<PAGE>

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


                                   FORM 10-Q


[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001


                                       OR


[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.

                         COMMISSION FILE NO. 000-23275


                       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 May 11, 2001 17,355,986 shares of the Registrant's Common Stock were
outstanding.

                                       1
<PAGE>

                       SOMNUS MEDICAL TECHNOLOGIES, INC.
                                     INDEX



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

Item 1. Financial Statements (unaudited)

          Condensed Consolidated Balance Sheets as of
          March 31, 2001 and December 31, 2000....................   3

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

          Condensed Consolidated Statements of Cash Flows for  the
          Three month periods ended March 31, 2001 and 2000.......   5

          Notes to Condensed Consolidated Financial Statements....   6

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

Item 3.   Quantitative and Qualitative Disclosures of
          Market Risk.............................................  21

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

Item 6.   Exhibits and Reports on Form 8-K........................  22

Signatures........................................................  23

                                       2
<PAGE>

Item 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                March 31, 2001     December 31, 2000
                                                 (Unaudited)              (*)
                                               ---------------     -----------------
Assets
Current assets:
<S>                                            <C>                 <C>
   Cash and cash equivalents                   $      2,031          $      5,396
   Accounts receivable, net                           2,013                 1,895
   Inventories                                        2,073                 2,066
   Other current assets                                 521                   424
                                               --------------       ---------------
Total current assets                                  6,638                 9,781

Property and equipment net                            2,507                 2,359
Other assets                                             87                    88
                                               --------------      ---------------
                                               $      9,232        $       12,228
                                               ==============      ===============


Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                            $      1,435        $        2,041
   Accrued liabilities                                  913                   940
   Accrued restructuring                                620                     -
   Accrued compenstion                                1,225                 1,357
   Accrued warranty                                     477                   477
   Accrued clinical cost                                425                   430
   Deferred revenue                                     410                   427
                                               --------------      ---------------
Total current liabilities                             5,505                 5,672

Stockholders' equity
   Common stock                                          17                    15
   Additional paid-in capital                        65,686                65,580
   Accumulated deficit                              (61,976)              (59,039)
                                               --------------      ---------------

Total stockholders' equity                            3,727                 6,556
                                               --------------      ---------------
                                               $      9,232        $       12,228
                                               ==============      ===============

</TABLE>
(*) Derived from audited financial statements

                            See accompanying notes

                                       3
<PAGE>

                         SOMNUS MEDICAL TECHNOLOGIES, INC.
                   Condensed Consolidated Statement of Operations
                                    (Unaudited)
                       (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                        For the Three Months
                                                                Ended
                                                  ----------------------------------
                                                      March 31,            March 31,
                                                        2001                  2000
 <S>                                              <C>                    <C>
Product revenue                                    $       3,005          $      3,201
Cost of sales                                              1,585                 1,879
                                                   -------------          ------------

Gross margin                                               1,420                 1,322

Operating expenses:
   Research and development                                1,179                 1,508
   Selling, general and administrative                     2,265                 2,889
   Restructuring Expenses                                    960                     -
                                                   -------------          ------------
Total operating expenses                                   4,404                 4,397
                                                   -------------          ------------
Loss from operations                                      (2,984)               (3,075)
Interest and other income, net                                47                   265
                                                   -------------          ------------
Net loss                                           $      (2,937)         $     (2,810)

Net loss per share, basic and diluted              $       (0.20)         $      (0.19)
                                                   =============          ============

Shares used in computing net loss per share,
basic and diluted                                         14,805                14,420
                                                   =============          ============
</TABLE>


                                       4
<PAGE>

                      SOMNUS MEDICAL TECHNOLOGIES, INC.
                Condensed Consolidated Statements of Cash Flows
                           (Unaudited, in thousands)

<TABLE>
<CAPTION>
                                                                             For the Three Months Ended
                                                                       March 31, 2001            March 31, 2000
                                                                       ----------------------------------------
<S>                                                                      <C>                     <C>
Cash flows used in operating activities
Net loss                                                                 $   (2,937)              $   (2,810)
Adjustments to reconcile net loss to net cash used in operating
activities:
   Amortization of deferred compensation                                          -                       17
   Depreciation                                                                 306                      196
   Changes in operating assets and liabilities:
     Accounts receivable                                                       (118)                      47
     Inventories                                                                 (7)                     609
     Other current assets                                                       (97)                      86
     Other noncurrent assets                                                      1                        -
     Accounts payable, accrued liabilities, and accrued warranty               (633)                    (703)
     Accrued restructuring                                                      620                        -
     Accrued compensation                                                      (132)                    (376)
     Accrued clinical costs                                                      (5)                      53
     Deferred revenue                                                           (17)                    (202)
                                                                         ----------               ----------

