<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 JUNE 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 August 14, 2001, 19,541,189 shares of the Registrant's Common Stock were
                                  outstanding.

                                       1
<PAGE>

                              CURON MEDICAL, INC.
                                     INDEX

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

         Condensed Balance Sheets as of
          June 30, 2001 and December 31, 2000...........................    3

         Condensed Statements of Operations for the
          three month and six month periods ended
          June 30, 2001 and 2000........................................    4

         Condensed Statements of Cash Flows for the
          six month periods ended June 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...................................................   23


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

Item 2.  Changes in Securities and Use of Proceeds......................   23

Item 3.  Legal Proceedings..............................................   24

Item 4.  Submission of Matters to a Vote of Security Holders............   24

Item 6.  Exhibits and Reports on Form 8-K...............................   24

Signatures..............................................................   25
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION


Item 1.  FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                                           June 30, 2001                       December 31, 2000
                                                                     --------------------                 ----------------------

Assets
Current assets:
<S>                                                                             <C>                                     <C>
      Cash and cash equivalents                                      $              9,368                 $               16,759
      Marketable securities                                                        32,988                                 22,447
      Accounts receivable, net of allowance for
      doubtful accounts of $20 and $15, respectively                                  514                                    259
      Inventories, net                                                              1,653                                    866
      Related party notes receivable, net                                              69                                    250
      Prepaid expenses and other current assets                                       831                                    969
                                                                     --------------------                 ----------------------
      Total current assets                                                         45,423                                 41,550

Long term investments                                                               2,332                                 12,882
Related party notes receivable                                                        303                                    102
Property and equipment, net                                                         1,434                                  1,397
Intangible assets, net                                                                359                                    584
Other assets                                                                           92                                    102
                                                                     --------------------                 ----------------------
      Total assets                                                   $             49,943                 $               56,617
                                                                    =====================                =======================
Liabilities and Stockholders' Equity
Current liabilities:
      Accounts payable                                               $                243                 $                  319
      Accrued liabilities                                                             966                                  1,315
                                                                     --------------------                 ----------------------
      Total current liabilities                                                     1,209                                  1,634

Other liabilities                                                                      58                                     53
                                                                     --------------------                 ----------------------
      Total liabilities                                                             1,267                                  1,687
                                                                     --------------------                 ----------------------

Stockholders' equity:
      Common stock                                                                     19                                     19
      Additional paid-in capital                                                   90,259                                 90,149
      Deferred stock compensation                                                  (1,611)                                (2,451)
      Accumulated deficit                                                         (40,165)                               (32,862)
      Accumulated other comprehensive income                                          174                                     75
                                                                     --------------------                 ----------------------
      Total stockholders' equity                                                   48,676                                 54,930
                                                                     --------------------                 ----------------------
      Total liabilities and stockholders' equity                     $             49,943                 $              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           For the Six
                                       Months Ended            Months Ended
                                    --------------------    -------------------
                                    June 30,    June 30,    June 30,   June 30,
                                       2001        2000        2001       2000
                                    --------    --------    --------   --------
<S>                                 <C>         <C>         <C>        <C>
Revenues                            $   568     $   127     $ 1,786     $   170
Cost of goods sold                    1,183         265       2,482         288
                                    -------     -------     -------     -------

Gross loss                             (615)       (138)       (696)       (118)
                                    -------     -------     -------     -------

Operating expenses:
     Research and development           581       1,335       1,324       3,091
     Clinical and regulatory            464         502         954         912
     Sales and marketing              2,138         756       3,461       1,095
     General and administrative       1,129       1,143       2,253       2,072
                                    -------     -------     -------     -------
Total operating expenses              4,312       3,736       7,992       7,170
                                    -------     -------     -------     -------

Operating loss                       (4,927)     (3,874)     (8,688)     (7,288)

Interest income                         587         146       1,388         260
Interest expense                         (3)     (1,043)         (3)     (1,052)
                                    -------     -------     -------     -------

Net loss                            $(4,343)    $(4,771)    $(7,303)    $(8,080)
                                    =======     =======     =======     =======

Net loss per share, basic
 and diluted                         $(0.23)     $(1.75)     $(0.39)     $(3.27)
                                    =======     =======     =======     =======

