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

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                      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 October 31, 1998, 13,886,049 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                                     INDEX

PART I.  FINANCIAL INFORMATION                                            PAGE
------------------------------                                            ----

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of September 30, 
         1998 (unaudited) and December 31, 1997..............................3

         Condensed Consolidated Statements of Operations for the
         Three and Nine month periods ended September 30, 1998 and 1997
         (unaudited).........................................................4

         Condensed Consolidated Statements of Cash Flows for the Nine 
         month periods ended September 30, 1998 and 1997 (unaudited).........5

         Notes to Condensed Consolidated Financial Statements (unaudited)....6

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

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

Item 2.  Changes in Securities and Use of Proceeds..........................21

Item 6.  Exhibits and Reports on Form 8-K...................................21

Signatures..................................................................22
                                        

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

Item 1.  Financial Statements

                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                            SEPTEMBER 30, 1998        DECEMBER 31, 1997
                                                                   (UNAUDITED)                      (*)
                                                            ------------------        -----------------
<S>                                                        <C>                        <C>
ASSETS                                           
Current assets:                                  
  Cash and cash equivalents                                           $ 35,917                  $ 45,145
  Accounts receivable, net                                               1,744                       662
  Inventories, net                                                         875                       236
  Other current assets                                                     286                       300
                                                         ---------------------      --------------------
Total current assets                                                    38,822                    46,343
Property and equipment, net                                              1,742                     1,822
Other assets                                                                84                        62
                                                         ---------------------      --------------------
                                                                      $ 40,648                  $ 48,227
                                                         =====================      ====================
LIABILITIES AND STOCKHOLDERS' EQUITY             
Current liabilities:                             
  Accounts payable                                                    $  1,183                  $  1,112
  Accrued compensation                                                   1,414                       509
  Other accrued liabilities                                              2,668                       986
                                                         ---------------------      --------------------
Total current liabilities                                                5,265                     2,607
                                                 
Stockholders' equity:                            
  Common stock                                                              14                        13
  Additional paid-in capital                                            65,103                    64,782
  Deferred stock compensation                                           (1,716)                   (3,321)
  Accumulated deficit                                                  (28,018)                  (15,854)
                                                         ---------------------      --------------------
Total stockholders' equity                                              35,383                    45,620
                                                         ---------------------      --------------------
                                                                      $ 40,648                  $ 48,227
                                                         =====================      ====================
</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            For the Nine Months Ended 
                                                 -------------------------------       -------------------------------   
                                                    Sept. 30,          Sept. 30,          Sept. 30,          Sept. 30,
                                                         1998               1997               1998               1997
                                                 ------------       ------------       ------------       ------------  
<S>                                                 <C>                <C>                <C>                <C>
Total revenues                                       $ 2,331            $   868           $  6,031            $ 1,100
                                              
Cost and expenses:                            
    Manufacturing start-up costs              
     and costs of revenues                             1,365              1,010              3,989              1,969
    Research and development                           1,963              2,044              5,992              4,095
    Selling, general and administrative                3,759              2,398              9,752              4,339
                                                 -----------        -----------        -----------        -----------   
Total costs and expenses                               7,087              5,452             19,733             10,403
                                                 -----------        -----------        -----------        -----------   
Loss from operations                                  (4,756)            (4,584)           (13,702)            (9,303)
                                              
Interest and other income                                469                113              1,541                352
Interest expense                                          (1)               (53)                (3)              (120)
                                                 -----------        -----------        -----------        -----------   
Net Loss                                             $(4,288)           $(4,524)          $(12,164)           $(9,071)
                                                     =======            =======           ========            =======
Net loss per share:                           
    Basic and Diluted                                $ (0.31)           $ (1.67)          $  (0.89)           $ (3.53)
                                                     =======            =======           ========            =======
Shares used in computing per share amounts:   
    Basic and Diluted                                 13,804              2,704             13,642              2,567
                                                     =======            =======           ========            =======
</TABLE>
                                                                                
                             See accompanying notes

4
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited, In thousands)

