<PAGE>   1

                                                                    EXHIBIT 13.1


This discussion contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors," as well as those discussed in the "Risk Factors" section of the
Company's Annual Report on Form 10-K.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Computer Motion, Inc. (the "Company") develops and markets proprietary robotic
and computerized surgical systems that are intended to enhance a surgeon's
performance and centralize and simplify a surgeon's control of the operating
room ("OR"). The Company believes that its products will provide surgeons with
the precision and dexterity necessary to perform complex, minimally invasive
surgical procedures, as well as enable surgeons to control critical devices in
the OR through simple verbal commands. The Company believes that its products
will broaden the scope and increase the effectiveness of minimally invasive
surgery, improve patient outcomes, and create a safer, more efficient and cost
effective OR.

The Company's AESOP(R) robotic endoscope positioning system allows direct
surgeon control of the endoscope through simple verbal commands, eliminating the
need for a member of a surgical staff to manually control the camera, while
providing a more stable and sustainable endoscopic image.

The Company's ZEUS(TM) Robotic Surgical System is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate surgical instruments. The Company believes that ZEUS will
improve a surgeon's dexterity and precision and enhance visualization of, and
access to, confined operative sites.

The Company's HERMES(TM) Control Center is designed to enable a surgeon to
directly control multiple OR devices, including various laparoscopic,
arthroscopic and video devices, as well as the Company's robotic devices,
through simple verbal commands.

The Company's SOCRATES(TM) Telementoring System enables remote access to HERMES
networked devices via proprietary software and standard teleconferencing
components.

Recurring revenue represents sales to ongoing customer for supplies, disposable
drapes, instruments, accessories, services and extended warranty arrangements.

Development revenue relate to a program in which the Company receives fees from
clinical development partners for the use of prototype product to perform
limited, experimental procedures on animals, including minimally invasive
coronary artery bypass grafts, as well as anastomosis of the small bowel, bile
duct, ureteral and iliac artery.

The Company has sustained significant losses since inception and expects to
continue to incur losses due to research and development efforts, costs
associated with obtaining regulatory approvals and clearances, continued
marketing expenditures to increase sales and other costs associated with the
Company's anticipated growth. Furthermore, the Company anticipates that its
operating results may fluctuate significantly from quarter to quarter in the
future, depending on a number of factors, many of which are outside the
Company's control. These factors include timing and results of clinical trials,
delays associated with FDA and other clearance processes, changes in pricing
policy by the Company or its competitors, the number, timing and significance of
product enhancements and new products by the Company and its competitors, health
care reimbursement policies and product quality issues.

RESULTS OF OPERATIONS

revenue > Revenue increased $3,674,000 (20%) to $21,732,000 in 2000 from
$18,058,000 in 1999. The increase resulted from a $5,391,000 or 87%, increase in
ZEUS revenue. While Zeus has limited use in the United States, it can be sold
without restriction in all countries that accept the "CE" mark for approved
applications use. Recurring revenues increased by $905,000, or 72%, as the
installed base of robotic systems increased leading to more demand for parts,
accessories, supplies and service. AESOP revenues declined, $862,000 or 13% due
to the focus of management's efforts on the emerging Zeus product lines. Hermes
sales also declined by $1,345,000 or 49% as the Company's OEM partner, Stryker
Corporation, purchased lower volumes in 2000 compared to 1999. Development
revenues decreased by $372,000 or 27%. These revenues will decrease over time,
as this is no longer an active program and because these agreements begin
expiring in 2001.

Revenues outside of the United States increased $2,310,000 or 33%. Sales to Asia
increased in particular by $4,070,000 or 556% as a new distribution agreement
was signed in Japan. Late in the year, the Company also retained a sales
executive in Latin America leading to $242,000 of revenue in that region
compared to none previously partially offset by a reduction in revenues from
Canada, Europe and the Middle East of $2,002,000.

