CURON MEDICAL INC - 10-Q Quarterly Report

	June 30, 2002			December 31, 2001
Assets
Current assets:
Cash and cash equivalents	$	7,592		$	7,509
Marketable securities		22,085			27,619
Accounts receivable, net of allowance for doubtful accounts of $40 and $20, respectively		777			666
Inventories, net		1,354			1,410
Related party notes receivable		406			144
Prepaid expenses and other current assets		772			883

Total current assets		32,986			38,231
Long term investments		1,008			3,048
Related party notes receivable		—			354
Property and equipment, net		1,039			1,216
Intangible assets, net of amortization of $903 and $770, respectively		—			133
Other assets		92			91

Total assets	$	35,125		$	43,073

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	382		$	449
Accrued liabilities		1,050			1,077
Notes payable		126			207

Total current liabilities		1,558			1,733
Other liabilities		55			52

Total liabilities		1,613			1,785

Contingencies (Note 4)
Stockholders’ equity:
Common stock		19			19
Additional paid-in capital		90,323			90,368
Deferred stock compensation		(502	)		(956	)
Accumulated deficit		(56,351	)		(48,291	)
Accumulated other comprehensive income		23			148

Total stockholders’ equity		33,512			41,288

Total liabilities and stockholders' equity	$	35,125		$	43,073

	For the Three Months Ended						For the Six Months Ended
	June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Revenues	$	877		$	568		$	1,816		$	1,786
Cost of goods sold		1,135			1,183			2,218			2,482

Gross loss		(258	)		(615	)		(402	)		(696	)

Operating expenses:
Research and development		842			581			1,631			1,324
Clinical and regulatory		333			464			651			954
Sales and marketing		1,982			2,138			3,860			3,461
General and administrative		1,027			1,129			1,999			2,253

Total operating expenses		4,184			4,312			8,141			7,992

Operating loss		(4,442	)		(4,927	)		(8,543	)		(8,688	)
Interest income, net		207			584			483			1,385

Net loss	$	(4,235	)	$	(4,343	)	$	(8,060	)	$	(7,303	)

Net loss per share, basic and diluted	$	(0.22	)	$	(0.23	)	$	(0.41	)	$	(0.39	)

Shares used in computing net loss per share, basic and diluted		19,509			19,081			19,458			18,887

	For the Six Months Ended,
	June 30, 2002			June 30, 2001
Cash Flows From Operating Activities
Net loss	$	(8,060	)	$	(7,303	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		348			387
Amortization of acquired technology		133			225
Amortization of stock-based compensation		257			706
Accretion of discount on securities, net		(56	)		(99	)
Loss on disposal of fixed assets		24			—
Changes in assets and liabilities:
Accounts receivable, net		(111	)		(255	)
Inventories		56			(787	)
Prepaid expenses and other current assets		111			138
Accounts payable		(67	)		(76	)
Accrued liabilities		(27	)		(349	)
Other long-term assets and liabilities		2			15

Net cash used in operating activities		(7,390	)		(7,398	)

Cash Flows From Investing Activities
Purchase of property and equipment		(195	)		(424	)
Purchase of marketable securities		(13,199	)		(27,721	)
Proceeds from maturities of marketable securities		20,704			27,928

Net cash provided by (used in) investing activities		7,310			(217	)

Cash Flows From Financing Activities
Principal payments on notes payable		(229	)		—
Proceeds from issuance of notes payable		148			—
(Payments) proceeds from related party notes receivable, net		92			(20	)
Proceeds from issuance of common stock, net of issuance costs		152			244

Net cash provided by financing activities		163			224

Net increase (decrease) in cash and cash equivalents		83			(7,391	)
Cash and cash equivalents at beginning of period		7,509			16,759

Cash and cash equivalents at end of period	$	7,592		$	9,368

The Company has sustained operating losses and negative cash flows from operations and expects such losses to continue in the foreseeable future. The Company intends to finance its operations primarily through its cash and cash equivalents, marketable securities, future financing and future revenues, however, there can be no assurance that such efforts will succeed or that sufficient funds will be made available.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Numerator:
Net loss	$	(4,235	)	$	(4,343	)	$	(8,060	)	$	(7,303	)

Demoninator:
Weighted average shares outstanding		19,718,000			19,462,000			19,684,000			19,353,000
Weighted average unvested common shares subject to repurchase		(209,000	)		(381,000	)		(226,000	)		(466,000	)

Weighted average shares used in basic and diluted net loss per share		19,509,000			19,081,000			19,458,000			18,887,000

Net loss per share	$	(0.22	)	$	(0.23	)	$	(0.41	)	$	(0.39	)

Revenue from product sales is recognized on product shipment against a signed purchase order or sales quote provided no significant obligations remain and collection of the receivables is deemed probable for both sales of control modules and catheters. Revenues for extended warranty contracts are recognized over the extended warranty period. To date, post-sale customer support and training have not been significant.

The Company may sell products under a purchase commitment, with delivery of the control module at inception of the contract and catheters generally delivered over a period of six months. Revenue for the control module is deferred and recognized ratably over shipment of catheters under contract. Revenue on the catheters is recognized upon shipment at an amount representing their fair value based on verifiable objective evidence of such.