<TABLE>
<CAPTION>
                                                                                      FOR THE NINE MONTHS ENDED
                                                                                SEPT. 30,                    SEPT. 30,
                                                                                     1998                         1997
                                                                          ---------------              ---------------      
<S>                                                                        <C>                          <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss                                                                         $(12,164)                     $(9,071)
Adjustments to reconcile net loss to net cash used in operating
 activities:
  Amortization of deferred compensation                                             1,766                          679
  Depreciation and amortization                                                       612                          381
  Net book value of property, plant and equipment retirements                         115                          476
  Changes in operating assets and liabilities:
    Other current assets                                                               13                           12
    Accounts receivable                                                            (1,082)                        (346)
    Inventories                                                                      (639)                        (117)
    Other assets noncurrent                                                           (23)                        (360)
    Accounts payable and other accrued liabilities                                  1,752                        1,342
    Accrued employee compensation                                                     905                          236
                                                                         ----------------             ----------------     
Net cash used in operating activities                                              (8,745)                      (6,768)
                                                                         ----------------             ----------------     
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures                                                                 (646)                      (1,715)
                                                                         ----------------             ----------------    
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock                                           -                        4,940
Net proceeds from issuance of common stock                                            163                           53
Repayment of shareholder loan                                                           -                            3
Proceeds from borrowings under lease line of credit                                     -                        1,702
Repayment of lease line of credit                                                       -                          (31)
                                                                         ----------------             ----------------    
Net cash provided by financing activities                                             163                        6,667
                                                                         ----------------             ----------------     
Net decrease in cash and cash equivalents                                          (9,228)                      (1,816)
Cash and cash equivalents, beginning of period                                     45,145                        8,829
                                                                         ----------------             ----------------     
Cash and cash equivalents at end of period                                       $ 35,917                     $  7,013
                                                                         ================             ================     
 </TABLE>

                             See accompanying notes

5
<PAGE>
 
                       SOMNUS MEDICAL TECHNOLOGIES, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
------------------------------

     The condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1998 and
1997, have been prepared by the Company, 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 September 30,
1998 and results of operations and cash flows for all periods presented have
been made.  The condensed consolidated balance sheet at December 31, 1997 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
Company's audited consolidated financial statements as included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, as filed with
the Securities and Exchange Commission.  The results of operations for the three
and nine month periods ended September 30, 1998 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire
fiscal year ending December 31, 1998.

NOTE 2 - REVENUE RECOGNITION
----------------------------

     The Company generally recognizes 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.

NOTE 3 - INVENTORIES
--------------------

<TABLE>
<CAPTION>
(In thousands)                           SEPTEMBER 30, 1998      DECEMBER 31, 1997
                                                (UNAUDITED)                    
<S>                                      <C>                     <C>
Raw Materials                                          $422                    $ 71 
Work in Process                                          46                      77 
Finished Goods                                          407                      88
                                       --------------------------------------------
                                                       $875                    $236
                                       ============================================
</TABLE>

6
<PAGE>
 
NOTE 4 - NET LOSS PER SHARE
---------------------------

     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.

     The Company has 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.

NOTE 5 - INITIAL PUBLIC OFFERING
--------------------------------

     During the quarter ended December 31, 1997, the Company successfully
completed its initial public offering (the "Offering").  The Offering generated
net proceeds of approximately $37.9 million from the sale of 4,000,000 shares of
Common Stock.  Subsequent to the end of such quarter, the Company's underwriters
exercised the over-allotment option, generating additional net proceeds of
approximately $5.9 million from the sale of 600,000 shares of Common Stock.  The
proceeds from the Offering and over-allotment option are being used to fund
operating activities.

     Concurrent with the closing of the Offering, the then holders of all of the
Series A, B and C Preferred Stock (5,998,446 shares in total) converted their
shares into the Company's Common Stock.

NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income",
issued by the FASB in June 1997.  SFAS No.130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net loss or
stockholders' equity.  SFAS No.130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income.  Comprehensive income is
equal to net income for the three and nine month periods ended September 30,
1998 and 1997.

     Effective January 1, 1998, the Company adopted  FASB SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".  SFAS
No.131 superseded SFAS 14, "Financial Reporting for Segments of a Business
Enterprise".  SFAS No.131 establishes standards for the way that public business
enterprises report selected information about operating segments in interim
financial reports.  SFAS No.131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No.131 had no impact on the Company's results of
operations, financial position, or disclosure of segment information through
September 30, 1998.

7
<PAGE>
 
NOTE 7 - OPTION EXCHANGE PROGRAM
--------------------------------

     On September 18, 1998, the Company effected an option exchange program to
allow employees (excluding executive officers) to exchange 436,168 options to
purchase shares with an exercise price between $7.50 and $10.75 for options with
an exercise price of $3.375 (the fair value of the Company's stock on September
18, 1998).  Under the terms of this program, no portion of any repriced option
is exercisable until September 18, 1999.

NOTE 8 - SUBSEQUENT EVENTS
--------------------------

     In October 1998, the Company announced that its board of directors has
authorized a stock repurchase program permitting the purchase of up to 1,000,000
shares, at up to $5.00 per share, of its common stock in the open market.  To
date, no shares have been repurchased by the Company.

     In November 1998, the Company announced the appointment of a new Chief
Executive Officer (CEO) and that the current CEO will remain as the Chief
Technical Officer (CTO) and Chairman of the Board, effective January 1, 1999. As
a result of this a one time charge, which is currently estimated to be
approximately $300,000 to $500,000, will be incurred in the fourth quarter.