Shares used in computing net loss
 per share, basic and diluted        19,081       2,730      18,887       2,472
                                    =======     =======     =======     =======
</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 Six Months Ended
                                                                                             June 30, 2001          June 30, 2000
                                                                                        --------------------      ----------------
<S>                                                                                    <C>                       <C>
Cash Flows From Operating Activities
Net loss                                                                                $  (7,303)                $ (8,080)
Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization                                                          387                      274
       Amortization of acquired technology                                                    225                       93
       Note payable issued in exchange for services received                                   -                        45
       Amortization of stock-based compensation                                               706                    1,939
       Amortization of discounts on notes payable                                              -                       924
       Common stock and stock options issued in exchange for services received                 -                       243
Changes in current assets and liabilities:
       Accounts receivable, net                                                              (255)                    (112)
       Inventories                                                                           (787)                    (189)
       Prepaid expenses and other current assets                                              138                     (421)
       Other assets                                                                            10                      (12)
       Accounts payable                                                                       (76)                    (309)
       Accrued liabilities                                                                   (349)                     145
       Other long-term liabilities                                                              5                       26
                                                                                        ---------                 --------
            Net cash used in operating activities                                          (7,299)                  (5,434)
                                                                                        ---------                 --------
Cash Flows From Investing Activities
Purchase of property and equipment                                                           (424)                    (350)
Purchase of marketable securities and long term investments                               (27,820)                  (3,560)
Proceeds from maturities and sales of marketable securities and long term investments      27,928                    1,000
Purchase of acquired technology                                                                -                       (73)
                                                                                        ---------                 --------
            Net cash used in investing activities                                            (316)                  (2,983)
                                                                                        ---------                 --------
Cash Flows From Financing Activities
Proceeds from issuance of convertible notes payable                                            -                    11,045
Principal payments on notes payable                                                            -                      (111)
Proceeds from related party notes receivable                                                  250                       -
Payments on related party notes receivable                                                   (270)                     (52)
Proceeds from employee stock purchase plan                                                    214                       -
Proceeds from exercise of stock options                                                        30                      276
                                                                                        ---------                 --------
            Net cash provided by financing activities                                         224                   11,158
                                                                                        ---------                 --------
Net increase in cash and cash equivalents                                                  (7,391)                   2,741
Cash and cash equivalents at beginning of period                                           16,759                    7,988
                                                                                        ---------                 --------
Cash and cash equivalents at end of period                                              $   9,368                 $ 10,729
                                                                                        =========                 ========
Supplemental Disclosure of Non-Cash Investing and Financing Information
Deferred stock based compensation                                                       $    (134)                $  2,426
Issuance of warrants with debt                                                          $      -                  $  2,100
Issuance of common stock in exchange for intangible assets                              $      -                  $    831
</TABLE>

   See accompanying notes to the condensed consolidated financial statements

                                       5
<PAGE>

                              CURON MEDICAL, INC.
                        NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS

                                  (Unaudited)

June 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. 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 consolidated 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.

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

                                       6
<PAGE>

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):


<TABLE>
<CAPTION>
                                                         June 30, 2001       June 30, 2000
                                                       -----------------    ----------------
<S>                                                      <C>                  <C>
Unvested common shares (shares subject to repurchase)                349               1,113
Shares issuable upon exercise of stock options                     1,888               1,155
Convertible preferred stock                                           --               9,597
Shares issuable upon exercise of warrants                            569                 722
                                                       -----------------    ----------------
Total                                                              2,806              12,587
                                                       =================    ================
</TABLE>


Revenue Recognition
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 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

                                       7
<PAGE>

amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles 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.

NOTE 2.  Inventories

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                  June 30, 2001             December 31, 2000
                               --------------------        -------------------

<S>                             <C>                         <C>
Raw materials                    $            1,049          $             555
Work-in-process                                 116                        115
Finished goods                                  488                        196
                               --------------------        -------------------
                                 $            1,653          $             866
                               ====================         ==================
</TABLE>



NOTE 3.  Deferred Stock Compensation

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

<TABLE>
<CAPTION>
                                          Three Months Ended                                   Six Months Ended
                               ------------------------------------------            --------------------------------
                                      June 30,                   June 30,                 June 30,           June 30,
                                          2001                       2000                     2001               2000
                               ---------------            ---------------            -------------      -------------
<S>                              <C>                       <C>                         <C>                <C>
Cost of product sold              $         26               $         21               $       56          $      21
Research and development                   (14)                       282                       59                867
Clinical and regulatory                     22                         30                       64                 92
Sales and marketing                         66                        124                      173                170
General and administrative                 169                        373                      354                789
                               ---------------            ---------------            -------------       ------------
                                  $        269               $        830                $     706          $   1,939
                               ===============            ===============            =============       ============
</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 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 2001, the Company entered into a promissory note agreement with an
officer of the Company.  The note bears interest at a rate of 4.8% per annum and
principal and interest are payable in May 2002.  The note is collateralized by
equity securities.