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS 146), “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, (Issue 94-3) “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact, if any, on the Company’s financial position or results of operations.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Cost of goods sold	$	(30	)	$	26		$	(12	)	$	56
Research and development		18			(14	)		46			59
Clinical and regulatory		14			22			32			64
Sales and marketing		(18	)		66			5			173
General and administrative		96			169			186			354

	$	80		$	269		$	257		$	706

In June 2001, a civil action was filed against the Company in the United States District Court, Western District of Kentucky, Louisville Division, alleging that the Plaintiff sustained a nerve injury and damage to his gastrointestinal tract during a Stretta procedure caused by the defective design and manufacture of the Company’s product. Plaintiff’s allegations against the Company include strict liability for a product that was in a defective and unreasonably dangerous condition, negligence in the design and manufacturing of the product, breach of implied warranty of merchantability, and loss of consortium. Plaintiff was a subject in a randomized clinical trial and had given Informed Consent to the treating institution for the procedure. Plaintiff is seeking a trial by jury and unspecified damages. The Company believes Plaintiff’s claim is without merit.

In September 2001, a civil action was filed against a number of defendants, including the Company, in the Superior Court of the State of California in and for the City and County of Santa Clara, alleging that the Plaintiff sustained injury when undergoing surgery utilizing the Stretta System, caused by defects in design and manufacture. Plaintiff also alleges negligence in the design, manufacture, advertising and sale of the Stretta System and that its warnings, instructions and directions for use were inadequate. Additional defendants include the treating physicians and the associated medical institutions, which it is alleged, were medically negligent in treatment of Plaintiff. Plaintiff is seeking unspecified damages. The Company believes Plaintiff’s claim is without merit.

In June 2002, a civil action was filed against a number of defendants, including the Company, in the Court of Common Pleas, Philadelphia County in the State of Pennsylvania, alleging that the Plaintiff sustained injury during a Secca procedure caused by the device being defective and/or in an unreasonably dangerous condition. Plaintiff was a subject in a clinical trial and had given Informed Consent to the treating institution for the procedure. Additional defendants include the treating physician, the associated medical institution who, it is alleged, were medically negligent in treatment of Plaintiff, and the members of the Institutional Review Board who approved the protocol for the clinical trial. Plaintiff has demanded a trial by jury and unspecified damages. The Company believes Plaintiff’s claim against the Company is without merit.

On July 17, 2002, John W. Morgan announced his resignation as the Company’s Chief Executive Officer, President and Board member. Michael Berman, Chairman of the Board, has assumed the position of interim Chief Executive Officer while the Company conducts a search for a new President and Chief Executive Officer. Under the terms of the severance agreement, Mr. Morgan received a $275,000 lump sum payment, six month’s accelerated vesting of his stock options, and the loan and accrued interest receivable from Mr. Morgan, in the amount of $272,000, was forgiven. This will result in a estimated total operating charge of $547,000 in the third quarter of 2002.

This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements relating to our expectations as to the timing and success of our clinical trials and regulatory submissions, the mix of our sales and revenues derived from generators and disposable devices, the rate of growth and success of our international sales and marketing efforts, our expectations regarding increased operating expenses and net losses as our business expands, the timing of new product introductions, and our ability to maintain current and planned operations through at least the next 12 months without raising additional funds. These forward-looking statements involve risks and uncertainties. The cautionary statements set forth below and those contained in “Factors That May Affect Future Results,” commencing on page 12, identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, failure to obtain regulatory approvals as anticipated, a slower rate of market acceptance of our products than expected, increased competition, continued adverse changes in general economic conditions in the United States and internationally, including adverse changes in the specific markets for our products, adverse changes in customer order patterns, pricing pressures, risks associated with foreign operations, failure to reduce costs or improve operating efficiencies, and our ability to attract, hire and retain key and qualified employees.

We were incorporated in May 1997. Business activities before January 1998 were negligible. In 1998, our primary activity was developing the Curon Control Module and Stretta Catheter for the treatment of gastroesophageal reflux disease (“GERD”). Prior to December 31, 2000 we were in the development stage and until that time, we had devoted substantially all of our efforts to raising capital and developing, marketing and selling our products.

In early 1999, we began a multi-center clinical trial of the Stretta^® System in the United States. We also developed our manufacturing capability to support the production of Stretta Catheters and Curon Control Modules for the clinical trial. Based on the data acquired in the trial, we submitted a 510(k) notification to the FDA in January 2000 for clearance to market the Stretta System for treatment of GERD. We received 510(k) clearance in April 2000. In October 1999, we received CE Mark approval of the Stretta System, indicating that the Stretta System meets European medical device standards allowing us to market it within the European Union. In May 2000, we launched the Stretta System commercially at Digestive Disease Week, a large professional gastroenterology conference. Also, in May 2000, we initiated a randomized controlled trial of the Stretta System in the United States. In this trial, patients received either the Stretta procedure or a placebo procedure, and results were compared. The data generated is being used to influence physician adoption rates, facilitate reimbursement approvals and enhance marketing activity. The active clinical portion of this trial was completed in the quarter ended March 31, 2001. The abstracted data was presented in a plenary session at the Digestive Disease Week Conference in May 2002.

In April 1999, we began developing the Secca^® System for the treatment of fecal incontinence. In November 1999, we conducted a 10-patient human clinical pilot study outside the United States and, in July 2000, we began a U.S. multi-center clinical trial of the Secca System under an Investigational Device Exemption. In September 2001, we received CE Mark approval of the Secca System, indicating that the Secca System meets European medical device standards allowing us to market it within the European Union. Our multi-center clinical trial was completed, and the results were used to support a 510(k) submission to the FDA in December 2001. We received 510(k) clearance from the FDA in March 2002 to market the system for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback. In May 2002, we initiated a randomized controlled trial in the U.S for the Secca System. In this trial, patients will receive either the Secca procedure or a placebo procedure, and results will be compared. The data generated will be used to influence physician adoption rates, facilitate reimbursement approvals and enhance marketing activity. We made our first sales of the Secca System in June 2002.