     In November 1998, the Company announced the adoption of a Preferred Shares
Purchase Agreement (the agreement).  Pursuant to the agreement, there will be a
dividend distribution of one Preferred Share Purchase Right on each outstanding
share of the Company's Common Stock, commencing on November 18, 1998.  Each
right will entitle stockholders to buy one one-thousandth of a share of the
Company's Series A Participating Preferred Stock at an exercise price of $18.00.
The Rights will become exercisable following the tenth day after a person or
group announces acquisition of, or commencement of a tender offer which would
result in the consumption of 15% or more of the Company's Common Stock.  Subject
to certain restrictions, the Company will be entitled to redeem the Rights at
$0.001 per Right at any time before they become exercisable.  Subject to certain
restrictions, at any time after an event triggering exercisability of the Rights
at a discounted price and prior to the acquisition by the acquiring person of
50% or more of the outstanding Common Stock, the Board of Directors of the
Company may exchange the Rights (other than those owned by the acquiring person
or its affiliates) for Common Stock or the Company at an exchange ratio of one
share of Common Stock per Right.

8
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

  The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1997.

  The information set forth below contains forward-looking statements
(designated by an *), and the Company's 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 the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.

OVERVIEW

     Somnus designs, develops, manufactures and markets innovative medical
devices that utilize its proprietary RF technology for the treatment of upper
airway disorders. The Company's 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), snoring and enlarged turbinates.

     The Company has a limited history of operations that, to date, has
consisted primarily of research and development, product engineering, seeking
clearance of its 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.  The Company 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, the Company began direct sales of the Somnoplasty
System in the United States.  The Company has since received FDA clearance to
treat enlarged turbinates, in December 1997, and OSA, in November 1998.  During
the quarter the Company terminated its relationship with Medtronic and
established a European headquarters in the Netherlands.  While the Company
completes the process of identifying potential distribution partners, an interim
relationship with Entermed B.V. has been established to distribute the Company's
products throughout Europe.*

     The Company anticipates continuing to hire additional financial accounting
personnel to meet increasing demands of its business and to strengthen the
Company's management capability.* The Company also plans 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 anticipated growth of the Company.*  Additionally, the
Company will invest in further production equipment, vertical integration and
facility expansion to reduce manufacturing costs, reduce manufacturing cycle
time and increase production capacity.* These hires and capital expenditures
will require operating capital on an ongoing basis.*  The Company will continue
to expand its internal reporting capabilities and implement appropriate systems
to properly manage its business.*

9
<PAGE>
 
     This current and anticipated significant growth of the Company's personnel,
sales and scope of operations may place considerable strain on the Company's
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 the Company's
operations or that its 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 the Company's business,
financial condition and results of operations.

     The Company is building a direct sales force to cover the United States,
Europe and Canada. Presently the sales force consists of a Vice President of
North American Sales, two domestic regional sales managers and twelve domestic
sales representatives. During the quarter the Company hired a Vice President and
General Manager of European Sales & Marketing and direct sales representatives
covering France, Germany, the Netherlands and Belgium to manage distributors in
European countries.* Medtronic previously distributed the Company's products in
Europe.  The Company and Medtronic have cooperatively transitioned product
distribution rights back to Somnus.  Additionally, the Company plans to enter
into agreements for product distribution in Japan and other international
markets.* The Company anticipates significant short-term expenditures in the
development of its direct sales infrastructure.*

     As of September 30, 1998, the Company has incurred cumulative losses from
inception of approximately $28,018,000. Moreover, the Company expects to incur
significant additional operating losses over the next couple of years primarily
due to the development of its manufacturing and sales and marketing capabilities
along with ongoing research and development efforts, including expenses
associated with the Company's patent portfolio.* The Company's 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 the Company's 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
the Company or its competitors, the timing of regulatory clearances or approvals
of those new products and the ability of the Company to market its products in
the United States and internationally.  Accordingly, interim period comparisons
of the Company's operating results are not necessarily meaningful and should not
be relied upon as indicators of likely future performance or annual operating
results.

  The Company's business and financial results could be materially adversely
affected in the event that the Company is 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.
The Company's 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.