Net cash used in operating activities                                        (3,019)                  (3,083)
                                                                         ----------               ----------

Cash flows used in investing activities
   Capital expenditures                                                        (454)                    (281)
   Maturity of Short-term investments                                             -                    4,972
                                                                         ----------               ----------
Net cash provided by (used in) investing activities                            (454)                   4,691
                                                                         ----------               ----------

Cash flows provided by financing activities
Net proceeds from issuance of common stock                                      108                      153
                                                                         ----------               ----------

Net increase in cash and cash equivalents                                    (3,365)                   1,761
Cash and cash equivalents at beginning of period                              5,396                   14,888
                                                                         ----------               ----------
Cash and cash equivalents at end of period                               $    2,031                $  16,649
                                                                         ==========               ==========

</TABLE>
                            See accompanying notes

                                       5
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

NOTE 1 - Summary of Significant Accounting Policies
---------------------------------------------------

     Basis of Presentation

     The accompanying unaudited financial statements, have been prepared, 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.  Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, the accompanying unaudited,
condensed financial statements reflect all adjustments (which include only
normal recurring adjustments) considered necessary for a fair presentation of
the company's interim financial information.   These financial statements and
notes should be read in conjunction with the audited consolidated financial
statements as included in our Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the Securities and Exchange Commission on March
29, 2001.

     The results of operations for the three month periods ended March 31, 2001
are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 2001.

     Revenue Recognition

     Somnus 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 product
shipments to our international distributors made under agreements that do not
provide for right of return or price protection, revenue is recognized upon
shipment to the final customer.  Allowances for product returns are provided at
the time of revenue recognition.


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


(in thousands)     March 31, 2001  December 31, 2000

Raw Materials          $1,387             $1,204
Work in Process            93                290
Finished Goods            593                572
                  -----------------------------------
                       $2,073             $2,066
                  ===================================

                                       6
<PAGE>

NOTE 2 - Restructuring Expenses
-------------------------------

     In January 2001, the Company announced a restructuring plan that was
implemented during the three months ended March 31, 2001. The plan resulted in
the elimination of approximately ten percent of the Company's workforce. The
plan encompassed the operational components of sales and marketing,
manufacturing, certain ongoing clinical programs, and research development. The
plan also included closing the European sales headquarters in the Netherlands
and managing international distributors from the United States and the
consolidation of domestic operations into one facility in Sunnyvale, California.
As a result of this plan, the Company recorded a restructuring charge of
$960,000. The restructuring charge is primarily made up severance costs for
affected employees, costs related to the closing of the European headquarters
and the consolidation of the United States facilities, including rent, lease
termination costs, and the write off of leasehold improvements. The following
table summarizes our 2001 restructuring charge activity for the three months
ended March 31, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                                        Accrued
                               Restructuring    Cash Payments      Write-Off of      Restructuring
                                   Charge       Made in Q1 2001      Impaired       Charge at March
                                  Q1 2001                             Assets           31, 2001

<S>                            <C>                  <C>               <C>               <C>
Severance and
Benefits                          $ 166            ($ 76)                -                 $ 90



Lease
Termination
Costs                               453              (53)          ( $ 131)                 269

Professional and
Other Fees                          185              (42)                -                  143


Clinical Trial
Terminations                         65              (10)                -                   55


Other Costs                          91              (28)                -                   63
                    ------------------------------------------------------------------------------------------

Total                             $ 960           ($ 209)           ($ 131)               $ 620
                    ==========================================================================================
</TABLE>


NOTE 3 - Comprehensive Loss
--------------------------

     There was no difference between net loss and comprehensive loss for the
three months ended March 31, 2001 and 2000.


NOTE 4 - Subsequent Events
--------------------------

     On April 26, 2001,  an aggregate of 2,500,000 shares of the Company's
Common Stock were issued pursuant to a private placement to certain investors
for proceeds of $3,050,000, net of costs of $300,000.  In connection with this
issuance, warrants were issued to the same investors to purchase an aggregate of
625,000 shares of the Company's Common Stock, at a

                                       7
<PAGE>

price per share of $1.68 if exercised during the period from 91 days to 180 days
following April 26, 2001 and at a price per share of $2.01 for the period from
181 days until their expiration. The announcement of a merger within 90 days of
the issuance of the Warrants involving per share proceeds of at least $2.68 will
result in the Warrants being unexercisable, provided such merger is consummated
within 180 days from the date of the announcement.