To date, we have generated limited revenues. Our revenues are, and will be, derived from the sale of radiofrequency generators and our disposable devices, such as the Stretta Catheter and Secca Handpiece. We expect that disposable sales will form the basis of a recurring revenue stream. However, domestic disposable sales continue to grow more slowly than expected primarily due to difficulties encountered by our physician customers in easily obtaining reimbursement for the Stretta procedure on a case-by-case

basis. Some of our customers also find the 45 minutes necessary to perform a Stretta procedure to be a limiting issue in that their endoscopy unit schedule is typically dominated by short diagnostic procedures. Although disposable sales from outside the United States are increasing, they are not yet sufficient to offset the current domestic situation. Our strategies of pursuing national reimbursement coverage and incorporating technical improvements to our systems to reduce treatment times are designed to address these issues and we expect that our revenue from disposables will increase on implementation.

Initially, we are focusing our sales efforts in the United States through a direct sales force. In international markets, we rely primarily on third-party distributors. In November 2000, we incorporated a subsidiary company in Belgium and hired a European manager to support European distributors’ sales, marketing and clinical efforts. At June 30, 2002, this subsidiary had four employees. We do not expect the number of employees to increase in 2002. During the first quarter of 2001, we entered into distribution agreements covering sales in Belgium, the Netherlands, Germany, Italy and Greece. In August 2001, we entered into a distribution agreement in South Africa, and in December 2001, we entered into distribution agreements covering sales in Portugal, Sweden, Denmark, Norway and Finland. In March and June 2002, we entered into distribution agreements in Egypt and Israel, respectively. First shipments have been made to all distributors. Our gross margins on sales through international third-party distributors will be lower than our gross margins on U.S. sales as a result of distributor discounts.

Our costs of revenues represent the cost of producing generators and disposable devices. We also license a technology used in the generators that we sell. In addition to the up-front payment to license the technology, we are required to pay licensing fees based on the sales price of the units. We believe that there are alternative technologies that could be utilized should we choose to do so. Research and development expenses consist primarily of personnel costs, professional services, patent application and maintenance costs, materials, supplies and equipment. Clinical and regulatory expenses consist primarily of expenses associated with the costs of clinical trials, clinical support personnel, the collection and analysis of the results of these trials, and the costs of submission of the results to the FDA. Sales and marketing expenses consist of personnel related costs, advertising, public relations and attendance at selected medical conferences. General and administrative expenses consist primarily of the cost of corporate operations and personnel, legal, accounting and other general operating expenses of our company. Through June 30, 2002, we recorded limited product sales while incurring cumulative net losses of $56.4 million. In addition to increasing expenditures related to continuing selling activities of the Stretta System, we anticipate that our expenses will increase as we continue to develop new products, conduct clinical trials, commercialize our products and acquire additional technologies as opportunities arise. As a result, we expect our operating expenses and cumulative net losses to increase.

Revenues for the quarter ended June 30, 2002, were $877,000, compared to $568,000 for the same quarter in 2001. The increase in sales was related primarily to volume increases. Stretta Control Module and Catheter sales accounted for 48% and 41% of gross sales, respectively in the quarter ended June 30, 2002, as compared to 56% and 43%, respectively, for the same period in 2001. International sales accounted for approximately $125,000 in the second quarter of 2002, compared to $59,000 for the same quarter in 2001. For the six months ended June 30, 2002, revenues were $1.8 million, and $1.8 million for the same period in 2001. Stretta Control Module and Catheter sales accounted for 54% and 38% of gross sales, respectively in the six months ended June 30, 2002, as compared to 55% and 44%, respectively, for the same period in 2001. International sales accounted for approximately $203,000 in the first six months of 2002, compared to $75,000 for the same period in 2001. Secca revenue for the three months ended June 30, 2002 was $48,000, which represents the first sales of this product. Revenues have not grown according to the Company’s previous expectations primarily due to difficulties encountered by our physician customers in easily obtaining reimbursement for the Stretta procedure on a case-by-case basis. Some of our customers also find the 45 minutes necessary to perform a Stretta procedure to be a limiting issue in that their endoscopy unit schedule is typically dominated by short diagnostic procedures. Although disposable sales from outside the United States are increasing, they are not yet sufficient to offset the current domestic situation. Our strategies of pursuing national reimbursement coverage and incorporating technical improvements to our systems to reduce treatment times are designed to address these issues and we expect that our revenue from disposables will increase on implementation.

In the quarter ended June 30, 2002, cost of goods sold was $1.1 million, compared to $1.2 million for the same quarter in 2001. For the six months ended June 30, 2002, cost of goods sold was $2.2 million, and $2.5 million for the same period in 2001. As sales volume increases, we expect gross profit to become positive and increase accordingly. Our sales have not yet reached a level which absorbs our manufacturing capacity to the extent that we would experience positive gross profit. Amortization of stock-based compensation was a benefit of $30,000 in the quarter ended June 30, 2002, and an expense of $26,000 for the same period in 2001. For

Research and development expenses were $842,000 in the quarter ended June 30, 2002, and $581,000 for the same period in 2001. For the six months ended June 30, 2002, research and development expenses were $1.6 million, and $1.3 million for the same period in 2001. Research and development expense increased primarily due to increases in patent and trademark legal expense of $207,000 for the quarter ended June 30, 2002 as compared to the same period in 2001, and $230,000 for the six months ended June 30, 2002 as compared to the same period in 2001. In addition, pilot manufacturing expenses related to the Secca System were $85,000 for the quarter ended June 30, 2002 and $235,000 for the six months ended June 30, 2002. There was no pilot manufacturing of new products in 2001. The Secca System was commercialized in June of 2002, with the first sales being made in that month. Amortization of stock-based compensation accounted for $18,000 in the quarter ended June 30, 2002, and a benefit of $14,000 for the same period in 2001. For the six months ended June 30, 2002, amortization of stock-based compensation was $46,000, and $59,000 for the same period in 2001.