10
<PAGE>
 
RESULTS OF OPERATIONS

     Total revenues.  The Company's revenues for the three and nine months ended
September 30, 1998 (third quarter) are derived primarily from sales of its
Somnoplasty System, consisting of the 215 RF Generator, the S2 Generator, the SP
1000, SP 1010 and SP 1100 disposable devices, to private practices, hospitals,
clinics and sleep centers. The Company's revenues for the three and nine month
periods ended September 30, 1998 were approximately $2,331,000 and $6,031,000,
respectively.  Revenues of $868,000 and $1,100,000 were recorded for the three
and nine month periods ended September 30, 1997.  During the three and nine
months ended September 30, 1998, and the comparable periods of 1997, net
revenues were attributable to sales to customers principally in the United
States.  The Company expects that the sale of generators will constitute a
significant percentage of the Company's total revenues in the near term as it
builds an installed base of users.*

     Manufacturing start-up costs and costs of revenues.  Manufacturing start-up
costs and costs of revenues were $1,365,000 in the three months ended September
30, 1998 compared to $1,010,000, for the prior year period.  For the nine month
period ended September 30, 1998, manufacturing start up costs were $3,989,000,
compared to $1,969,000 for the prior-year period.  Manufacturing start-up costs
and costs of revenues consist 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 establishing manufacturing
capabilities account for the majority of the increase from 1997 to 1998. The
Company believes that manufacturing start-up costs and costs of revenues will
increase in absolute dollars but may fluctuate as a percentage of revenues.*

     Research and development expenses.  Research and development costs for the
three months ended September 30, 1998 were $1,963,000, compared to $2,044,000
for the prior-year period.  For the nine months period ended September 30, 1998,
research and development costs were $5,992,000, compared to $4,095,000 for the
prior-year period. Research and development expenses are comprised of salaries,
prototype development costs, costs associated with intellectual property, and
clinical trial and regulatory approval expenses.

     Expense levels between the comparative three month periods were comparable
and reflect the ongoing expenditures incurred in the development and refinement
of the Somnoplasty System, including generators and disposable devices.  The
increase in expenses for the nine month period indicates increased patent legal
expenses of approximately $600,000 versus $246,000 in the prior year period,
increased consulting fees of $795,000 from $336,000 in the prior year period,
higher level of general infrastructure costs, including facilities costs
incurred in 1998 of $700,000, and increased salaries and employee related
expenses of $1,934,000 compared to $1,241,000 for the prior year period.
Included in the 1998 employee related expenses is approximately $606,000 of non-
cash stock compensation charges resulting from stock option grants, compared to
$341,000 for the prior year period. These additional expenses were partially
offset by a lower requirement for clinical trial and prototype costs of
approximately $1,180,000 as compared to approximately $1,726,000 in the prior
year period.

     Selling, general and administrative. Selling, general and administrative
("SG&A") expenses for the three months ended September 30, 1998 were $3,759,000,
compared to $2,398,000 for the prior-year period.  For the nine month period
ended September 30, 1998, 

11
<PAGE>
 
SG&A was $9,752,000, compared to $4,339,000 for the prior-year period. 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 salaries and employee
expenses of $1,894,000 and $4,995,000 for the three and nine months ended
September 30, 1998, compared to $917,000 and $1,568,000, for the prior year
periods, respectively, due to increased headcount, higher levels of commission
on higher sales volumes, the European office and a one time charge in connection
with the severance of the Company's former Chief Financial Officer.  Employee
expenses also include expenses of $422,000 and $1,159,000 for the three and nine
months ended September 30, 1998, increased from $275,000 and $332,000 for the
prior year periods, respectively, relating to non-cash stock compensation
charges resulting from stock option grants and related to a change in the
employment status of a company executive.  Increased selling expenses included
commissions, travel and entertainment costs of $249,000 and $658,000 for the
three and nine months ended September 30, 1998, versus $38,000 and $55,000 for
the prior year periods, respectively and sales samples costs incurred in 1998 of
$313,000.  Costs of development of marketing literature and campaigns, tradeshow
attendance, and an extensive ongoing public relations effort to promote the
Somnoplasty System totaled approximately $442,000 and $1,018,000 for the three
and nine months ended September 30, 1998, compared to $235,000 and $448,000 for
the prior year periods, respectively.

     Interest and other income, net.  Interest and other income, net for the
three months ended September 30, 1998 was $468,000, compared to $60,000 for the
prior-year period.  For the nine month period ended September 30, 1998, interest
and other income was $1,538,000, compared to $1,072,000 for the prior-year
period. The increases were attributable to interest income earned by the Company
on an increased outstanding balance of cash and cash equivalents, invested from
the proceeds of the IPO. Interest expense was $1,000 and $3,000 in the three and
nine months ended September 30, 1998, compared to  $53,000 and $117,000 in the
prior-year period, respectively. The decrease was due to the repayment of
borrowings under the equipment lease line of credit.

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.

12
<PAGE>
 
     The Company is in the process of assessing its exposure to the Year 2000
problem.  The Company is upgrading its current third party software for Year
2000 compliance.  While the Company believes it has made progress in resolving
known Year 2000 issues, sufficient testing has not been completed to fully
validate the readiness of the Company's systems.  Additional testing and
upgrades are planned during fiscal 1999 to reasonably ensure Year 2000
compliance.*

     The Company is also assessing the possible effect on its operations of the
Year 2000 readiness of critical suppliers of products and services.  The
Company's reliance on its key suppliers, and therefore on the proper functioning
of their information systems and software, is increasing, and there can be no
assurance that another company's failure to address Year 2000 issues could not
have an adverse effect on the Company.