     On May 4, 2001, we announced that we had reached an agreement on a merger
with Gyrus PLC, a public limited company incorporated and existing under the
laws of England and Wales, under which Gyrus will make a cash tender offer for
all of our outstanding shares, at $3.11 per share. The completion of the
merger is subject to the tender of a majority of the shares of our common
stock in the tender offer and the receipt of certain U.S. and U.K. regulatory
approvals. The consummation of the tender offer is also subject to the closing
of Gryus' announced acquisition of the ear, nose and throat division of Smith
& Nephew Inc. and the closing of firmly underwritten financing for both
acquisitions.

                                       8
<PAGE>

Item 2.  MANAGEMENTS' 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, 2000.

     The information set forth below contains forward-looking statements
(designated by a *), 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 1" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.

Overview

  On May 4, 2001, we announced that we had reached agreement on a merger with
Gyrus PLC, a public limited company incorporated and existing under the laws of
England and Wales, under which Gyrus will make a cash tender offer for all of
our outstanding shares, at $3.11 per share.  The completion of the merger is
subject to the tender of a majority of the shares of our common stock in the
tender offer and the receipt of certain U.S. and U.K. regulatory approvals.  The
consummation of the tender offer is also subject to the closing of Gryus'
announced acquisition of the ear, nose and throat division of Smith & Nephew
Inc. and the closing of firmly underwritten financing for both acquisitions.
Within the next few months, in the event the merger agreement is not
consummated, we will need to either raise additional funds through the issuance
of equity or debt securities in the public or private markets in order to
continue operations, or sell the company to another acquiror.*  To this end, we
will continue to work with ING Barings as our exclusive financial advisor to
provide us with investment banking services and financial advice on strategic
opportunities, including raising capital through the sale of stock to the public
or to private investors, as well as the sale of our company.

  We design, develop, manufacture and market innovative medical devices that
utilize our proprietary temperature controlled radiofrequency technology for the
treatment of upper airway disorders. Our Somnoplasty 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 syndrome, OSAS, chronic turbinate hypertrophy, and habitual snoring.

  Our operations in 1996 and 1997 consisted largely of research and development,
product engineering, seeking clearance of our products from the Food & Drug
Administration, 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, or EU, Australia,
Southeast Asia and certain other areas. We commercially introduced the
Somnoplasty System internationally, beginning in June 1997. One month later,
after receiving 510(k) clearance from the FDA for the use of the Somnoplasty
System to treat habitual snoring, we began direct sales of the Somnoplasty
System in the United States. We received FDA clearance to treat chronic
turbinate hypertrophy in December 1997 and OSAS in November 1998. During the
third quarter of fiscal 1998 we established a European headquarters in the
Netherlands.

  During 1999, we continued to build our direct sales force in the United
States. During the fourth quarter of 1999, we hired a Director of International
Sales to manage our distributors in

                                       9
<PAGE>

countries other than the United States and Europe. In May, 2000, we received
510(K) clearance for the Model 2420, (a dual needle device) in combination with
the Somnus Control Unit for coagulation of tissue in the head and neck. In July
2000, we secured regulatory "shonin" approval to market our model 1010, 1100,
and 1200 devices in Japan. We had previously secured regulatory "shonin"
approval to market our S2 control unit in Japan on November 27, 1998.

  In January 2001, we announced a restructuring plan which included the closing
of our European operations and managing international distributors from the
United States.  In April 2001, we announced the availability of our single
channel Elypse control unit for the treatment of upper airway disorders.  In
addition, in April 2001, we announced plans to increase our sales force in the
United States through the addition of independent distributors.  To date, we
have signed agreements with three regional organizations to distribute our
products

  We have incurred significant operating losses since the commencement of our
operations in 1996. As of March 31, 2001, we have an accumulated deficit of
approximately $62 million. We expect those losses to continue based on our
current and projected sales and marketing, general and administrative, and
research and development expenses.* Despite the net proceeds of  $3,050,000
received in an April 2001 private placement, we will either need to raise
additional cash within the next few months or sell the company. We expect to
attempt to raise additional funds through another issuance of equity or debt,
but the consummation of an additional financing is uncertain.* If we are unable
to raise sufficient additional funds within the next few months, it is unlikely
that we will be able to continue our operations. We may never generate
sufficient revenue to sustain our business. Our ability to generate revenue
depends on many factors, including our ability to achieve market acceptance for
the Somnoplasty System, our ability to produce our products consistent with
government and regulatory standards, and our ability to obtain reimbursement for
both our products and the procedure from healthcare payors.