Clinical and regulatory expenses were $333,000 in the quarter ended June 30, 2002, and $464,000 for the same period in 2001. For the six months ended June 30, 2002, clinical and regulatory expenses were $651,000, and $954,000 for the same period in 2001. The decrease in spending in 2002 over 2001 was due to costs involved in the U.S. Secca trial and the Stretta randomized control trial, which were both ongoing in 2001, and have been completed as of 2002. Clinical trial costs include payments to hospitals, and the related travel expense for Curon employees. Clinical efforts on the Secca randomized trial began in May 2002, and the related spending has been limited to date. Amortization of stock-based compensation accounted for $14,000 in the quarter ended June 30, 2002, and $22,000 for the same period in 2001. For the six months ended June 30, 2002, amortization of stock-based compensation was $32,000, and $64,000 for the same period in 2001.

Sales and marketing expenses were $2.0 million in the quarter ended June 30, 2002, and $2.1 million for the same period in 2001. The decrease in spending for the quarter was primarily due to a decrease in recruiting costs of $189,000 from 2001 to 2002, partially offset by an increase in personnel costs of $84,000. For the six months ended June 30, 2002, sales and marketing expenses were $3.9 million, and $3.5 million for the same period in 2001. Spending for the first six months of 2002 has increased over the same period in 2001 due to increased personnel costs of $506,000, partially offset by a recruiting decrease of $210,000. Compared to the same period in 2001, spending for the first six months of 2002 reflects higher personnel costs related to the expansion of our direct U.S. sales force, with a decrease in the related recruiting costs. Amortization of stock-based compensation accounted for a benefit of $18,000 in the quarter ended June 30, 2002, and an expense of $66,000 for the same period in 2001. For the six months ended June 30, 2002, amortization of stock-based compensation was $5,000, and $173,000 for the same period in 2001.

General and administrative expenses were $1.0 million in the quarter ended June 30, 2002 and $1.1 million for the same period in 2001. For the six months ended June 30, 2002, general and administrative expenses were $2.0 million, and $2.3 million for the same period in 2001. Amortization of stock-based compensation was a $96,000 in the quarter ended June 30, 2002, and $169,000 for the same period in 2001. For the six months ended June 30, 2002, amortization of stock-based compensation was $186,000, and $354,000 for the same period in 2001.

During the quarter ended June 30, 2002, compared to the quarter ended June 30, 2001, net interest income decreased by $377,000. The decrease was due to an approximate cash and investment decrease of $14.0 million, and a decrease in investment yields from approximately 7% to 4%. For the six months ended June 30, 2002, compared to the same period in 2001, net interest income decreased by $902,000. Interest expense was not material.

and bank equipment line financing totaling $780,000. At June 30, 2002, we had $31.4 million in working capital and our primary source of liquidity was $29.7 million in cash and cash equivalents and marketable securities. In addition, we had $1.0 million invested in long term securities at that date. We intend to finance our operations primarily through our cash and cash equivalents, marketable securities, future financing and future revenues. We believe we have enough cash to fund operations for at least two years, and that alternative financing is available, if needed, however, there can be no assurance that such efforts will succeed or that sufficient funds will be made available.

Cash used in operating activities was $7.4 million in the six month period ended June 30, 2002, and also $7.4 million for the same period in 2001. Our loss for the first six months of 2002 was $8.1 million, compared to a loss of $7.3 million for the same period in 2001. Cash spent on operations has remained relatively stable between the two years, with interest income being the primary difference in total loss.

Cash provided by investing activities amounted to $7.3 million in the six months ended June 30, 2002, which consisted primarily of proceeds from net maturities and sales of marketable securities of $7.5 million, partially offset by expenditures of $195,000 for property and equipment. As of June 30, 2002, we had no material commitments for capital expenditures. For the six months ended June 30, 2001, net cash used by investing activities was $217,000, which consisted primarily of expenditures of $424,000 for property and equipment, partially offset by $207,000 provided by net maturities and sales of marketable securities. Higher property and equipment investment in 2001 was related to the headcount increases in the sales department.

Cash provided by financing activities was $163,000 in the six months ended June 30, 2002, primarily related to $152,000 from the sale of stock through both the Employee Stock Purchase Plan and Stock Option Plan and $92,000 of net proceeds received on related party notes receivable, offset by net payments on notes payable of $81,000. For the six months ended June 30, 2001, net cash provided by financing activities was $224,000, primarily related to $244,000 from sale of stock through the Employee Stock Purchase Plan and Stock Option Plan, offset by net increases in related party notes receivable of $20,000. Related party notes receivable are loans to officers of the Company.

We expect to acquire additional capital equipment on an ongoing basis as we increase capacity and improve capabilities. We have not planned any significant capital expenditures during fiscal 2002. We expect that our existing capital resources and interest income will enable us to maintain current and planned operations through at least the next 12 months. In the event that we require additional funding at any point in the future, we will seek to raise such additional funding from other sources, including the public equity market, private financings, collaborative arrangements and debt. If additional capital is raised through the issuance of equity or securities convertible into equity, our stockholders may experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of our common stock. Additional financing may not be available to us on favorable terms, if at all. If we are unable to obtain financing, or to obtain it on acceptable terms, we may be unable to execute our business plan.

