in the three months ended March 31, 2000.
Amortization of stock-based compensation accounted for $74,000 in the three
months ended March 31, 2001 and $585,000 in the three months ended March 31,
2000. Additionally in the first three months of 2000 we spent $550,000 for
preparing the Stretta Catheter for commercial manufacturing.

Clinical and regulatory expenses

     Clinical and regulatory expenses were $490,000 in the three months ended
March 31, 2001 and $410,000 in the three months ended March 31, 2000.
Amortization of stock-based compensation accounted for $42,000 in the three
months ended March 31, 2001 and $62,000 in the three months ended March 31,
2000. The remaining increase in spending in 2001 over 2000 was due to hiring
additional clinical personnel and 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 $1.3 million in the three months ended
March 31, 2001 and $339,000 in the three months ended March 31, 2000.
Amortization of stock-based compensation accounted for $ 107,000 in the three
months ended March 31, 2001 and $46,000 in the three months ended March 31,
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 three months
ended March 31, 2001 and $ 929,000 in the three months ended March 31, 2000.
Amortization of stock-based compensation accounted for $185,000 in the three
months ended March 31, 2001 and $416,000 in the three months ended March 31,
2000. The remaining increase in spending in 2001 over 2000 was primarily due to
increased personnel costs as our company expanded and the higher cost investor
relations relating to being a publicly held company, including legal,
accounting, insurance and investor relations.

                                      -11-
<PAGE>

Interest Income and Expense

     During the three months ended March 31, 2001 compared to the three months
ended March 31, 2000, interest income increased by $687,000 primarily as a
result of increased earnings on interest bearing marketable securities.

     Interest expense for the three months ended March 31, 2001 and March 31,
2000 decreased by $9,000 to zero.

Income taxes

     As a result of our net losses, we did not incur any income tax obligations
in either the three months ended March 31, 2001 or the three months ended March
31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have funded our operations and capital investments from
proceeds from our initial public offering completed in September 2000 totaling
$55.0 million, from the partial exercise of the underwriter's overallotment
provision totaling $5.2 million, from the private sale of equity securities
totaling $22.0 million, the issuance of convertible notes totaling $11.8 million
and from bank equipment line financing totaling $780,000. At March 31, 2001, we
had $44.4 million in working capital and our primary source of liquidity was
$43.0 million in cash and cash equivalents and marketable securities. In
addition, we had $5.8 million invested in long term securities at that date.

     Cash used in operating activities was $3.2 million in the three months
ended March 31, 2001, which consisted of a net loss adjusted for noncash items
of $2.2 million, partially offset by increases in accounts receivable and
inventories of $895,000 and decreases in accrued liabilities of $211,000.

     Cash provided by investing activities amounted to $1.6 million in the three
months ended March 31, 2001, which consisted of net sales of marketable
securities of $1.9 million, offset by expenditures for property and equipment of
$283,000. As of March 31, 2001, we had no material commitments for capital
expenditures.

     Cash provided by financing activities was $91,000 in the three months ended
March 31, 2001, of which $17,000 was received from the exercise of stock options
and $74,000 was the net proceeds of related party notes receivable transactions.

     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.

                                     -12-
<PAGE>

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 $ 3.0 million for the three months ended March
31, 2001. As of March 31, 2001, we had an accumulated deficit of approximately
$35.8 million. We have generated limited revenues from the sale of our products,
and it is possible that we will never generate significant revenues from product
sales in the future. Even if we do achieve significant revenues from our product
sales, we expect to incur significant net losses over the next two years and
these losses may increase*. It is possible that we will never achieve profitable
operations.

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

     We commercially introduced our Stretta System, which consists of a
radiofrequency generator and a disposable handheld device, in May 2000. We are
highly dependent on Stretta System sales because we anticipate that the Stretta
System will account for substantially all our revenue through at least 2001*. To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents a
significant departure from conventional GERD treatment methods. We believe that
physicians will not use our Stretta System unless they determine, based on
published peer-reviewed journal articles, long-term clinical data and their
professional experience, that the Stretta System provides an effective and
attractive alternative to conventional means of treatment for GERD. Currently,
there is one peer-reviewed journal article, limited peer-reviewed clinical
reports and short-term 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. If physicians do not adopt our Stretta System, we may never
achieve significant revenues or profitability.