Note 5. Legal Proceedings

  In June 2001, the Company was served with a civil action lawsuit alleging
defective design and manufacture of a Company product used in a randomized
clinical trial. The plaintiff is seeking unspecified damages. The Company
believes the lawsuit is without merit.

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," identify important
factors that could cause actual results to differ materially from those
predicted in any such forward-looking statements.  Such factors include, but are
not limited to, failure to obtain regulatory approvals as anticipated, a slower
rate of market acceptance of our products than expected, increased competition,
continued adverse changes in general economic conditions in the United States
and internationally, including adverse changes in the specific markets for our
products, adverse changes in customer order patterns, pricing pressures, risks
associated with foreign operations, failure to reduce costs or improve operating
efficiencies, and our ability to attract, hire and retain key and qualified
employees.


Overview

  We were incorporated in May 1997. Business activities before January 1998 were
negligible. In 1998, our primary activity was developing the Curon Control
Module and Stretta Catheter for the treatment of 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.

                                       9
<PAGE>

  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 PMA application.

  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.

  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.  On August 1, 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.
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 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 June 30,
2001, we recorded limited product sales while incurring cumulative net losses of
$40.2 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 six months ended June 30, 2001 and 2000.

Revenues

                                       10
<PAGE>

  Revenues for quarter ended June 30, 2001, were $568,000, compared to $127,000
for the same quarter in 2000.  For the six months ended June 30, 2001, revenues
were $1.8 million, compared to $170,000 for the same period in 2000.  Revenues
are from the sale of 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 June 30, 2001, cost of goods sold was $1.2 million
and $265,000 for the same quarter in 2000.  Amortization of stock-based
compensation accounted for $26,000 in the quarter ended June 30, 2001, and
$21,000 for the same period in 2000. For the six months ended June 30, 2001,
cost of goods sold was $2.5 million and $288,000 for the same period in 2000.
Amortization of stock-based compensation was $56,000 in the six months ended
June 30, 2001, and $21,000 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 June 30, 2000.
In 2001, approximately $1.4 million of unabsorbed overhead costs were included
in cost of goods sold.

Research and development expenses

  Research and development expenses were $581,000 in the quarter ended June 30,
2001, and $1.3 million for the same quarter in 2000. Amortization of stock-based
compensation accounted for a credit of $14,000 in the quarter ended June 30,
2001, due to a decrease in the stock price used to value consultant stock
options, and was an expense of $282,000 for the same quarter in 2000. For the
six months ended June 30, 2001, research and development expenses were $1.3
million, and $3.1 million for the same period in 2000. Amortization of stock-
based compensation was $59,000 for the six months ended June 30, 2001, and
$867,000 for the same period in 2000. Additionally in the first six months of
2000 we spent $500,000 in each quarter preparing the Stretta Catheter for
commercial manufacturing.

Clinical and regulatory expenses

  Clinical and regulatory expenses were $464,000 in the quarter ended June 30,
2001, and $502,000 for the same period in 2000. Amortization of stock-based
compensation accounted for $22,000 in the quarter ended June 30, 2001 and
$30,000 for the same period in 2000. For the six months ended June 30, 2001,
clinical and regulatory expenses were $954,000, and $912,000 for the same period
in 2000.  Amortization of stock-based compensation was $64,000 in the six month
period ended June 30, 2001, and $92,000 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 $2.1 million in the quarter ended June 30,
2001, and $756,000 for the same period in 2000. Amortization of stock-based
compensation accounted for $66,000 in the quarter ended June 30, 2001, and
$124,000 for the same period in 2000. For the six months ended June 30, 2001,
sales and marketing expenses were $3.5 million, and $1.1 million for the same
period in 2000.  Amortization of stock-based compensation was $173,000 in the
six months ended June 30, 2001, and $170,000 for the same period in 2000.  The
remaining

                                       11
<PAGE>

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 quarters ended
June 30, 2001 and 2000. Amortization of stock-based compensation accounted for
$169,000 in the quarter ended June 30, 2001, and $373,000 for the same period in
2000. For the six months ended June 30, 2001, general and administrative
expenses were $2.3 million, and $2.1 million for the same period in 2000.
Amortization of stock-based compensation was $354,000 in the six months ended
June 30, 2001, and $789,000 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 June 30, 2001, compared to the quarter ended June 30,
2000, interest income increased by $441,000. For the six months ended June 30,
2001, compared to the same period in 2000, interest income increased by $1.1
million. Increases were due to earnings on a greater amount of marketable
securities resulting from cash received from the Initial Public Offering.

