<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, 1999


                                     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.  000-23275


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


           Delaware                                              77-0423465
(State or other jurisdiction of                               (I.R.S.Employer
 incorporation or organization)                              Identification No.)

                              285 N. Wolfe Road
                         Sunnyvale, California 94086
        (Address of principal executive offices, including zip code)

                               (408) 773-9121
            (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 April 30, 1999, 14,093,457 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
 
                      SOMNUS MEDICAL TECHNOLOGIES, INC.
                                    INDEX

PART I.  FINANCIAL INFORMATION                                              Page
------------------------------                                              ----


Item 1.  Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of
         March 31, 1999 and December 31,1998...................................3
                                                                  
         Condensed Consolidated Statements of Operations for the  
         Three month periods ended March 31, 1999 and 1998.....................4
                                                                  
         Condensed Consolidated Statements of Cash Flows for the  
         Three month periods ended March 31, 1999 and 1998.....................5
                                                                  
         Notes to Condensed Consolidated Financial Statements..................6
                                                                  
Item 2.  Management's Discussion and Analysis of                  
         Financial Condition and Results of Operations.........................8
                                                                  
Item 3.  Quantitative and Qualitative Disclosures of              
         Market Risk..........................................................18
                                                                  
                                                                  
PART II.  OTHER INFORMATION                                       
---------------------------                                       
                                                                  
Item 2.  Changes in Securities and Use of Proceeds............................19
                                                                  
Item 6.  Exhibits and Reports on Form 8-K.....................................19
                                                                  
Signatures....................................................................20
                                        

                                       2
<PAGE>
 
PART I - FINANCIAL INFORMATION
------------------------------

Item 1.  Financial Statements

                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                     Condensed Consolidated Balance Sheets
                                (In thousands)


<TABLE>
<CAPTION>
                                                                                           March 31,             December 31, 
                                                                                               1998                      1998
                                                                                        (Unaudited)                       (*)
                                                                              ---------------------      --------------------
Assets
Current assets:
<S>                                                                             <C>                        <C>
  Cash and cash equivalents                                                                $ 29,598                  $ 32,280
  Accounts receivable, net                                                                    1,547                     1,329
  Inventories                                                                                 1,126                       806
  Other current assets                                                                          304                       411
                                                                              ---------------------      --------------------
Total current assets                                                                         32,575                    34,826
Property and equipment, net                                                                   1,472                     1,601
Other assets                                                                                     91                        85
                                                                              ---------------------      --------------------
                                                                                           $ 34,138                  $ 36,512
                                                                              =====================      ====================
 
Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                                                         $  1,633                  $  1,521
  Accrued liabilities                                                                         2,586                     2,174
  Accrued compensation                                                                        2,585                     1,858
  Accrued clinical costs                                                                        759                       675
  Deferred revenue                                                                            1,319                       856
                                                                              ---------------------      --------------------
Total current liabilities                                                                     8,882                     7,084
 
Stockholders' equity:
  Common stock                                                                                   14                        14
  Additional paid-in capital                                                                 64,910                    65,046
  Deferred stock compensation                                                                  (347)                     (450)
  Accumulated deficit                                                                       (39,321)                  (35,182)
                                                                              ---------------------      --------------------
Total stockholders' equity                                                                   25,256                    29,428
                                                                              ---------------------      --------------------
                                                                                           $ 34,138                  $ 36,512
                                                                              =====================      ====================
</TABLE>

(*)  Derived from audited financial statements.

                            See accompanying notes

                                       3
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                Condensed Consolidated Statements of Operations
                                  (Unaudited)
                     (In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                                    For the Three Months
                                                                                            Ended
                                                                             ----------------------------------
                                                                                  March 31,           March 31,
                                                                                       1999                1998
                                                                             --------------     ---------------
<S>        <C>                                                                 <C>                <C>
Revenue                                                                             $ 2,342             $ 1,685
Cost of sales                                                                         1,506               1,324
                                                                             --------------     ---------------
Gross Margin                                                                            836                 361
Operating expenses:
    Research and development                                                          1,871               2,382
    Selling, general and administrative                                               3,596               2,594
                                                                             --------------     ---------------
Total operating expenses                                                              5,467               4,976
                                                                             --------------     ---------------
Loss from operations                                                                 (4,631)             (4,615)
 
Interest and other income, net                                                          492                 542
                                                                             --------------     ---------------
Net Loss                                                                            $(4,139)            $(4,073)
                                                                             ==============     ===============
Net loss per share:
    Basic and Diluted                                                               $ (0.29)            $ (0.30)
                                                                             ==============     ===============
Shares used in computing per share amounts:
    Basic and Diluted                                                                14,077              13,479
                                                                             ==============     ===============
</TABLE>