We have only a limited operating history upon which you can evaluate our business. We have incurred losses every year since we began operations. In particular, we incurred net losses of $15.4 million in 2001, $15.8 million in 2000, $14.1 million in 1999 and $8.1 million for the six months ended June 30, 2002. As of June 30, 2002, we had an accumulated deficit of approximately $56.4 million. We have generated limited revenues from the sale of our products, and it is possible that we will never generate significant revenues from product sales in the future. Even if we do achieve significant revenues from our product sales, we expect to incur significant net losses over the next several years and these losses may increase. It is possible that we will never achieve profitable operations.

management’s resources away from running the business and could negatively affect our operating results. Once a new chief executive officer is identified, the transition to new management could be disruptive to our business. In addition, we recently announced costs saving actions, which included a reduction in our workforce and additional operating expense cuts, as part of our effort to achieve operational savings throughout the organization. We can provide no assurance that the actions taken to cut costs will result in the anticipated savings. A reduction in our workforce and reallocation of employee duties also may make it difficult to motivate and retain existing employees which would affect our ability to deliver products and negatively impact our revenues.

In the past, we became aware of some issues that negatively impacted our earnings. For example, we learned that it is time consuming to obtain purchase commitments for our products because of the number of individuals at hospitals who need to approve the purchase. As a result, we changed our sales and marketing models to more effectively address this issue. We also became aware of misinformation in the marketplace regarding past adverse events associated with our procedure. In response, we dedicated resources to educating physicians regarding the use of our products to combat this misinformation. Our efforts to rectify these situations may not be sufficient. In addition, the cost of our efforts in addressing these matters diverts resources that could be allocated to increasing revenues. In the future, we may experience similar problems and if we are unable to take appropriate action and take it quickly our results of operations and our financial performance will be harmed.

Our stock is currently trading at less than $1.00. Under the continued listing standards for inclusion of our stock on the Nasdaq National Market, our stock cannot close below $1.00 for 30 consecutive trading days. We can give no assurance that our stock will trade above $1.00 in the future. If we cannot maintain Nasdaq maintenance standards we may be transferred from the Nasdaq National Market to the Nasdaq Small Cap or 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 fund our operations.

We commercially introduced our Stretta System, which consists of a radiofrequency generator and a disposable handheld device, in May 2000. We are highly dependent on Stretta System sales because we anticipate that the Stretta System will account for substantially all our revenue through at least 2002. To achieve increasing sales, our product must continue to gain recognition and adoption by physicians who treat gastrointestinal disorders. The Stretta System represents a significant departure from conventional GERD treatment methods. We believe that physicians will not use our Stretta System unless they determine, based on published peer-reviewed journal articles, long-term clinical data and their professional experience, that the Stretta System provides an effective and attractive alternative to conventional means of treatment for GERD. Currently, there are eight peer-reviewed journal articles, limited peer-reviewed clinical reports and 12-month clinical follow-up data on our Stretta System. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks and uncertainty of third-party reimbursement. For example, we believe that physician adoption rates were negatively impacted by adverse events and a voluntary market withdrawal, which occurred early in the launch of the Stretta System. Future adverse events or recalls would also impact future acceptance rates. If physicians do not adopt our Stretta System, we may never achieve significant revenues or profitability.

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

more conservative treatments such as diet modification or biofeedback. This clearance was based upon the study of 50 patients. Safety and efficacy data presented to the FDA for the Secca System was based on six month follow-up studies on these patients. We may find that data from longer-term patient follow-up studies is inconsistent with those indicated by our relatively short-term data. However, if longer-term patient studies or clinical experience indicate that treatment with the Secca System does not provide patients with sustained benefits or that treatment with our product is less effective or less safe than our current data suggests, our sales could decline and we could be subject to significant liability. Further, we may find that our data is not substantiated in studies involving more patients, in which case we may never achieve significant revenues or profitability. If patient studies or clinical experience do not meet our expectations regarding the benefits of the Secca System, our expected revenues from this product may never materialize.

It is important to the success of our sales efforts to educate physicians in the techniques of using our products. We rely on physicians to spend their time and money to attend our pre-sale educational sessions. Positive results using the Stretta and Secca Systems are highly dependent upon proper physician technique. If physicians use either system improperly, they may have unsatisfactory patient outcomes or cause patient injury, which may give rise to negative publicity or lawsuits against us, any of which could have a material adverse effect on our sales and profitability.

Although the Center for Medicare and Medicaid Services, or CMS, granted a new specific APC code providing higher reimbursement levels for the Stretta Procedure for Medicare purposes on October 1, 2001, there is no assurance that private, third-party payors will conform to this. Physicians, hospitals and other health care providers are unlikely to purchase our products if they are not adequately reimbursed for the Stretta procedure or the products. To date, only a limited number of private third-party payors have agreed to reimburse for the cost of the Stretta procedure or products. Until a sufficient amount of positive peer-reviewed clinical data has been published, insurance companies and other payors may refuse to provide reimbursement for the cost of the Stretta procedure or may reimburse at levels that are not acceptable to providers. Some payors may refuse adequate reimbursement even upon publication of peer-reviewed data. If users of our products cannot obtain sufficient reimbursement from health care payors for the Stretta procedure or the Stretta System disposables, then it is unlikely that our product will ever achieve significant market acceptance. The Secca procedure has not yet received any coding decision and no tests have yet been made of the willingness of third party health care payors to reimburse the costs of the procedure. We cannot assure you that the procedure will ever be reimbursed. Failure to achieve reimbursement will have a serious negative effect on our revenues.

Even if third-party payors provide adequate reimbursement for the Stretta procedure, adverse changes in third-party payors’ policies toward reimbursement could preclude market acceptance for our products and have a material adverse effect on our sales and revenue growth. We are unable to predict what changes will be made in the reimbursement methods used by third-party health care payors.

For example, some health care payors are moving toward a managed care system in which providers contract to provide comprehensive health care for a fixed cost per person. We cannot assure you that in a prospective payment system, which is used in many managed care systems, the cost of our products will be incorporated into the overall payment for the procedure or that there will be adequate reimbursement for our products separate from reimbursement for the procedure.