  The Company announced a restructuring plan in January 2001 which was
implemented during the three months ended March 31, 2001. The plan resulted in
a headcount reduction of approximately ten percent of our workforce.  The plan
encompassed the operational components of sales and marketing, manufacturing,
certain ongoing clinical programs, and research and development.  The plan also
included the closing of European operations in the Netherlands and managing
international distributors from the United States and the consolidation of
domestic operations into one facility in Sunnyvale, California.

  Product shipments of control units and disposable devices are made directly
from our facility in Sunnyvale, California to domestic customers and
international distributors. As our installed base of control units has
increased, we have continued to receive an increasing percentage of our sales
revenue from the sale of disposable handpieces as opposed to the sales of
control units.

  Our personnel, sales, and scope of operations 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 and
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.

                                       10
<PAGE>

  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 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.

                                       11
<PAGE>

Results of Operations

     Net Revenue.  Our revenues for the three months ended March 31, 2001 were
derived primarily from sales of our Somnoplasty system, consisting of control
units and disposable devices to private practices, hospitals, clinics, and sleep
clinics.  Net revenues for the three  months ended March 31, 2001 were
$3,005,000 compared to $3,201,000 for the prior year quarter, a decrease of
approximately  $196,000 or 6 percent.  The decrease for  the three month period
ended March 31, 2001 as compared to the prior year period is attributable to
lower revenue from control units due to a decrease in the average selling price
per unit partially offset by increased revenue from disposable handpieces due to
the higher installed base. During the three  month periods ended March 31, 2001
and 2000, 84.4 and 87.5 percent of our revenues, respectively  were derived from
sales to customers in the United States.  As we have implemented sales programs
that reduce the price of control units, the revenue from products shipped has
shifted from a mix of approximately 26 percent control units and 74 percent
disposable handpieces for the three  month periods ended March 31, 2000 to a mix
of approximately 14 percent control units and 86  percent disposable handpieces
for the three month period ended March 31, 2001.

     Cost of sales and gross margin.  Cost of sales consists of raw materials,
subassemblies and completed electronics, quality assurance and warranty costs.
Gross margin for the quarter increased to $1,420,000 or 47 percent  of sales,
from $1,322,000 or 41 percent of sales in the prior year quarter.  The increase
in gross margin as a percentage of sales for the three months ended March 31,
2001 as compared to the prior year period is due to an increase in manufacturing
volume and the corresponding economy of scale offset by the lower average
selling price of our control unit.  We anticipate in the future as sales
increase, cost of sales will increase  but may fluctuate as a percentage of
sales depending on volume and product mix. *

     Research and development expenses.  Research and development expenses are
comprised of salaries, prototype development costs, costs associated with
clinical trials and regulatory approval costs.  Research and development costs
for the first quarter of 2001 were $1,179,000, a decrease over the prior year
quarter of $329,000 or 22  percent.   The decrease for the three months ended
March 31, 2001 as compared to the prior year quarter was primarily attributable
to decreased salaries and wages as we implemented our restructuring plan.  The
decrease in research and development expenses is also due to a reduction in
prototype expenses and ongoing cost management efforts.

     Selling, general and administrative expenses.  Selling, general and
administrative expenses consist of executive salaries, professional fees,
facilities overhead, accounting, human resources, and general office
administration expenses such as rent and facility costs.  Selling, general and
administrative expenses for the first quarter of 2001 were $2,265,000, a
decrease over the prior year period of $624,000 or 21.6  percent.  The decrease
in the three month period ended March 31, 2001 as compared to the prior year
quarter is due to  reduced costs due to the closing of our European sales
headquarters and managing international distributors from the United States,
reduced promotional and advertising costs, and ongoing cost management efforts.

     Restructuring expenses.   Restructuring expenses of $960,000 relate to the
restructuring plan that was completed during the three month period ended
March 31, 2001.  The restructuring charge is primarily made up of severance
costs for affected employees, costs related to the shutdown of the European
headquarters and consolidation of the United States facilities, including rent,
lease termination costs, and the write off of leasehold improvements. The plan

                                       12
<PAGE>

resulted in the elimination of approximately ten percent of the Company's
workforce.  The plan encompassed the operational components of sales and
marketing, manufacturing, certain ongoing clinical programs, and research
development. The plan also included  closing  the European sales headquarters in
the Netherlands and managing international distributors from the United States
and the consolidation of domestic operations into one facility in Sunnyvale,
California.

     Interest and other income.  Interest and other income for the first quarter
of 2001 was $47,000 compared to $265,000 for the prior year quarter.  The
decrease in the three month period ended March 31, 2001 as compared to the prior
year quarter is attributable to the reduction in interest income earned on a
decreasing balance of cash, cash equivalents, and short-term investments.