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

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

     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 May 2001, we expect to complete the U.S. clinical trial
of the Secca System, and 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

                                      -13-
<PAGE>

the benefits of the Secca System, we may not obtain regulatory clearance or
approval to sell the product 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
negative publicity or lawsuits against us, any of which could have a material
adverse effect on our sales and profitability.

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

     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. The advent of
contracted rates per procedure has also made it difficult to receive
reimbursement for disposable products, even if the use of these products
improves clinical outcomes. 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.

                                      -14-
<PAGE>

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 $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 has recently received FDA clearance for an endoscopic suturing
device for the treatment of GERD. 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 or less expensive than ours. For
example, AstraZeneca's patent for Prilosec, the leading prescription medication
for the treatment of GERD, expires in 2001, 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 May 1, 2001, we
relied on 13 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;

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

                                      -15-
<PAGE>

     .    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 four distribution agreements: one each in
Germany, Italy and Greece 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 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.

                                      -16-
<PAGE>

     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. We have
never been through a QSR inspection, and we cannot assure you that we would
pass. If we failed a QSR inspection, 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 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.

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.

                                      -17-
<PAGE>

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

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

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

     .    product design, development, manufacture and testing;

     .    product labeling;

     .    product storage;

     .    premarket clearance or approval;

     .    advertising and promotion; and

     .    product sales and distribution.

     Noncompliance with applicable regulatory requirements can result in
enforcement action which may include recalling products, ceasing product
marketing, paying significant fines and penalties, and similar FDA actions which
could limit product sales, delay product shipment, and adversely affect our
profitability.

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

     Since February, 2001, we have 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). 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 and
Australia, 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:

                                      -18-
<PAGE>

     .    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 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 May 1, 2001, we had 24 issued or allowed U.S. patents and 41 pending
U.S. patent applications. We also had 13 issued U.S. patents and 19 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.

                                      -19-
<PAGE>

     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 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 announced that it
has reached a definitive merger agreement with Gyrus Group PLC, a public limited
company incorporated and existing under the laws of England and Wales. If this
merger is consummated 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.

                                      -20-
<PAGE>

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

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

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

     Our officers, directors and principal stockholders holding more than 5% of
our common stock together control approximately 62% 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.

                                      -21-
<PAGE>

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

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

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

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 2.  Changes in Securities and Use of Proceeds

     On September 26, 2000, we completed the sale of 5,000,000 shares of our
common stock at a per share price of $11.00 in a firm commitment underwritten
public offering. The offering was effected pursuant to a Registration Statement
on Form S-1 (Registration No. 333-37866), which the United States Securities and
Exchange Commission declared effective on September 21, 2000. On October 24,
2000, we completed the sale of an additional 475,000 shares of our common stock
at a per share price of $11.00 pursuant to the exercise of the over-allotment
option by the underwriters. Of the approximately $54.8 million in net offering
proceeds, through March 31, 2001, we have used approximately $12.0 million for
the repayment of debt and accrued interest, $1.3 million for research and
development, $2.2 million for the manufacture of products, $1.1 million for
clinical expense and reimbursement efforts, $1.0 million for sales and marketing
initiatives to support the commercialization of the Stretta System and $3.0
million for general corporate purposes.

     All amounts represent estimates of direct or indirect payments of amounts
to third parties. Other than a $150,000 loan rate to David S. Utley, M.D., our
Chief Medical Officer, which has a two year maturity date, no amounts were paid
directly or indirectly for the above purposes to directors of 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.

                                      -22-
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

     (a) 10.17 Security Agreement with David S. Utley, Chief Medical Officer.

     (b) There were no reports on Form 8-K during the quarter ended March 31,
2001.

                                     -23-
<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: May 15, 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)

                                      -24-