                            See accompanying notes

                                       4
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                Condensed Consolidated Statements of Cash Flows
                           (Unaudited, In thousands)


<TABLE>
<CAPTION>
                                                                                       For the Three Months Ended
                                                                                     March 31,                   March 31,
                                                                                          1999                        1998
                                                                         ---------------------        --------------------
<S>                                                                        <C>                          <C>
Cash flows used in operating activities
Net loss                                                                               $(4,139)                    $(4,073)
Adjustments to reconcile net loss to net cash used in operating
activities:
 Amortization of deferred compensation                                                     103                         570
 Depreciation and amortization                                                             243                         218
 Changes in operating assets and liabilities:
    Other current assets                                                                   106                         (69)
    Accounts receivable                                                                   (218)                       (603)
    Inventories                                                                           (320)                         (6)
    Other assets noncurrent                                                                 (6)                        (47)
    Accounts payable and other accrued liabilities                                         524                          36
    Accrued compensation                                                                   727                         250
    Accrued clinical costs                                                                  84                         447
    Deferred revenue                                                                       463                         (40)
                                                                         ---------------------        --------------------
Net cash used in operating activities                                                   (2,433)                     (3,317)
                                                                         ---------------------        --------------------
Cash flows used in investing activities
  Capital expenditures                                                                    (114)                       (175)
  Repurchase of common stock                                                              (196)                          -
                                                                         ---------------------        --------------------
Net cash used in investing activities                                                     (310)                       (175)
                                                                         ---------------------        --------------------
Cash flows provided by financing activities
Net proceeds from issuance of common stock                                                  60                          27
                                                                         ---------------------        --------------------
 
Net decrease in cash and cash equivalents                                               (2,682)                     (3,465)
Cash and cash equivalents, beginning of period                                          32,280                      45,145
                                                                         ---------------------        --------------------
Cash and cash equivalents at end of period                                             $29,598                     $41,680
                                                                         =====================        ====================
Supplemental disclosure of cash flow information
Cash paid for interest                                                                       1                           1
 
</TABLE>

                             See accompanying notes

                                       5
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                                        
NOTE 1  Summary of Significant Accounting Policies
--------------------------------------------------

     Basis of Presentation

     The condensed consolidated balance sheet as of March 31, 1999, the
condensed consolidated statements of operations for the three month periods
ended March 31, 1999 and 1998, and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 1999 and 1998, have been
prepared by management, without audit, in accordance with generally accepted
accounting principles, for interim financial information and pursuant to
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at March 31, 1999 and results
of operations and cash flows for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1998 has been derived from
the audited financial statements at that date.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.

     These condensed financial statements should be read in conjunction with the
our audited consolidated financial statements as included in our Annual Report
on Form 10-K for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission.  The results of operations for the three month periods
ended March 31, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999.

     Revenue Recognition

     We generally recognize revenue at the time products are shipped or, for
sales which are financed through third parties, upon acceptance from a third
party leasing company of a customer lease and the related equipment.  For
shipments to distributors made under agreements that do not provide for right of
return or price protection, revenue is generally recognized upon shipment.
Allowances for product returns are provided for at the time of revenue
recognition.

     Comprehensive Loss

     We have no material components of other comprehensive loss and,
accordingly, the comprehensive loss is the same as the net loss for all periods
presented.

     Net Loss Per Share

                                       6
<PAGE>
 
     Basic and diluted earnings per share have been calculated using the
weighted average common shares outstanding during the periods in accordance with
Statement No. 128 "Earnings Per share" issued by the Financial Accounting
Standards Board and Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 98.

     We have securities outstanding that could dilute basic earnings per share
in the future that were not included in the computation of net loss per share in
the periods presented as their effect is antidilutive.

     Segment Information

     We have organized the business in one operating segment which includes
activities relating to development, manufacturing and marketing of medical
devices and utilization of proprietary radiofrequency technology for the
treatment of upper airway disorders.  Substantially all of our assets are in the
United States and through March 31, 1999 we have derived our revenue primarily
from our operations in the United States.

NOTE 2 - Inventories
--------------------

<TABLE>
<CAPTION>
(in thousands)                                                         March 31, 1999     December 31, 1998
                                                                         (Unaudited)
<S>                                                                  <C>                  <C>
Raw Materials                                                                    $  426                 $399
Work in Process                                                                     125                  111
Finished Goods                                                                      575                  296
                                                                   -----------------------------------------
                                                                                 $ 1,126                $806
                                                                   =========================================
</TABLE>

NOTE 3  Stock Repurchase Program
--------------------------------

     In October 1998, we announced that our board of directors had authorized a
stock repurchase program permitting the purchase of up to 1,000,000 shares, at
up to $5.00 per share, of our common stock in the open market.  The stock
repurchase program has been implemented during the first quarter of fiscal 1999
with 67,500 shares repurchased under the program as of March 31, 1999 for a net
cash outflow of approximately $196,000.