Internationally, market acceptance of our products will be dependent upon the availability of adequate reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country and include both government-sponsored health care and private insurance. Although we are seeking international reimbursement approvals, we cannot assure you that any such approvals will be obtained in a timely manner or at all. If foreign third-party payors do not adequately reimburse providers for the Stretta procedure and the products used with it, then our sales and revenue growth may be limited.

also compete with large medical device companies such as Johnson & Johnson/Ethicon, which makes instrumentation for fundoplication surgery, and C.R. Bard, which received FDA clearance for an endoscopic suturing device for the treatment of GERD in April 2000. Boston Scientific has recently signed an agreement with Enteric to market a liquid polymer that is injected into the lower esophageal sphincter for the treatment of GERD. In December 2001, Medtronic announced that it had purchased Endonetics, Inc., a developer of biomaterial that can be endoscopically placed in the wall of the lower esophagus, improving performance of the esophageal sphincter for treatment of GERD.

At any time, these competitors or other companies may develop new competitive products that are more effective or less expensive than ours. For example, AstraZeneca has developed a new product, Nexium, for the treatment of GERD, which doctors may prescribe in lieu of recommending our Stretta Procedure. Less expensive, generic drugs will be introduced to treat GERD as AstraZeneca’s patent for Prilosec, the leading prescription medication for the treatment of GERD, expired in 2001, although pending lawsuits may delay the significant availability of competition until later in 2002. If we cannot compete effectively in this highly competitive market, we may not be able to achieve our expected revenue growth.

We have limited sales and marketing experience. As of June 30, 2002, we relied on 11 direct sales employees to sell our Stretta System in the United States. We must manage this sales team over the next 24 months to achieve our market share and revenue growth goals. Since we have only recently launched the Secca System, our sales force has little experience marketing the product, and we cannot predict how successful they will be in selling the product. There are significant risks involved in building and managing our sales force and marketing our products, including our:

Internationally, we rely on a network of distributors to sell our products. We depend on these distributors in such markets and we will need to attract additional distributors to grow our business and expand the territories into which we sell our products. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, we may not realize expected international revenue growth.

Although we believe that our current manufacturing facility will be adequate to support our commercial manufacturing activities for the foreseeable future, we may be required to expand our manufacturing facilities to begin large-scale manufacturing. If we are unable to provide customers with high-quality products in a timely manner, we may not be able to achieve market acceptance for our Stretta or Secca Systems. Our inability to successfully manufacture or commercialize our devices could have a material adverse effect on our product sales.

Third-party suppliers provide materials and components used in our products. If these suppliers become unwilling or unable to supply us with our requirements, replacement or alternative sources might not be readily obtainable due to regulatory requirements applicable to our manufacturing operations. Obtaining components from a new supplier may require a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. This process may take a substantial period of time, and we cannot assure you that we would be able to obtain the necessary regulatory clearance or approval. This could create supply disruptions that would reduce our product sales and revenue.

Our manufacturing processes are required to comply with the quality system regulation, or QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products. The FDA enforces the QSR through inspections. In May 2001, we received the report on our first QSR inspection, which was completed in March 2001. There were no significant findings. If we fail any future QSR inspections, our operations could be disrupted and our manufacturing delayed. Failure to take corrective action in response to a QSR inspection could force a shut-down of our manufacturing operations and a recall of our products, which would have a material adverse effect on our product sales, revenues, and expected revenues and profitability. Furthermore, we cannot assure you that our key component suppliers are, or will continue to be, in compliance with applicable regulatory requirements, will not encounter any manufacturing difficulties, or will be able to maintain compliance with regulatory requirements. Any such event could have a material adverse effect on our available inventory and product sales.

Our products are considered medical devices and are subject to extensive regulation in the United States and in foreign countries where we intend to do business. Unless an exemption applies, each medical device that we wish to market in the United States must first receive either 510(k) clearance or premarket approval from the FDA. Either process can be lengthy and expensive. The FDA’s 510(k) clearance process usually takes from four to twelve months, but may take longer. The premarket application (“PMA”) approval process is much more costly, lengthy and uncertain. It generally takes from one to three years or even longer. Delays in obtaining regulatory clearance or approval will adversely affect our revenues and profitability.

Although we have obtained 510(k) clearance for both the Stretta System, for use in treating GERD, and the Secca System, for treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback, our clearance can be revoked if postmarketing data demonstrates safety issues or lack of effectiveness. Moreover, we will need to obtain 510(k) clearance or PMA approval to market any other new products. We cannot assure you that the FDA will not impose the more burdensome PMA approval process upon this technology in the future. More generally, we cannot assure you that the FDA will ever grant 510(k) clearance or premarket approval for any product we propose to market. If the FDA withdraws or refuses to grant approvals, we will be unable to market such products in the United States.

Our Stretta and Secca Systems are cleared by the FDA; the Stretta System for the treatment of GERD and the Secca System for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback. FDA regulations prohibit us from promoting or advertising either system, or any future cleared or approved devices, for uses not within the scope of our clearances or approvals, and prohibit us from making unsupported safety and effectiveness claims. These determinations can be subjective, and the FDA may disagree with our promotional claims. If the FDA requires us to revise our promotional claims or takes enforcement action against us based upon our labeling and promotional materials, our sales could be delayed, our profitability could be harmed and we could be required to pay significant fines or penalties.