Liquidity and Capital Resources

     Since inception through March 31, 2001, Somnus has financed its operations
primarily through the private placement of equity securities, bank loans, credit
lease lines of credit, stockholder loans and our November 1997 Initial Public
Offering.  From inception, we raised approximately $19,545,000 in net proceeds
from private equity financing which includes $3,050,000 raised in our recently
concluded April 26, 2001 private placement.  We raised an additional $43,800,000
from our Initial Public Offering, net of costs of $4,500,000.

     Cash and cash equivalents at March 31, 2001 were $2,031,000 compared to
$5,396,000 at December 31, 2000.

     Net cash used in operating activities was  $3,019,000 for the three months
ended March 31, 2001, compared to $3,083,000 million for the prior year quarter

     Net cash used in investing activities was approximately $454,000 for the
three months ended March 31, 2001, compared to net cash provided by investing
activities of $4,691,000  for the prior year quarter.  The decrease from the
prior year period is attributable to the maturity of short-term investments in
the prior year period partially offset by an increase in capital expenditures
for the three months ended March 31, 2001.

     Net cash provided by financing activities was approximately $108,000 for
the three months ended March 31, 2001 as compared to $153,000 for the prior year
quarter.

     At March 31, 2001, our principal sources of liquidity consisted of cash and
cash equivalents.  There were no other material unused sources of liquid assets
at March 31, 2001.

     We currently anticipate that our capital expenditure requirements will be
between $2,500,000 to $4,000,000 for the next twelve months.* We expect capital
expenditures of $500,000 to $1,000,000 related to day-to-day operating needs,
including an anticipated facility move in the first quarter of 2002.* In
addition, we expect to capitalize between $2,000,000 to $3,000,000 of fixed
assets for Company owned control units.* The Company owned control units will
consist primarily of units placed at customer sites and demonstration units for
our direct and independent sales force. The level of capital expenditure shown
above reflects an expansion of our customer installed base. The expansion of our
installed base is dependent on acceptance of our products by new customers and
the successful implementation of our independent sales representative strategy.
There can be no assurance that new customers will accept our products at a rapid

                                       13
<PAGE>

rate or that we will be able to successfully implement our independent sales
representative strategy.

     Our existing resources will only be sufficient capital to support our
operations for a few months.* We have incurred cumulative operating losses of
$62 million, including a net loss of $2.9 million for the three month period
ending March 31, 2001. In addition, our cash, cash equivalents, and short-term
investments decreased from $5.4 million at December 31, 2000 to $2.0 million at
March 31, 2001.  On April 26, 2001, an aggregate of 2,500,000 shares of the
Company's Common Stock were issued pursuant a to private placement to certain
investors for proceeds of $3,050,000.  Despite this additional funding, our
current cash position still  raises substantial doubt about our ability to
continue as a going concern.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     Our operating results may vary significantly depending on certain factors,
including  market acceptance of products, the ability to anticipate and meet
customer demand, 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 counties in which we do business, a
slower growth rate in our target markets,  and the factors set forth in our
annual report on Form 10-K for the fiscal year ended December 31, 2000.

The consummation of the merger agreement we signed with Gyrus Group PLC may
never occur.

     On May 4, 2001, we announced that we had signed an agreement to merge with
Gyrus Group, PLC, a public limited company incorporated and existing under the
laws of England and Wales, under which Gyrus will make a cash tender offer for
all of our outstanding shares, at $3.11 per share. The completion of the merger
is subject to the tender of a majority of the shares of our common stock in the
tender offer and receipt of certain U.S. and U.K. regulatory approvals.  The
consummation of the tender offer is also subject to the closing of Gryus'
announced acquisition of the ears, nose, and throat division of Smith & Nephew,
Inc. and the closing of the firmly underwritten financing for both acquisitions.
We can provide no assurance that a sufficient number of shares will be tendered
to allow the merger to occur.  In the event an in sufficient number of shares
are tendered, Gyrus may undertake additional efforts to acquire the necessary
shares or abandon the merger altogether.

If the merger is not completed, our stock price may be adversely affected.

     On Thursday, May 3, 2001, the closing price for our stock was $1.65. Upon
the announcement of the merger with Gyrus, our stock price increased 74% to a
closing price of $2.87 on May 4, 2001. If the merger is not completed, the
price of our stock may drop significantly.

In the event the merger is not consummated, our funds available for operations
are low and we will need to either raise additional funds soon which will cause
dilution to existing investors, or sell the company to another acquiror.