                                       7
<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
condensed consolidated financial statements and notes thereto, and with our
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.

     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"
and those set forth under "Item One" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.

Overview

     Somnus Medical Technologies, Inc. designs, develops, manufactures and
markets innovative medical devices that utilize our proprietary RF technology
for the treatment of upper airway disorders.  Our Somnoplasty/SM/ System 
provides physicians with a suite of products designed to offer minimally
invasive, curative treatment alternatives for disorders of the upper airway,
including obstructive sleep apnea (OSA), enlarged turbinates and snoring.

     We have a limited history of operations that, to date, has consisted
primarily of research and development, product engineering, seeking clearance of
our products from the Food & Drug Administration (FDA), initial development of a
direct sales force in the United States and internationally, and training
international distributor employees for distribution of the Somnoplasty System
in the European Union (EU), Australia, Southeast Asia and certain other areas.
We commercially introduced the Somnoplasty System internationally, through
Medtronic, beginning in June 1997.  One month later, after receiving 510(k)
clearance from the FDA for the use of the Somnoplasty System to treat snoring,
we began direct sales of the Somnoplasty System in the United States.  We 
subsequently received FDA clearance to treat enlarged turbinates, in December
1997, and OSA in November 1998. During the third quarter of fiscal 1998 we
terminated our relationship with Medtronic and established a European
headquarters in The Netherlands. This headquarters is responsible for:

 .  establishing and managing relationships with key distributors throughout
   Europe,
 .  marketing the Somnoplasty System throughout Europe and
 .  providing clinical support.

     We ship product from our facility to end user customers within the 
United States. Additionally, we have entered into independent distribution
agreements, several of which were executed during the three months ended March
31, 1999, for distribution of our products within Europe, Canada and
Asia/Pacific. We expect to continue to invest in our sales and marketing 
organization and to identify further qualified distribution partners.*

                                       8
<PAGE>
 
     We plan to continue to hire additional management and engineering personnel
to support and develop manufacturing expertise and large scale manufacturing
capacity expansion as required to support the current and anticipated growth.*
Additionally, we will invest in further production equipment, vertical
integration and facility expansion to reduce manufacturing costs, reduce
manufacturing cycle time and increase production capacity.* During the first
quarter of fiscal 1999, we completed certain manufacturing facility expansion
and improved layout for increased capacity, process improvement and quality
control to support such growth.  Personnel hires and capital expenditures will
continue to require operating capital on an ongoing basis.*  We will continue to
improve processes, expand our internal reporting capabilities and further
strengthen systems to manage our expanding business.*

     This current and anticipated significant growth of our personnel, sales and
scope of operations may place considerable strain on our management, financial,
manufacturing and other capabilities, procedures and controls.  There can be no
assurance that any existing or additional capabilities, procedures or controls
will be adequate to support our operations or that our capabilities, procedures
or controls will be designed, implemented or improved in a timely and cost-
effective manner.  Failure to implement, improve and expand such capabilities,
procedures and controls in an efficient manner could have a material adverse
effect on our business, financial condition and results of operations.

     As of March 31, 1999, we have incurred cumulative losses from inception of
approximately $39,321,000.  Moreover, we expect to incur significant additional
operating losses over the next couple of years primarily due to the development
of our manufacturing and sales and marketing capabilities along with ongoing
research and development efforts, including clinical studies and expenses
associated with our patent portfolio.* Our limited operating history makes
accurate prediction of future operating results difficult or impossible.

     Future revenues and results of operations may fluctuate significantly from
quarter to quarter or year to year and will depend upon numerous factors,
including the extent to which our products gain market acceptance, the scale-up
of manufacturing capabilities, the expansion of sales and marketing activities,
competition, the timing and success of new product introductions by us or our
competitors, the timing of regulatory clearances or approvals of those 

                                       9
<PAGE>
 
new products and our ability to market our products in the United States
and internationally. Accordingly, interim period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indicators of likely future performance or annual operating results.
 
     Our business and financial results could be materially adversely affected
in the event that we are unable to market the Somnoplasty System effectively,
anticipate customer demand accurately or effectively manage new product
launches, pricing and cost containment pressures in health care.  Our operations
and financial results could also be significantly affected by international
factors, including oversight by numerous regulatory agencies, changes in foreign
currency exchange rates and foreign economic and political conditions.