     Although it is difficult to estimate the total Year 2000 project costs, the
Company's preliminary estimate is that such costs will total approximately
$100,000, * which is not material to the Company's business operations or
financial condition.  There can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.  The
Company has incurred approximately $50,000 through September 30, 1998 on this
project.  There can be no assurance that these costs will not be material to the
Company or that the Company will be able to resolve in a timely manner any
issues that may arise. The expenses of the Year 2000 project are being funded
from existing cash reserves and through operating cash flows.

     The Company has not yet fully developed a comprehensive contingency plan to
address situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations. Development of contingency plans is
planned to take place during the first half of fiscal 1999. *  There can be no
assurance that the Company will be able to develop a contingency plan that will
adequately address issues that may arise in the year 2000. The failure of the
Company to develop and implement, if necessary, an appropriate contingency plan
could have a material impact on the operations of the Company.  Finally, the
Company is also vulnerable to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions.

     The Company believes that it is unlikely to experience a material adverse
impact on its financial condition or results of operations due to Year 2000
compliance issues.  However, since the assessment process is ongoing, Year 2000
compliance complications are not fully known, and potential liability issues are
not clear, the full potential impact of the Year 2000 on the Company is not
known at this time.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception through September 30, 1998, the Company has financed its
operations primarily through the private placement of equity securities, bank
loans, lease lines of credit, stockholder loans and its November 1997 IPO. From
inception, the Company raised approximately $16,400,000 in net proceeds from
private equity financings.  The Company raised an additional $43,756,000 from
its IPO, net of costs of $4,540,000.

13
<PAGE>
 
     Cash and cash equivalents at September 30, 1998 were $35,917,000 compared
to $45,145,000 at December 31, 1997.

     Net cash used in operating activities was approximately $8,745,000 for the
nine months ended September 30, 1998, compared to $6,768,000 for the prior-year
period.  Net cash used in operating activities differs from the Company's 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 the increase in accounts payable and related accruals.  These
sources of funds were offset partially by an increase in accounts receivable and
inventory, as the Company increases sales of its products and moves more of the
manufacturing operations in-house.  Net cash used in investing activities was
approximately $646,000 for the nine months ended September 30, 1998, compared to
$1,715,000 for the prior-year periods, the net cash used in investing activities
was primarily attributable to capital expenditures during these periods.  Net
cash provided by financing activities was approximately $162,000 for the nine
months ended September 30, 1998 and  $6,667,000 for the prior-year periods,
respectively.  Net cash provided by financing activities in 1998 is attributable
primarily to the exercise of options.  The nine months ended September 30, 1997
included primarily the issuance of preferred stock and borrowings under a lease
line of credit.

     The Company has recorded deferred stock compensation expense for the
difference between the exercise price and the deemed fair value for financial
statement presentation purposes of the Company's Common Stock, as determined by
the Board of Directors, for certain options granted and related to the severance
of the Company's former Chief Financial Officer.  The total unamortized deferred
stock compensation at September 30, 1998 is $1,716,000. The Company amortized
deferred compensation expenses of approximately $1,766,000 in the nine months
ended September 30, 1998 compared to $679,000 for the respective 1997 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 September 30, 1998, the Company's principal sources of liquidity
consisted of $35,917,000 in cash and cash equivalents. There were no other
material unused sources of liquid assets at September 30, 1998.

     The Company currently anticipates that its capital expenditure requirements
will be approximately $2.0 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.*

     The Company anticipates that its existing resources will enable the Company
to maintain its current and planned operations at least through the next twelve
months.*  However, there can be no assurance that the Company will not require
additional funding prior to such time. The Company's future capital requirements
will depend on many factors, including the ability of the Company 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 the Company's funding requirements will be available as
needed.  If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders may result. 

14
<PAGE>
 
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research or development programs or to relinquish rights to
products at an earlier stage of development or on less favorable terms than the
Company would otherwise seek to obtain. The failure of the Company to raise
capital when needed would have a material adverse effect on the Company's
business, financial condition and results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     The Company's operating results may vary significantly depending on certain
factors, including the effect of lack of market acceptance of new products,
delays in the introduction or shipment of new products, increased competition,
delays in ongoing research and development programs, litigation costs should the
Company be involved in litigation, adverse changes in the economic conditions in
any of the several countries in which the Company does business, a slower growth
rate in the Company's target markets, the uncertainty of international
regulatory clearances or approvals, and the factors set forth under the
Company's annual report on form 10-K for the fiscal year ended December 31,
1997.