     We have incurred cumulative operating losses of $62 million, including a
net loss of $2.9 million for the three month period ending March 31, 2001. In
addition, our cash and cash equivalents decreased from $5.4 million at December
31, 2000 to $2.0 million at March 31, 2001. On April 26, 2001, an aggregate of
2,500,000 shares of the Company's Common Stock

                                       14
<PAGE>

were issued pursuant to a private placement to certain investors for net
proceeds of $3,050,000. Despite this additional funding our current cash
position raises substantial doubt about our ability to continue as a going
concern.

     Within the next few months, if the merger with Gyrus is not consummated, we
expect we will raise additional funds through the issuance of equity or debt
securities in the public or private markets in order to continue operations, or
sell the company to another acquiror.* To this end, we will continue to work
with ING Barings as our exclusive financial advisor to provide us with
investment banking services and financial advice on strategic opportunities,
including raising capital through the sale of stock to the public or to private
investors, as well as the sale of our company. Additional financing and merger
opportunities may not be available, or if available, may not be on favorable
terms. The availability of financing or merger opportunities will depend, in
part, on market conditions, which have been depressed as of late. If we cannot
raise sufficient new capital we may be unable to successfully promote or produce
products, continue supplying our services, or pay our employees, or vendors any
of which could seriously harm our business. Any future equity financing would
result in substantial dilution to our stockholders. If we raise additional funds
by issuing debt, we may be subject to limitations on our operations, through
debt covenants or other restrictions.

We may fail to meet continued Nasdaq listing standards which would result in a
listing on a lesser known market within Nasdaq or a delisting altogether. Any
change in market listing may adversely affect our ability to raise capital.

     Under the continued listing standards for inclusion of our stock on the
Nasdaq National Market we are required to maintain net tangible assets of $4.0
million. As of March 31, 2001, our net tangible assets were $3.7 million. Due to
our financing on April 26, 2001, we are currently in compliance with Nasdaq
National Market continued listing requirements. We expect that our additional
funding received of $3,050,000, net of costs of $300,000 will enable us to
maintain net tangible assets in excess of $4.0 million for the next few months.
We are not certain that we will be able to raise additional capital or otherwise
increase the assets we own by acquiring cash from the sale of our products or
purchasing assets to continue to maintain minimum net tangible assets beyond the
next few months. There are other Nasdaq maintenance standards as well, including
a requirement that our stock cannot close below $1.00 for 30 consecutive trading
days. We can give no assurance that our stock will continue to trade above
$1.00. If we cannot maintain Nasdaq maintenance standards we may be transferred
from the Nasdaq National Market to the Nasdaq Small cap or the pink sheets or
delisted altogether. If our stock is removed from the Nasdaq National Market,
the liquidity and price of our stock may be adversely affected. As a result,
there may be less demand for our stock and we may be unable to raise sufficient
capital to funds our operations.

We have limited experience in selling and marketing our Somnoplasty System. We
may be unable to generate significant revenue from the sale or our generators
and the revenue resulting from sales of our handpieces may not be significant
enough to make us profitable.

     We have only limited experience selling and marketing the Somnoplasty
System for the treatment of turbinate hypertrophy (chronic nasal obstruction),
soft palate/uvula (habitual snoring), and base of tongue (obstructive sleep
apnea syndrome/upper airway resistance syndrome). The sale of our disposable
handpieces may not provide substantial revenue and we may ultimately prove
unsuccessful 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

                                       15
<PAGE>

Somnoplasty System will require us to demonstrate that the cost of our
products and procedures are competitive with currently available alternatives.
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 investments 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 effect on
our business, financial condition and results of operations.

We have a history of operating losses and we expect those losses to continue.

     We have had significant operating losses since the commencement of our
operations in 1996. As of March 31, 2001, we have an accumulated deficit of
approximately $62 million. Despite our restructuring plan, we expect those
losses to continue based on our current and projected  sales and marketing,
general and administrative, and research and development expenses.*  We may
never generate sufficient revenue to sustain our business.  The ability to
generate revenue  depends on many factors, including our ability to achieve
market acceptance for the Somnoplasty System, our ability to produce our
products consistent with government and regulatory standards, and our ability to
obtain reimbursement for both our products and the procedure from healthcare
payors.

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 turbinate hypertrophy (chronic nasal obstruction), soft
palate/uvula (habitual snoring), and base of tongue (obstructive sleep apnea
syndrome/upper airway resistance syndrome). Market acceptance will depend, in
the 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. This could result in the need for 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.

We rely on a third party manufacturer as our only supplier of the S-2 control
unit and may experience design or production problems and delays as a result.