Results of Operations

     Net revenue.  Our revenues for the three months ended March 31, 1999 (first
quarter) are derived primarily from sales of our Somnoplasty System, consisting
of the the S2 control unit, the SP 1010, SP 1100 and SP 1200 disposable
handpieces, to private practices, hospitals, clinics and sleep centers.  During
the first quarter of 1998 the control unit commercially available was the 215
RF, the S2 control unit and SP 1200 handpiece had not yet been introduced.  Net
revenues increased for the first quarter of fiscal 1999 to $2,342,000 from
$1,685,000 for the first quarter of fiscal 1998, an increase of approximately
$657,000 or 39%. This increase is primarily due to increased sales of control
units and increased handpiece shipments driven by a higher installed base,
increased intensity of consumption by that installed base, plus additional
indications treatable with the Somnoplasty System. The indications treatable
with the Somnoplasty System during the first quarter of fiscal 1999 included
the tongue, turbinate and soft palate/uvala, compared to only the soft
palate/uvala during the first quarter of fiscal 1998. During the three month
periods ended March 31, 1999 and 1998, net revenues were attributable to sales
to customers principally in the United States. We expect that the sale of
control units will constitute a significant percentage of our total revenues in
the near term as we build an installed base of users.* However, we expect
disposable handpieces to increase as a percentage of total revenue, year over
year.*

     Cost of sales.  Cost of sales increased by approximately $182,000 or 14% to
$1,506,000 for the first quarter of fiscal 1999 from $1,324,000, for the prior
year comparative period. Cost of sales consists of raw materials, subassemblies
and completed electronics, quality assurance and warranty costs. The cost of
product, salaries and employee-related expenses, and the costs of expanding
manufacturing capabilities account for the majority of the increase from 1998 to
1999.  We believe that cost of sales will increase in absolute dollars but may
fluctuate as a percentage of revenues.*

     Research and development expenses.  Research and development (R&D) costs
for the first quarter of fiscal 1999 were $1,871,000, compared to $2,382,000 for
the same period in the prior year, a decrease of approximately $511,000 or 21%.
Research and development expenses are comprised of salaries, prototype
development costs, costs associated with intellectual property, and clinical
trial and regulatory approval expenses.

     The decrease in expenses for the three month period is primarily due to a
decrease in salaries and employee related expenses of $262,000 due to lower
headcount including two open vice president positions, decreased consulting fees
of $345,000 and lower intellectual property costs of $121,000, partially offset
by a one time charge of $214,000 being fifty percent of the severance costs of a
certain officer.  Included in the employee related expenses is 

                                       10
<PAGE>
 
approximately $50,000 of non-cash stock compensation charges resulting from
stock option grants, compared to $206,000 for the prior year period.

     Selling, general and administrative.  Selling, general and administrative
("SG&A") expenses for the first quarter of fiscal 1999 were $3,596,000, compared
to $2,594,000 for the prior-year period, an increase of approximately $1,002,000
or 39%.  SG&A expenses consist of executive salaries, professional fees,
facilities overhead, accounting and human resources, general office
administration expenses such as rent and facility costs.

     The increases in SG&A are primarily due to increased infrastructure costs
of $572,000 including the European Office, information systems, human
resources and the facility remodeling during the period. A one time charge of
$214,000 being fifty percent of the severance costs of a certain officer and
increased advertising and sales travel expenses of $235,000. Non-cash stock
compensation charges resulting from stock option grants of $51,000 for the
three month period decreased compared to $365,000 for the prior year period.

     Interest and other income, net.  Interest and other income, net for the
first quarter of fiscal 1999 was $492,000, compared to $542,000 for the prior-
year period. The decrease is attributable to the reduction in interest income
earned on a decreasing balance of cash and cash equivalents, partially offset by
nonrecurring technology and documentation fees received from a related party.
Interest expense was $1,000 for each of the first quarters of fiscal 1999 and
1998.

Year 2000 Compliance

     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field.  As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000.  This may result in software
failures or the creation of erroneous results.

     We have assessed and continue to assess our exposure to the Year 2000
problem.  We believe our enterprise resource planning systems and networking
systems are compliant and we are upgrading our telecommunications systems for
Year 2000 compliance.  We also believe that our products are Year 2000
compliant.  However, while we believe we have made significant progress in
resolving known Year 2000 issues, sufficient testing has not been completed to
fully validate the readiness of our systems and products.  Additional testing
and upgrades are planned during the remainder of fiscal 1999 to reasonably
ensure substantial Year 2000 compliance for our operations.* There can be no
assurance that our additional testing and upgrades will ensure Year 2000
readiness and any inadequacies in our systems or products may have a material
adverse effect on our financial condition.