  Interest expense decreased by $1.0 million for the three and six months ended
June 30, 2001, compared to the same periods in 2000, as the debt for which the
interest was due was extinguished in the third quarter of 2000.

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 June 30, 2001, we had $44.2
million in working capital and our primary source of liquidity was $42.4 million
in cash and cash equivalents and marketable securities. In addition, we had $2.3
million invested in long term securities at that date.

  Cash used in operating activities was $7.3 million in the six month period
ended June 30, 2001, which consisted of a net loss adjusted for non-cash items
of $6.0 million, partially offset by increases in accounts receivable and
inventories of $1.0 million, and decreases in accrued liabilities of $349,000.

                                       12
<PAGE>

  Cash used by investing activities amounted to $316,000 in the six months ended
June 30, 2001, which consisted of expenditures of $424,000 for property and
equipment, partially offset by proceeds from maturities and net sales of
marketable securities of $108,000. As of June 30, 2001, we had no material
commitments for capital expenditures.

  Cash provided by financing activities was $224,000 in the six months ended
June 30, 2001, of which $30,000 was received from the exercise of stock options
and $214,000 was received from the Employee Stock Purchase Plan. These were
partially offset by increases of $20,000 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.


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 $7.3 million for the six months ended June 30,
2001. As of June 30, 2001, we had an accumulated deficit of approximately $40.2
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 2002. To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents a
significant departure from conventional GERD treatment methods. We believe that
physicians will not use our Stretta System unless they determine, based on
published peer-reviewed journal articles, long-term clinical data and their
professional experience, that the Stretta System provides an effective and
attractive alternative to conventional means of treatment for GERD. Currently,
there is one peer-reviewed journal article, limited peer-reviewed clinical
reports and 12-month

                                       13
<PAGE>

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 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
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. If users

                                       14
<PAGE>

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 $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

                                       15
<PAGE>

     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 August 1, 2001, we
relied on 14 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

  .  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

                                       16
<PAGE>

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.

  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.


                                       17
<PAGE>

  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.

  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.

                                       18
<PAGE>

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

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

  .  product design, development, manufacture and testing;

  .  product labeling;

  .  product storage;

  .  premarket clearance or approval;

  .  advertising and promotion; and

  .  product sales and distribution.

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

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

  In February 2001, we entered into a total of four distribution agreements: one
each in Germany, Italy and Greece and one covering sales in the region of
Belgium, the Netherlands, and Luxembourg (Benelux). 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:

  .  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.

                                       19
<PAGE>

  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 July 31, 2001, we had 30 issued or allowed U.S. patents and 36 pending
U.S. patent applications; this includes 15 issued U.S. patents and 18 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

                                       20
<PAGE>

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 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.



                                       21
<PAGE>

  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 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

                                       22
<PAGE>

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 June 30, 2001, we have used approximately $12.0 million for
the repayment of debt and accrued interest, $1.7 million for research and
development, $3.4 million for the manufacture of products, $1.4 million for
clinical expense and reimbursement efforts, $3.9 million for sales and marketing
initiatives to support the commercialization of the Stretta System and $3.4
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, and a $68,000 loan to James Goode,
our Vice President of Sales, which has a one year maturity date. 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.

                                       23
<PAGE>

Item 3.  Legal Proceedings

  On June 29, 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.

Item 4.  Submission of Matters to a Vote of Security Holders

  We held an annual meeting on May 15, 2001.  The first item of business was the
election of Class I directors.  The following nominees for Class I directors
were elected by a majority of votes present at the meeting:  David I. Fann and
John W. Morgan.

<TABLE>
<CAPTION>

                    Votes      Votes     Votes
Name                 For      Withheld  Against
-----------------------------------------------
<S>               <C>         <C>       <C>
David I. Fann     10,411,269    10,293        0
John W. Morgan    10,315,369   106,193        0
</TABLE>

Class II and Class III directors that continued their term as directors with the
Company are Alan L. Kaganov and Robert F. Kuhling, Jr., and Michael Berman and
Fred L. Brown, respectively.

The appointment of PricewaterhouseCoopers, LLP as our independent accountants
for the year ended December 31, 2001, was ratified with 10,421,512 votes in
favor, none against and 50 abstentions.  There were no votes withheld.

No other business was conducted.

Item 6. Exhibits and Reports on Form 8-K

  (a) 10.18 Security Agreement with James E. Goode, Vice President, Sales

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

                                       24
<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: August 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)

                                       25