     Limited Operating History; Absence of Profitability.  The Company was
incorporated in January 1996 and has a limited history of operations that, to
date, has consisted primarily of research and development, product engineering,
seeking clearance of its products from the FDA, initial development of a direct
sales force in the United States and training Medtronic employees for
distribution of the Somnoplasty System in the EU, Australia, Southeast Asia and
certain other areas. During the quarter the Company terminated its relationship
with Medtronic and established a European headquarters in the Netherlands. The
Company and Medtronic have cooperatively transitioned European product
distributor rights back to the Company.  While the Company completes the process
of identifying potential distribution partners, an interim relationship with
Entermed B.V. has been established to distribute the Company's products
throughout Europe.

     The Company commercially introduced the Somnoplasty System internationally,
through Medtronic, beginning in June 1997. One month later, after receiving
510(k) clearance for the use of the Somnoplasty System to treat snoring, the
Company began direct sales of the Somnoplasty System in the United States. In
December 1997, the Company received 510(k) clearance to use the Somnoplasty
System for the treatment of enlarged turbinates associated with chronic
rhinitis.  The Company began direct sales of the device for treating enlarged
turbinates in the first quarter of 1998.  In November 1998, the Company received
510(k) clearance to use the Somnoplasty System for the treatment of OSA.  The
Company has generated only limited revenues from sales of the Somnoplasty System
and does not have experience in manufacturing, selling or marketing its products
in large, commercial quantities. There can be no assurance that the Somnoplasty
System will be successfully commercialized or that the Company will achieve
significant revenues. From its inception in 1996 through September 30, 1998, the
Company had total revenues of approximately $8.6 million and incurred cumulative
losses of approximately $28.0 million.  The Company expects to significantly
increase its 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 the Company can
successfully manage the transition to a larger-scale commercial enterprise will
depend upon a number of factors, including increasing its commercial
manufacturing, sales and marketing capabilities, as well as establishing
relationships with 

15
<PAGE>
 
international distributors. The Company's inability to establish such
capabilities and relationships would have a material adverse effect on its
business, financial condition and results of operations.

     Additional Capital Requirements; No Assurance Future Capital Will Be
Available.  The Company has expended and will continue to expend substantial
funds for planned clinical investigations, capital expenditures, manufacturing
and marketing of its products.* The timing and amount of spending of such
capital resources is difficult to predict accurately and will depend upon
several factors, including the progress of its planned clinical investigations,
competing technological and market developments, commercialization of products
currently under development and market acceptance and demand for the Company's
products.* To the extent required, the Company may seek to obtain additional
funds through equity or debt financing, through collaborative or other
arrangements with other companies and from other sources.* If additional funds
are raised by issuing equity securities, dilution to stockholders could occur.
There can be no assurance that additional financing will be available when
needed or on terms acceptable to the Company. If adequate funds are not
available, the Company could be required to delay development or
commercialization of the Somnoplasty System for certain indications, to license
to third parties the rights to commercialize certain products or technologies
that the Company would otherwise seek to commercialize for itself or to reduce
the marketing, customer support or other resources devoted to certain of its
products, each of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

     Need to Manage Growth and Expand Financial Capabilities.  Significant
future growth in the Company's sales and expansion in the scope of its
operations, should they occur, may place considerable strain on the Company's
management, financial, manufacturing and other capabilities, procedures and
controls. In particular, the Company may be required in the near term to improve
and expand its financial capabilities through the enhancement of its financial
reporting systems.*  There can be no assurance that any existing or additional
capabilities, procedures or controls will be adequate to support the Company's
operations or that its 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 the Company's business,
financial condition and results of operations.

     Limited Regulatory Clearance; Dependence upon and Limited History of the
Somnoplasty System.  The Company's future success will depend upon the
successful commercialization and market acceptance of the Somnoplasty System for
the treatment of snoring, enlarged turbinates and OSA and the successful
development, regulatory clearances and/or approvals, commercialization and
market acceptance of the Somnoplasty System for additional anticipated
indications.*  In the United States, the Company has begun producing and selling
the Somnoplasty System for use in the reduction of tissue in the uvula and soft
palate to treat snoring, the reduction of tissue in the turbinates.  The Company
believes that its future success will depend upon the ability of physicians to
use one or more of the Company's devices to treat individual or multiple
indications, depending upon the patient's needs.*  Internationally, the Company
received a CE Mark in June 1997 and the Therapeutic Goods Administration ("TGA")
of Australia listing in July 1997, permitting the Company to commercialize the
Somnoplasty System in those markets for the treatment of upper airway disorders.
Although such approvals permit the Company to market its products for the
treatment of snoring, enlarged turbinates, enlarged tonsils and OSA, the Company
must 

16
<PAGE>
 
continue to pass annual ISO 9001/EN 46001 quality system audits ("ISO 9001") in
order to retain these international approvals. Failure to retain these approvals
could have a material adverse effect on the Company's business, financial
condition and results of operations. Other international markets, such as Japan,
have their own regulatory approval processes, and there can be no assurance that
these approvals will be obtained. Failure to obtain regulatory approval in other
international markets could have a material adverse effect on the Company's
business, financial condition and results of operations.