     We have also assessed and continue to assess the possible effect on our
operations of the Year 2000 readiness of critical suppliers of products and
services.  Our reliance on our key suppliers, and therefore on the proper
functioning of their information systems and software, is increasing.  We are in
the process of contacting critical suppliers to gain assurance of their Year
2000 readiness.  However, there can be no assurance all of these suppliers will
be Year 2000 compliant and their failure to address Year 2000 issues could have
a material adverse effect on us.

     Although it is difficult to estimate the total Year 2000 project costs, our
preliminary estimate is that such costs will total between approximately
$100,000 and $200,000, * which is not material to our business operations or
financial condition.  There can be no assurance that 

                                       11
<PAGE>
 
these estimates will be achieved and actual results could differ materially from
those anticipated. We have incurred approximately $60,000 through March 31, 1999
on this project. The expenses of the Year 2000 project are being funded from
existing cash reserves and through operating cash flows.

     Somnus has not developed a formal comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our operations.  Contingency plans will be established for certain mission
critical operations for the period immediately subsequent to January 1, 2000
and will be formalized during fiscal 1999.* There can be no assurance that we
will be able to develop a contingency plan that will adequately address issues
that may arise in the year 2000. Our failure to develop and implement, if
necessary, an appropriate contingency plan could have a material impact on our
operations. Finally, we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation Year
2000 compliance failures and related service interruptions.

     We believe that we are unlikely to experience a material adverse impact on
our financial condition or results of operations due to Year 2000 compliance
issues within our operations.*  However, since the assessment process is
ongoing, Year 2000 compliance complications are not fully known, critical
suppliers of components, services and others including utility companies are
outside our control, and potential liability issues are not clear, the full
potential impact of the Year 2000 on us is not known at this time and may have
a material adverse impact on us.

Liquidity and Capital Resources

     Since inception through March 31, 1999, we have financed our operations
primarily through the private placement of equity securities, bank loans, lease
lines of credit, stockholder loans and our November 1997 IPO. From inception, we
raised approximately $16,400,000 in net proceeds from private equity financings.
We raised an additional $43,756,000 from our IPO, net of costs of $4,540,000.

     Cash and cash equivalents at March 31, 1999 were $29,598,000 compared to
$32,280,000 at December 31, 1998.

     Net cash used in operating activities was approximately $2,433,000 for the
three months ended March 31, 1999, compared to $3,317,000 for the prior-year
period.  Net cash used in operating activities differs from our net loss for
these comparison periods primarily due to non-cash charges associated with the
amortization of deferred compensation, the depreciation of property and
equipment and changes in operating assets and liabilities. Net cash used in
investing activities was approximately $310,000 for the three months ended
March 31, 1999, compared to $175,000 for the prior-year period, the net cash
used in investing activities was primarily attributable to capital
expenditures during these periods and additionally the stock repurchase
program in 1999. Net cash provided by financing activities was approximately
$60,000 for the three months ended March 31, 1999 and for the prior year
period was $27,000. Net cash provided by financing activities in these three
month periods is primarily attributable to the exercise of options.

                                       12
<PAGE>
 
     We recorded deferred stock compensation expense for the difference between
the exercise price and the deemed fair value for financial statement
presentation purposes of our Common Stock, as determined by the Board of
Directors, for certain options granted.  The total unamortized deferred stock
compensation at March 31, 1999 is $347,000. Our amortized deferred compensation
expenses were approximately $103,000 in the three months ended March 31, 1999
compared to $570,000 for the respective 1998 period. The remainder of the
deferred stock compensation will be amortized over the corresponding vesting
period of each respective option, which is generally four years from date of
original issuance.*

     At March 31, 1999, our principal sources of liquidity consisted of
$29,598,000 in cash and cash equivalents. There were no other material unused
sources of liquid assets at March 31, 1999.

     We currently anticipate that our capital expenditure requirements will be
approximately $1.0 million for the next twelve months.* These requirements
relate primarily to the acquisition of computer hardware and software and for
additional leasehold improvements to handle anticipated headcount additions.*

     We anticipate that our existing resources will enable the us to maintain
our current and planned operations at least through the next twelve months.*
However, there can be no assurance that we will not require additional funding
prior to such time.  Our future capital requirements will depend on many
factors, including the ability of management to establish and maintain strategic
distributor relationships, the time and cost in obtaining regulatory approvals,
competing technological and market developments, the cost of manufacturing and
other factors.  There can be no assurance that additional financing to meet our
funding requirements will be available as needed.  If additional funds are
raised by issuing equity securities, substantial dilution to existing
stockholders may result. Insufficient funds may require the us to delay, scale
back or eliminate some or all of our research or development programs or to
relinquish rights to products at an earlier stage of development or on less
favorable terms than we would otherwise seek to obtain.  The failure of
management to raise capital when needed would have a material adverse effect on
our business, financial condition and results of operations.