     The third party manufacturer of our S-2 control unit is our only supplier
for this product. The inability of this manufacturer to successfully produce our
S-2 control unit consistent with our quality standards and/or on a timely basis
may have a material adverse affect on our financial condition and results of
operations. In the event this supplier fails to fulfill our product needs, we
will be forced to locate alternative suppliers. We can give no assurance that we
will be able to locate suitable replacement suppliers. If we are unable to
secure adequate manufacturing capacity to meet our supply requirements, our
business will be materially harmed.

We may experience problems with regard to our disposable devices which we
manufacture ourselves.

     We currently manufacture our disposable devices in their entirety. We have
in the past experienced and we may in the future experience design or production
problems and delays as

                                       16
<PAGE>

we manufacture these units. In addition, certain parts may be discontinued or
placed on allocation by their manufacturers. We have had to qualify alternative
vendors when parts could no longer be obtained by the vendor we had been using.
We may have to redesign our products to use alternative parts when we switch
vendors. These transfers to new vendors can cause delays in our manufacturing
operations. Additionally, there can be no assurance that in the future we will
be able to have parts specifically manufactured, redesign our products to use
other available parts or, qualify alternative vendors, at all or without
interrupting our ability to meet customer demand. The inability to react to
design or production issues through the manufacturing of special parts, redesign
of our products, and the qualification of new vendors could have a material
adverse effect on, financial condition and results of operations.

We are dependent on single-source suppliers for components.

     We purchase certain key components of our products from single-source
suppliers. We have in the past and may in the future encounter shortages from
one of our single source suppliers. * In such a situation, we have had to
identify and qualify one or more substitute suppliers for these component
needs. There can be no assurance that in the future 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.

If our vendors are unable to satisfy our manufacturing requirements our business
will be materially harmed.

     The S2 control unit and our disposable devices use electronic components.
Our vendors supply the electronic components we require to much larger
customers, with whom we have to compete for the limited supply. If we or our
third party manufacturer are not able to obtain such components in a timely
manner or in quantities necessary to meet our requirements, we may be unable to
fulfill orders and may lose customers.

     We have in the past and may in the future have vendors who are unable to
supply us with adequate quantities of components. In such a situation, we have
to identify and qualify one or more substitute suppliers for these components
needs. Incorporating new components or transferring existing components needs to
new vendors requires significant time and can cause products shipment delays. In
addition, the costs associated with manufacturing our products may increase if
we are required to use third party vendors. If we fail to satisfy our
manufacturing requirements, our business would be materially harmed.

Several factors will impact our ability to achieve market acceptance.

     Temperature Controlled Radiofrequency tissue volume reduction in the upper
airway is a new and novel development. Market acceptance of this procedure for
the treatment of turbinate hypertrophy (chronic nasal obstruction), soft
palate/uvula (habitual snoring), and base of tongue

                                       17
<PAGE>

(obstructive sleep apnea syndrome/upper airway resistance syndrome) could be
adversely affected by numerous factors, including:

      . the lack of availability of third-party reimbursement,

      . cost of the procedure,

      . clinical acceptance,

      . differentiation of our temperature control feature, and

      . effective physician training and patient acceptance.

     Third party reimbursement. Patients do not receive third-party
reimbursement for use of the Somnoplasty System in the treatment of habitual
snoring. Market acceptance of the Somnoplasty System for the treatment of
turbinate hypertrophy (chronic nasal obstruction), and base of tongue
(obstructive sleep apnea syndrome/upper airway resistance syndrome) depends, in
large part, upon the availability and receipt of an acceptable level of third-
party reimbursement for each of those indications, which has not yet been
established on a consistent basis. Reimbursement for the treatment of habitual
snoring, turbinate hypertrophy (chronic nasal obstruction), and base of tongue
(obstructive sleep apnea syndrome/upper airway resistance syndrome) varies
significantly depending on the third party payor involved, the region in the
United States and type of medical facility where the procedure is performed.

     Cost of the procedure and clinical acceptance.   Market acceptance also is
impacted by our ability to demonstrate that the Somnoplasty System is an
attractive alternative to other procedures, which depends upon physicians'
evaluations of the clinical safety and efficacy, ease of use, reliability and
cost-effectiveness of the Somnoplasty System. Recommendations and endorsements
by influential physicians have been and we believe, will continue to be,
essential to market acceptance. * There can be no assurance that such
recommendations or endorsements will continue to be obtained.