     The Somnoplasty System is in the early stage of commercialization and the
Company has only a limited history of its use in the treatment of snoring and
enlarged turbinates and has no history of its commercial use in the treatment of
OSA in the United States.  There can be no assurance that the procedure, which
involves the RF tissue volume reduction in the upper airways, 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 the Company's 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 the Company's business, financial condition and
results of operations.

     No Assurance of Market Acceptance.  The Somnoplasty System utilizes the
Company's proprietary RF tissue volume reduction technology for the treatment of
upper airway disorders. RF ablation in the upper airway is a new and novel
development.  Although the Company has received 510(k) clearance for use of the
Somnoplasty System to treat snoring, enlarged turbinates and OSA, as well as a
CE Mark and TGA listing for treatment of upper airway obstructions, market
acceptance for these indications could be adversely affected by numerous
factors, including the lack of availability of third-party reimbursement, cost
of the procedure, clinical acceptance or effective physician training.  The
Company does not anticipate that patients will receive third-party reimbursement
for use of the Somnoplasty System in the treatment of snoring.*  In addition,
should the Company receive regulatory clearance or approval for use of the
Somnoplasty System to treat additional indications, market acceptance will
depend, in large part, upon the availability of third-party reimbursement for
each of those indications, which is not assured.* Market acceptance will also
depend upon the Company's 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.*  There can be no assurance that these products will adequately
demonstrate these characteristics or that they will receive market acceptance
among physicians.  The Company believes that recommendations and endorsements by
influential physicians will be essential to market acceptance of its products.*
There can be no assurance that such recommendations or endorsements will be
obtained. 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 the Company's products
and delay or preclude commercial sales and market acceptance. If the Company is
unable to achieve broad market acceptance of the Somnoplasty System for its
current and anticipated indications, the Company's business, financial condition
and results of operations would be materially adversely affected.

     Patient acceptance may be affected by numerous factors, including the
possibility that the Somnoplasty procedure will require treatments on multiple
occasions.  The clinical data 

17
<PAGE>
 
submitted by the Company to the FDA with its 510(k) notification for the uvula
and soft palate indicated that patients may require anywhere from one to six
treatments to significantly reduce snoring. The Company anticipates that most
patients will require fewer treatments to reduce enlarged turbinates than
required to reduce snoring and more to treat OSA than snoring.* The Company
anticipates that most patients will only require one to three treatments to
significantly reduce 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. The need for multiple
treatments and the associated increased cost of the procedure could have a
significant adverse effect on patient acceptance and on the Company's business,
financial condition and results of operations. 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 the Company 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 the 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 the Company's business, financial condition
and results of operations.

     Limited Direct Sales and Marketing Experience.  The Company has only
limited experience selling and marketing the Somnoplasty System for the
treatment of snoring, enlarged turbinates and OSA, and selling and marketing its
products in commercial quantities. The Company intends to sell the Somnoplasty
System in the United States to private practices, clinics, hospitals and sleep
centers through a direct sales force.* The Company currently has a small direct
sales force that covers certain regions of the United States and intends to
increase its 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 the Company will be successful in building an effective
sales and marketing force, that it will be cost-effective or that it will
ultimately prove successful in selling the Somnoplasty System on a direct basis
in the United States. Market acceptance of the Somnoplasty System will also
require the Company to demonstrate that the cost of its 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 generator. There can be no assurance that the Company will
successfully generate sufficient demand for the Somnoplasty System at the prices
at which it currently offers its generators and disposable devices. In the event
the required investment were to preclude the Company from placing sufficient
quantities of generators, the Company's ability to sell disposable devices would
be limited, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

     Strategic and Distributor Relationships; Reliance on International Sales.
The Company's future success will depend, in part, on its ability to enter into
and successfully develop strategic and distributor relationships with other
parties with respect to the marketing and distribution of its products.*  The
Company is currently seeking to enter into strategic or additional distributor
relationships in Europe and within other markets, such as Japan.*  An 

18
<PAGE>
 
agreement has been established with a distributor, Entermed B.V. to distribute
the Company's products, on an interim basis, throughout Europe. The success of
the Company's future strategic or distributor relationships, will depend on the
other parties' interests in the specific products involved and their willingness
and ability to perform the role contemplated by the Company.* The Company may
have limited or no control over the resources that any particular strategic
party or distributor devotes to its relationship with the Company.* During the
quarter the Company and Medtronic have worked cooperatively to transition
European product distribution rights back to the Company, and the Company is in
the process of establishing a direct European sales force. There can be no
assurance that the Company will be successful in locating 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 the Company. In the event the Company is not
successful in developing such additional relationships, or if such relationships
do not prove to be successful, the Company's business, financial condition and
results of operations would be materially adversely affected.