Factors That May Affect Future Results

     Our operating results may vary significantly depending on certain factors,
including the effect of lack of market acceptance of products, delays in the
introduction or shipment of new products, increased competition, delays in
ongoing research and development programs, litigation costs should we be
involved in litigation, adverse changes in the economic conditions in any of the
several countries in which we do business, a slower growth rate in our target
markets, the uncertainty of international regulatory clearances or approvals,
and the factors set forth in our annual report on form 10-K for the fiscal year
ended December 31, 1998.

     We have a limited operating history and are not profitable.

     We have generated only limited revenues from sales of the Somnoplasty
System and have limited experience in manufacturing, selling and marketing our
products in commercial quantities. There can be no assurance that the
Somnoplasty System will be sufficiently successful for us to achieve significant
revenues. From inception in 1996 through March 31, 1999, we have had total
revenues of approximately $12.2 million and incurred cumulative 

                                       13
<PAGE>
 
losses of approximately $39.3 million. We expect to significantly increase
spending over the next several years with respect to sales and marketing,
manufacturing and to a lesser extent, ongoing research and development efforts
and clinical trials, and expects to incur significant additional losses for the
foreseeable future.* Whether we can successfully manage the transition to a
larger-scale enterprise will depend upon a number of factors, including our
ability to increase our commercial manufacturing and sales and marketing
capabilities. Our inability to establish such capabilities would have a material
adverse effect on our business, financial condition and results of operations.

     We are dependent upon the Somnoplasty System, which has not been available
for sufficient time for us to know if it is effective on a long-term basis.

     Our success depends upon the market acceptance of the Somnoplasty System
for the treatment of OSA, enlarged turbinates and snoring.  Market acceptance
will depend, in large part, upon the effectiveness of the Somnoplasty System
over time.*  There can be no assurance that the procedure will provide a
permanent, curative treatment for patients. Independent factors, such as aging
and weight gain, may, over time, lead to the enlargement of tissue in areas
previously treated by our procedure.*  Such regrowth of tissue could require
further treatments, making the procedure a potentially less attractive
alternative to existing surgical and non-surgical procedures, which could have a
material adverse effect upon our business, financial condition and results of
operations.


     Several factors will impact our ability to achieve market acceptance.

     RF tissue volume reduction in the upper airway is a new and novel
development.  Market acceptance of this procedure for the treatment of OSA,
enlarged turbinates and snoring could be adversely affected by numerous factors,
including:

 .  the lack of availability of third-party reimbursement,
 .  cost of the procedure,
 .  clinical acceptance,
 .  effective physician training and
 .  patient acceptance.

     Third party reimbursement.  We do not anticipate that patients will receive
third-party reimbursement for use of the Somnoplasty System in the treatment of
snoring.*  Market acceptance of the Somnoplasty System for the treatment of OSA
and enlarged turbinates will depend, in large part, upon the availability of
third-party reimbursement for each of those indications, which is not assured.*

     Cost of the procedure and clinical acceptance.  Market acceptance will also
depend upon our ability to demonstrate that the Somnoplasty System is an
attractive alternative to existing procedures, which will depend upon
physicians' evaluations of the clinical safety and efficacy, ease of use,
reliability and cost-effectiveness of the Somnoplasty System in a clinical
setting.*  We believe that recommendations and endorsements by influential
physicians will be essential to market acceptance.* There can be no assurance
that such recommendations or endorsements will be obtained.

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<PAGE>
 
     Physician training.  Broad use of the Somnoplasty System will require
training for physicians on how to perform the Somnoplasty procedure and
educating physicians regarding the advantages of the Somnoplasty System over
currently available surgical and non-surgical approaches.*  The time required to
complete such training and education could extend the sales cycle for our
products and delay or preclude commercial sales and market acceptance. If we are
unable to achieve broad market acceptance of the Somnoplasty System for our
current and anticipated indications, our business, financial condition and
results of operations would be materially adversely affected.