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

In February 2001, we entered into a total of four distribution agreements: one each in Germany, Italy, and Greece and one covering sales in the region of Belgium, the Netherlands, and Luxembourg (Benelux). In August 2001, we entered into a distribution agreement in South Africa, and in December 2001, we entered into distribution agreements in Portugal and one covering sales in the region of Denmark, Sweden, Norway and Finland (Scandinavia). In March 2002, we entered into a distribution agreement in Egypt. In June 2002, we entered into a distribution agreement in Israel. We are training these distributors and only began selling our products in international markets in April 2001. To successfully market our products internationally, we must address many issues with which we have little or no experience. We have obtained regulatory clearance to market the Stretta System in the European Union, Australia and Canada and to market the Secca System in the European Union, but we have not obtained any other international regulatory approvals for other markets or products. We cannot assure you that we will be able to obtain or maintain such approvals. Furthermore, although contracts already signed with European distributors specify payment in U.S. dollars, future international sales may be made in currencies other than the U.S. dollar. As a result, currency fluctuations may impact the demand for our products in countries where the U.S. dollar has increased compared to the local currency. Engaging in international business involves the following additional risks:

In addition, contracts may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system, and the protection of intellectual property in foreign countries may be more difficult to enforce. Once we begin selling our products internationally, any of these factors could cause our international sales to decline, which would impact our expected sales and growth rates.

The development, manufacture and sale of medical products involves a significant risk of product liability claims. The use of any of our products may expose us to liability claims, which could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us. For example, we are currently a party to three product liability lawsuits where there are allegations that our products are defectively designed and that we were negligent in manufacturing our products. We maintain product liability insurance at coverage levels which we believe to be commercially acceptable; however there can be no assurance that product liability or other claims will not exceed such insurance coverage limits or that such insurance will continue to be available on the same or substantially similar terms, or at all. We re-evaluate annually whether we need to obtain additional product liability insurance. Even if we obtain additional product liability insurance there can be no assurance that it would not have a material adverse effect on our business, financial condition, and results of operations. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any coverage in the future. Even in the absence of a claim, our insurance rates may rise in the future to a point where we decide not to carry any insurance.

As of June 30, 2002, we had 43 issued or allowed U.S. patents and 37 pending U.S. patent applications; this includes 20 issued U.S. patents and 16 pending U.S. patent applications licensed in from third-parties. We rely on patent, copyright, trade secret and trademark laws to protect our products, including our Stretta Catheter, our Secca Handpiece and our Curon Control Module, from being duplicated by competitors. However, these laws afford only limited protection. Our patent applications and the notices of allowance we have received may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Patents we have obtained and may obtain in the future may be challenged, invalidated or legally circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If our intellectual property rights do not adequately protect our commercial products, our competitors could develop new products or enhance existing products to compete more directly and effectively with us and harm our product sales and market position.

Because, in the United States, patent applications are secret unless and until issued as patents, or corresponding applications are published in other countries, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to file patent applications for such inventions. Litigation or regulatory proceedings, which could result in substantial cost and uncertainty, may also be necessary to enforce patent or other intellectual property rights or to determine the scope and validity of other parties’ proprietary rights. There can be no assurance that we will have the financial resources to defend our patents from infringement or claims of invalidity.

There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. Because we rely on unique technology to develop and manufacture innovative products, we are especially sensitive to the risk of infringing intellectual property rights. While we attempt to ensure that our products do not infringe other parties’ patents and proprietary rights, our competitors may assert that our products and the methods they employ may be covered by patents held by them or invented by them before they were invented by us. Although we may seek to obtain a license or other agreement under a third party’s intellectual property rights to bring an end to certain claims or actions asserted against us, we may not be able to obtain such an agreement on reasonable terms or at all. If we were not successful in obtaining a license or redesigning our products, our product sales and profitability could suffer, and we could be subject to litigation and potentially sizable damage awards.

Also, one or more of our products may now be infringing inadvertently on existing patents. As the number of competitors in our markets grows, the possibility of a patent infringement claim against us increases. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and divert management’s attention from our core business. If we lose in this kind of litigation, a court could require us to pay substantial damages or grant royalties, and prohibit us from using technologies essential to our products. This kind of litigation is expensive to all parties and consumes large amounts of management’s time and attention. In addition, because patent applications can take many years to issue, there may be applications now pending of which we are unaware and which may later result in issued patents that our products may infringe.

Our license with Gyrus Group PLC, a public company incorporated and existing under the laws of England and Wales, allows us to manufacture and sell our products using their radiofrequency generator technology. In addition, the University of Kansas license allows us to apply radiofrequency energy to tissue. To the extent these license interests become jeopardized through termination or material breach of the license agreements, our operations may be harmed. We may have to develop new technology or license other technology. We cannot provide any assurance that we will be able to develop such technology or that other technology will be available for license. Even if such technology is available, we may experience delays in our manufacturing as we transition to a different technology.

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

Our officers, directors and principal stockholders holding more than 5% of our common stock together control over 50% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interest of our other stockholders.

In November 2001, we adopted a stockholder rights plan. The purpose of the plan is to assure fair value in the event of a future unsolicited business combination or similar transaction involving Curon. If an individual or entity accumulates 15% of our stock, or 20% in the case of certain existing stockholders, the rights become exercisable for additional shares of our common stock or, if followed by a merger or other business combination where Curon does not survive, additional shares of the acquiror’s common stock. The intent of these rights is to force a potential acquiror to negotiate with the Board to increase the consideration paid for our stock. The existence of this plan, however, may deter a potential acquiror, which could negatively impact shareholder value.