     The Company anticipates that a significant portion of its future revenues
will relate to international sales of the Somnoplasty System through strategic
and distributor relationships.* 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, 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 the Company's products and the risk of financial instability of
distributors.  Additionally, the Company's business, financial condition and
results of operations may be adversely effected by fluctuations in overseas
economic conditions and international currency exchange rates, as well as by
increases in duty rates, difficulty in obtaining export licenses, constraints on
its ability to maintain or increase prices and competition.  There can be no
assurance that the Company will be able to successfully commercialize the
Somnoplasty System or any of its future products in any international market,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.

     Rapid Technological Change and Risk of Technological Obsolescence.  The
medical device industry is characterized by rapid and significant technological
change.  The Company's future success will depend in large part on the Company's
ability to continue to respond to such changes.  There can be no assurance that
the Company will be able to respond to such changes or that new or improved
competing products will not be developed that render the Somnoplasty System non-
competitive.  Product research and development will require substantial
expenditures and will be subject to inherent risks, and there can be no
assurance that the Company will be successful in developing or improving
products that have the characteristics necessary to effectively treat particular
upper airway obstructions or that any new products introduced will receive
regulatory clearance or approval or will be successfully commercialized.

  Transition from 215 RF Generator to 615/S2 Generator.  The Company has
purchased its 215 RF Generator as a finished assembly from a single-source
supplier.  The Company has discontinued selling the 215 RF Generator model
during 1998.  The  615/S2 (hereinafter the "S2") Generator is manufactured
entirely by the Company.  There can be no assurance that the 

19
<PAGE>
 
Company will not experience design or production issues as the Company commences
such manufacturing activities.

     The Company launched the S2 during the second quarter of 1998.  The S2
Generator is more expensive than the 215 Generator.  There can be no assurance
that the Company will be able to successfully market and sell the S2 Generator.
Further, there can be no assurance that the Company will not experience
increased levels of returns of the 215 Generator as a result of the launch of
the S2 Generator.

     Dependence on Single-Source Suppliers.  The Company purchases certain key
components of its S2 generator 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 the
Company will be able to locate alternative sources of such components on a
timely and cost-effective basis.  To date, the Company has not experienced
significant adverse effects resulting from any shortage of components.  However,
there can be no assurance that the single-source suppliers will meet the
Company's 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 generator shortages.  Such delays or shortages, particular as the Company
scales up its manufacturing activities in support of sales and distributor
orders, would have a material adverse effect on its business, financial
condition and results of operations.

     Dependence Upon Key Personnel.  The Company's future success depends in
significant part upon the continued service of certain key scientific, technical
and management personnel and its 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 the Company can retain
its key scientific, technical and managerial personnel or that it can attract,
assimilate or retain other highly qualified scientific, technical and managerial
personnel in the future.  Key employees of the Company include Stuart D.
Edwards, its Chief Executive Officer and Robert E. McCulloch, its Chief
Financial Officer.  Effective January 1, 1999, John Schulte will take over as
the Company's Chief Executive Officer, while Mr. Edwards will assume the
position of Chief Technical Officer of the Company.*  The Company has taken
steps to retain its 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 the Company's business, financial condition and
results of operations.

     Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis.  Any shortfall in revenues or earnings from levels expected by security
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock.

20
<PAGE>
 
PART II  -  OTHER INFORMATION
-----------------------------

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     From the date of the sale of securities under the Company's Registration
Statement on Form S-1 (File No. 333-35401), which was declared effective on
November 5, 1997 (the "Offering"), through September 30, 1998, the approximate
amount of net proceeds used from the Offering were $4.9 million for research and
development, clinical trials and regulatory matters, $3.6 million to manufacture
product and further develop manufacturing expertise and capabilities, $7.7
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 $700,000 for the acquisition of fixed assets.  The
Company has also made temporary investments in cash and cash equivalents of
$28.3 million.

     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 the Company, to persons owning ten percent
or more of any class of equity securities of the Company, or to affiliates of
the Company.  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 September 30,
     1998.

Exhibit 27.1 - Financial Data Schedule

21
<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:  November 12, 1998         By:  /s/ Stuart D. Edwards
                                 ------------------------------
                                 Stuart D. Edwards
                                 Chief Executive Officer



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

22