     Patient acceptance.  Patient acceptance may be affected by numerous
factors, including the possibility that the Somnoplasty procedure will require
treatments on multiple occasions, which would be not only inconvenient for the
patient, but also more costly.*  Patients may require anywhere from one to six
treatments to significantly reduce snoring; however, we anticipate that most
patients will only require one to three treatments to significantly reduce
snoring.*  We anticipate that most patients will require fewer treatments to
reduce enlarged turbinates than required to reduce snoring and more to treat OSA
than snoring.*  Factors such as poor training of the treating physician or
improper use of the Somnoplasty System by the treating physician could lead to a
patient requiring more treatments. Patient acceptance of the Somnoplasty System
for the treatment of snoring, turbinate reduction, OSA, and other potential
indications will also depend in part upon physician recommendations as well as
other factors, including the effectiveness and reliability of the procedure as
compared to existing surgical and non-surgical procedures.*  There can be no
assurance that the Somnoplasty System will be accepted by the patient community
or that market demand for such system will be sufficient to allow us to achieve
profitable operations. In addition, publicity arising from any adverse outcome
or other problem occurring in the treatment of a Somnoplasty patient for any
reason, particularly during this early phase of the commercialization of the
Somnoplasty System, could materially adversely affect patient demand for the
procedure.  Failure of the Somnoplasty System, for whatever reason, to achieve
significant patient acceptance would have a material adverse effect on our
business, financial condition and results of operations.

     We have limited direct sales and marketing experience.

     We have only limited experience selling and marketing the Somnoplasty
System for the treatment of OSA, enlarged turbinates and snoring. We are
directing our sales effort in the United States on private practices, clinics,
hospitals and sleep clinics through a direct sales force.  We currently have a
small direct sales force that covers certain regions of the United States and
intend to increase our sales and marketing force in the near future to
accelerate commercialization of the Somnoplasty System throughout the United
States.* There can be no assurance that we will be successful in building an
effective sales and marketing force, that we will be cost-effective or that we
will ultimately prove successful in selling the Somnoplasty System on a direct
basis in the United States in sufficient quantities for us to become profitable.
Market acceptance of the Somnoplasty System will also require us to demonstrate
that the cost of our products and procedures are competitive with currently
available alternatives.* The use of the Somnoplasty System requires the
healthcare provider to make an up-front investment in an RF control unit. There
can be no assurance that we will successfully generate sufficient demand for the
Somnoplasty System at the prices at which we currently offer our control units
and disposable devices.  In the event the required investment were to preclude
us from placing sufficient quantities of control units, our ability to sell
disposable devices would be limited, which would have a material adverse effect
on our business, financial condition and results of operations.

                                       15
<PAGE>
 
     We need to develop successful distributor relationships for international
sales.

     Our future success will depend, in part, on our ability to enter into and
successfully develop strategic and distributor relationships with other parties
with respect to the marketing and distribution of our products.*

     In September 1998, we established a European Headquarters in The
Netherlands.  This headquarters is responsible for:

 .  establishing and managing relationships with key distributors throughout
   Europe,
 .  marketing the Somnoplasty System throughout Europe and
 .  providing clinical support

     Product shipments are made directly from our facility in the United
States to the distributor. We have signed several distribution agreements
during the three months ended March 31 1999. We expect to continue to identify
qualified distribution partners intensifying our coverage of Europe.* In
markets outside the United States and Europe, we manage distributors from our
facility in the United States. We have distribution agreements outside the
United States and Europe and we expect to continue to identify qualified
distribution partners in such territories.*

     The success of our future strategic or distributor relationships, will
depend on the other parties' ability to perform the role contemplated by us.*
We may have limited or no control over the resources that any particular
strategic party or distributor devotes to our relationship with us.  There can
be no assurance that we will be successful in locating or finalizing agreements
with further qualified parties with whom to enter into additional strategic or
distributor relationships or that any such relationships can be maintained or
will ultimately prove beneficial to us. In the event we are not successful in
developing such additional relationships, or if such relationships do not prove
to be successful, our business, financial condition and results of operations
would be materially adversely affected.

     International sales of the Somnoplasty System are subject to numerous
risks.  Distribution, pricing and marketing structures, as well as regulatory
requirements, vary significantly from country to country.  Additionally, such
sales can be adversely affected by:

 .  limitations or disruptions caused by the imposition of government controls,
 .  difficulty in obtaining export licenses,
 .  political instability,
 .  trade restrictions,
 .  changes in foreign tax laws or tariffs or other trade regulations,
 .  difficulties coordinating communications among and managing international
   operations,
 .  the risk that distributors will fail to effectively promote our products,
 .  the risk of financial instability of distributors,
 .  fluctuations in overseas economic conditions and international currency
   exchange rates,
 .  increases in duty rates and
 .  competition.

                                       16
<PAGE>
 
     There can be no assurance that we will be able to successfully
commercialize the Somnoplasty System or any of our future products in any
international market, which would have a material adverse effect on our
business, financial condition and results of operations.