     Competition and differentiation of our technology. There can be no
assurance that we will be able to successfully differentiate our technology from
competing products. In the treatment of habitual snoring, the Somnoplasty System
is subject to intense competition from existing products, such as nasal dilators
and oral appliances, and surgical procedures, such as LAUP. The U.S. market for
products for the treatment of OSAS is currently dominated by CPAP products
produced by Healthdyne Technologies Inc, Nellcor Puritan Bennett, Inc., a wholly
owned subsidiary of Mallinckrodt Inc., ResMed Inc. and Respironics, Inc. There
can be no assurance that the Somnoplasty System will successfully compete with
or replace any existing products for these or other indications. Other companies
offer products which use radiofrequency for the treatment of upper airway
disorders, including Elmed, Ellman, and Entec, a division of Arthrocare, Inc.
There can be no assurance of our ability to differentiate our products with
temperature control feature from these products.

     Physician training. Broad adoption of the Somnoplasty System will require
us to train 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

                                       18
<PAGE>

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 has been and we believe will
continue to be affected by numerous factors, including the possibility that the
Somnoplasty procedure may require multiple treatments, which would be not only
inconvenient for the patient, but also more costly if not covered by insurance.
Patient acceptance of the Somnoplasty System for the treatment of turbinate
hypertrophy (chronic nasal obstruction), soft palate/uvula (habitual snoring),
and base of tongue (obstructive sleep apnea syndrome/upper airway resistance
syndrome) 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. We have not yet
obtained broad acceptance of the Somnoplasty System by the patient community,
and there can be assurance that we will achieve such broad acceptance, or that
market demand for our 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 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.


Our products could infringe the intellectual property rights of others and lead
to costly litigation and/or substantial royalty payments.

     Our competitors or licensors may assert that our products infringe upon
their intellectual property. We may be forced to arbitrate or litigate to
protect our products from claims of infringement. One of our former licensors
has claimed royalty rights on our control unit. We do not believe this claim is
valid but cannot assure you that we will not have to pay retroactive and future
royalties as a result. We may have to litigate or arbitrate to protect our
interests in this matter. Litigation and arbitration are costly pursuits and
they consume time that management would otherwise dedicate to building our
business. In the event that our products infringe on the intellectual property
of others we may be required to pay significant damages.

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.

     Following implementation of our restructuring plan, our distributors
worldwide are managed out of our headquarters in Sunnyvale, California. We may
add additional distributors as necessary to further penetrate markets around the
world. *

     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 we could enter into additional strategic or
distributor relationships or that any such relationships can be maintained or
will ultimately prove beneficial

                                       19
<PAGE>

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 a 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,

    . increase in duty rates and

    . competition.

     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.

Compliance with Quality System regulations is costly and time consuming and our
failure to comply could lead to delays in filling product orders and loss of
sales revenues.

     Our facilities are subject to inspection by regulatory authorities,
including the FDA, for compliance with Quality System regulations. The FDA
completed an inspection of our manufacturing facility in April 2000 and the FDA
inspector provided a list of observations indicating he believed were not in
full compliance with applicable Quality System regulations. In addition, in July
2000, the FDA issued us a formal warning letter, which stated that the methods
used in, or the facilities or controls used for the manufacture, packaging,
storage, or installation of our devices are not in conformance with applicable
Quality System regulations. The issuance of a formal warning letter may
materially impact our business, because:

    . Federal agencies are advised of the issuance and may take this information
      into account when considering the award of contracts;

                                       20
<PAGE>

    . The FDA will not clear pre-market submission for devices to which Quality
      System violations are reasonably related until the violations have been
      corrected; and

    . The FDA will not approve a request for Certificate for Products to Export
      which will prevent us from exporting to new foreign markets until the
      violations have been corrected.

     We implemented a plan to take corrective actions to address the FDA's
observations and submitted a written response to the FDA Warning Letter. In
August 2000, we commissioned an audit of the Quality System regulations as
required by the FDA. The findings of this audit were submitted to the FDA. The
FDA reinspected our facility in March 2001. The FDA inspector provided a list
of three observations, none of which were identified in the warning letter. We
responded to these observations in writing in March 2001. In addition, we have
addressed the observations identified by the FDA. We have been advised by the
FDA that the March 2001 inspection and the companies status has been
reclassified since items in the July 2000 Warning Letter have been
satisfactorily discharged and that the conditions stated above no longer apply
to us. The FDA could initiate another inspection to verify that we have
corrected the observations. Failure to achieve and maintain compliance with
Quality System regulations could have a significant adverse effect on our
ability to continue to manufacture and sell our products, and in the most
serious cases could result in the seizure or recall of products, and
injunction and/or civil fines.

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 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, 2000.

                                       21
<PAGE>

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

Item 6: Exhibits and Reports on Form 8-K

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


            Exhibit 99.1 Schedule 14d-9, filed on May 7, 2001 (File No. 005-
            53019) and incorporated by reference herein.







                                       22
<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 11, 2001    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 accounting officer)





                                       23