In addition, our basic corporate documents and Delaware law contain provisions that might enable our management to resist a takeover. Any of the above provisions might discourage, delay or prevent a change in the control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

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

We invest our excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings. These instruments have maturities of eighteen months or less when acquired, with an average maturity date of less than three months. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that while the instruments we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

In June 2001, Hershel E. Fancher et al (“Fancher”) filed a civil action against us in the United States District Court, Western District of Kentucky, Louisville Division, alleging that he sustained a nerve injury and damage to his gastrointestinal tract during a Stretta procedure caused by the defective design and manufacture of our product. Fancher’s allegations against us include strict liability for a product that was in a defective and unreasonably dangerous condition, negligence in the design and manufacturing of the product, breach of implied warranty of merchantability, and loss of consortium. Fancher was a subject in a randomized clinical trial and had given Informed Consent to the treating institution for the procedure. Fancher is seeking a trial by jury and unspecified damages. We believe Fancher’s claim is without merit.

In September 2001, Diana Conklin (“Conklin”) filed a civil action against a number of defendants, including Curon, in the Superior Court of the State of California in and for the City and County of Santa Clara, alleging that she sustained injury when undergoing surgery utilizing the Stretta System, caused by defects in design and manufacture. Conklin also alleges negligence in the design, manufacture, advertising and sale of the Stretta System and that its warnings, instructions and directions for use were inadequate. Additional defendants include the treating physicians and the associated medical institutions, who, it is alleged, were medically negligent in treatment of Conklin. Conklin is seeking unspecified damages. We believe Conklin’s claim against us is without merit.

In June 2002, Eileen Guckin et al (“Guckin”) filed a civil action against a number of defendants, including Curon, in the Court of Common Pleas, Philadelphia County in the State of Pennsylvania, alleging that she sustained injury during a Secca procedure caused by the device being defective and/or in an unreasonably dangerous condition. Guckin was a subject in a clinical trial and had given Informed Consent to the treating institution for the procedure. Additional defendants include the treating physician, the associated medical institution who, it is alleged, were medically negligent in treatment of Guckin, and the members of the Institutional Review Board who approved the protocol for the clinical trial. Guckin has demanded a trial by jury and unspecified damages. We believe Guckin’s claim against us is without merit.

On September 26, 2000, we completed the sale of 5,000,000 shares of our common stock at a per share price of $11.00 in a firm commitment underwritten public offering. The offering was effected pursuant to a Registration Statement on Form S-1 (Registration No. 333-37866), which the United States Securities and Exchange Commission declared effective on September 21, 2000. On October 24, 2000, we completed the sale of an additional 475,000 shares of our common stock at a per share price of $11.00 pursuant to the exercise of the over-allotment option by the underwriters. Of the approximately $54.8 million in net offering proceeds, through June 30, 2002, we have used approximately $12.0 million for the repayment of debt and accrued interest, $6.4 million for research and development, $6.9 million for the manufacture of products, $2.6 million for clinical expense and reimbursement efforts, $11.1 million for sales and marketing initiatives to support the commercialization of the Stretta System and $7.3 million for general corporate purposes. All amounts represent estimates of direct or indirect payments of amounts to third parties.

We had a loan of $259,000 to John W. Morgan, our former President and Chief Executive Officer. As a result of Mr. Morgan’s severance agreement, the loan and accrued interest was forgiven, in the total amount of $272,000. In January 2001, we issued a $150,000 loan to David S. Utley, M.D., our Chief Medical Officer. Amounts due under the loan are forgiven over time based upon Dr. Utley’s continued employment, and forgiven in full on January 4, 2003 or upon an earlier change in control. Other than these loans, no amounts were paid directly or indirectly for the above purposes to directors or officers of the Company, to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company, other than amounts related to the repayment of debt and accrued interest, which amounts matured less than one year from the date of issuance. The use of proceeds described above do not represent a material change in the use of proceeds describe in the Offering prospectus.

On July 17, 2002, John W. Morgan announced his resignation as the Company’s Chief Executive Officer, President and Board member. Michael Berman, Chairman of the Board, has assumed the position of interim Chief Executive Officer while the Company conducts a search for a new President and Chief Executive Officer. Under the terms of the severance agreement, Mr. Morgan received a $275,000 lump sum payment and six month’s accelerated vesting of his stock options, and his loan and accrued interest, in the amount of $272,000, was forgiven.

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), we are required to disclose the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. The Audit committee has approved the engagement of PricewaterhouseCoopers LLP for the following non-audit services: the preparation of federal and state tax returns.

Delaware		77-0470324
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	3

		Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2002 and 2001	4

		Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and 2001	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	20

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	21

	Item 2.	Changes in Securities and Use of Proceeds	21

	Item 4.	Submission of Matters to a Vote of Security Holders	21

	Item 5.	Other Information	22

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

SIGNATURES			23

	June 30, 2002	June 30, 2001
Unvested common shares (shares subject to repurchase)	198,000	349,000
Shares issuable upon exercise of stock options	2,061,000	1,888,000
Shares issuable upon exercise of warrants	569,000	569,000

Total	2,828,000	2,806,000

	June 30, 2002		December 31, 2001
Inventories:
Raw material	$	781	$	1,033
Work-in-process		127		7
Finished goods		446		370

	$	1,354	$	1,410


Remainder of 2002		$271
2003		409

Total future minimum operating lease payments		$680

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Name	Votes For	Votes Withheld	Votes Against
Alan L. Kaganov	10,397,190	12,888	0
Rob Kuhling, Jr	10,397,190	12,888	0

Exhibit 10.20		Severance Agreement with John W. Morgan dated July 19, 2002.

Exhibit 99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

Exhibit 99.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

	CURON MEDICAL, INC. (Registrant)

Date: August 13, 2002	By:	/s/ MICHAEL BERMAN
		Michael Berman Interim Chief Executive Officer (Principal Executive Officer)



						By:		/s/ ALISTAIR F. MCLAREN
								Alistair F. McLaren Vice President of Finance Chief Financial Officer and Chief Information Officer (Principal Financial Officer)