     We may experience manufacturing problems with regard to our control unit.

     In the past we purchased our 215 RF control unit as a finished assembly
from a single-source supplier. We discontinued selling the 215 RF control unit
model during fiscal 1998. The S-2 control unit is manufactured entirely by us.
There can be no assurance that we will not experience design or production
issues as Somnus commences such manufacturing activities.

     We launched the S-2 during the second quarter of fiscal 1998.  The S-2
control unit is more expensive than the 215 RF control unit.  There can be no
assurance that we will be able to successfully market and sell the S-2 control
unit.  Further, there can be no assurance that we will not experience increased
levels of returns of the 215 RF control unit as a result of the launch of the S-
2 control unit or that we will not experience increased levels of warranty costs
associated with the new product.  Further, we expect that we will continuously
bring new generation products to market that may compliment or replace current
products.*  There can be no assurance that we can successfully manage these
product transitions.

     We are dependent on single-source suppliers for components.

     We purchase certain key components of our products from single-source
suppliers.  There can be no assurance that the components obtained from the
single-source suppliers will continue to be available in adequate quantities or,
if required, that we will be able to locate alternative sources of such
components on a timely and cost-effective basis.  To date, we have not
experienced significant adverse effects resulting from any shortage of
components.  However, there can be no assurance that the single-source suppliers
will meet our future requirements for timely delivery of components of
sufficient quality and in sufficient quantity.*  The components may take several
months to procure, and a significant increase of orders could lead to
significant delays and control unit or device shortages.  Such delays or
shortages, particularly as we scale up our manufacturing activities in support
of sales and distributor orders, would have a material adverse effect on our
business, financial condition and results of operations.

     We are dependent upon key personnel.

     Our future success depends in significant part upon the continued service
of certain key scientific, technical and management personnel and our continuing
ability to attract and retain highly qualified scientific, technical and
managerial personnel.*  Competition for such personnel is intense, and there can
be no assurance that we can retain our key scientific, technical and managerial
personnel or that we can attract, assimilate or retain other highly qualified
scientific, technical and managerial personnel in the future.  We have taken
steps to retain our key employees, including the granting of stock options that
vest over time.  The loss of key personnel, especially if without advanced
notice, or the inability to hire or retain qualified personnel could have a
material adverse effect upon our business, financial condition and results of
operations.

     Due to the factors noted above, our future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis.  Any
shortfall in revenues or earnings from 

                                       17
<PAGE>
 
levels expected by security analysts could have an immediate and significant
adverse effect on the trading price of our common stock.

Item 3.  Quantitative and Qualitative Disclosures of Market Risk

     There have been no material changes in the reported market risks since
December 31, 1998.

                                       18
<PAGE>
 
PART II  -  OTHER INFORMATION
-----------------------------

Item 2.  Changes in Securities and Use of Proceeds

     From the date of the sale of securities under our Registration Statement on
Form S-1 (File No. 333-35401), which was declared effective on November 5, 1997
(the "Offering"), through March 31, 1999, the approximate amount of net proceeds
used from the Offering were $8.2 million for research and development, clinical
trials and regulatory matters, $6.3 million to manufacture product and further
develop manufacturing expertise and capabilities, $14.1 million to improve and
expand financial capabilities, to enhance financial reporting systems, to expand
sales and marketing efforts, and for other general corporate purposes and
$925,000 for the acquisition of fixed assets.  The remaining net proceeds from
the IPO continue to be held in temporary cash and cash equivalent investments.

     All amounts represent estimates of direct or indirect payments of amounts
to third parties.  No amounts were paid directly or indirectly for the above
purposes to directors of officers of Somnus, to persons owning ten percent
or more of any class of equity securities of Somnus, or to affiliates of
Somnus other than in the ordinary course of business. The use of proceeds
described above do not represent a material change in the use of proceeds
describe in the Offering prospectus.

Item 6:  Exhibits and Reports on Form 8-K

     (a)  There were no reports on Form 8-K during the quarter ended March 31,
          1999.

          Exhibit 10.18 - Consulting agreement dated December 28, 1998 between
                          the Registrant and Gary R. Bang.
          Exhibit 27.1 -  Financial Data Schedule

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<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, 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.



                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                                 (Registrant)




Date:  May 14, 1999           By:     /s/ John G. Schulte
                              --------------------------- 
                              John G. Schulte
                              President and
                              Chief Executive Officer



                              By:   /s/  Robert D. McCulloch
                              ------------------------------
                              Robert D. McCulloch
                              Vice President of Finance
                              Chief Financial Officer
                              (principal financial and chief accounting officer)

                                       20