Revenue increased $7,472,000 (71%) to $18,058,000 in 1999 from $10,586,000 in
1998. The increase resulted from a $1,231,000 or 72%, increase in HERMES revenue
as the OEM agreement with Stryker was in effect for the entire 1999 year
compared to 1998 which is the year the agreement went into effect. In addition,
Zeus revenues increased $6,521,000, or 382%, as Zeus moved from a prototype
product in 1998 to a commercial product in 1999. AESOP revenues were relatively
flat, declining $289,000 or 4% as decreasing unit sales were offset by
increasing pricing with newer models. Development revenues increased by $279,000
or 25% as additional development partners signed agreements with the Company.

revenue recognition > The Company applies the provisions of Staff Accounting
Bulleting No. 101 (SAB 101) when recognizing revenue. SAB 101 states the that
revenue generally is realized or realizable and earned when all of the following
criteria are met: a) persuasive evidence of an arrangement exists, b) delivery
has occurred or the services have been rendered, c) the seller's price to the
buyer is fixed or determinable, and d) collectibility is reasonably assured.

The Company recognizes revenue from the sale of products to end-users, including
supplies and accessories, once shipment has occurred, (as the Company's general
terms are FOB shipping point. In those few cases where the customers terms are
FOB their plant, revenue is not recognized until the Company receives a signed
delivery and acceptance certificate), and all of the conditions of SAB 101
(items a). through d). as identified above) have been met. Revenue is recognized
from the performance of services as the services are performed.

The Company recognizes revenue from the sale of products to distributors,
including supplies and accessories, once shipment has occurred, (as the
Company's general terms are FOB shipping point. ), and all of the conditions of
SAB 101 have been met. The Company's distributors do not have rights of return
or cancellation. Revenue from distributors which does not meet all of the
requirements of SAB 101 are deferred and recognized upon the sale of the product
to the end user.

gross profit > Gross profit increased $4,232,000 (47%) to $13,155,000 in 2000
from $8,923,000 in 1999. Gross margin increased to 61% in 2000 as compared to
49% in 1999. The increase in gross margin was primarily due to increased volumes
leading to a greater absorption of fixed manufacturing costs.

<PAGE>   2

Gross profit increased $2,829,000 (46%) to $8,923,000 in 1999 from $6,094,000 in
1998. Gross margin decreased to 49% in 1999 as compared to 58% in 1998. The
decrease in gross margin was primarily due to costs associated with the ZEUS
product line as older products in the field were replaced with upgraded or new
products, costs of future upgrades were recognized, and promotional accessories
were offered at little or no cost.

selling, general and administrative > Selling, general and administrative
expenses increased $4,367,000 (33%) to $17,798,000 in 2000 as compared to
$13,431,000 in 1999. The increase was due mainly to the investment in our
international infrastructure, increased levels of marketing support, greater
travel and business expenses, and higher commissions based on the increased
sales.

The Company's selling, general and administrative expense increased
approximately $2,100,000 to $6,300,000 in the fourth quarter 2000 compared to
$4,200,000 in the third quarter 2000. The increase was due primarily to the
investment in our international infrastructure spending of approximately
$350,000; increased non-recurring investments in a marketing database, public
relations, marketing support and consulting of approximately $650,000; legal
costs associated with the patent lawsuit $454,000; higher commissions of
approximately $300,000 based on increased shipments; increased participation in
tradeshows of approximately $190,000 and increased bad debt provision of
approximately $170,000.

The Company expects that these levels will remain relatively flat or decline as
the infrastructure is now in place to support significant levels of business. As
revenues increase though, sales commissions will increase as well. The Company
has undertaken a number of initiatives to hold or decrease expenses in other
areas to compensate for this increase in sales commissions. Included in these
are a reduction in headcount, a change in compensation programs including both
general bonuses and sales commissions, a reduction in travel and a reduction in
marketing expenses.

Selling, general and administrative expenses increased $2,314,000 (21%) to
$13,431,000 in 1999 as compared to $11,117,000 in 1998. The increase was due
mainly to the addition of sales and marketing personnel and related recruiting
and relocation costs, increased levels of marketing support, greater travel and
business expenses, and higher commissions based on the increased sales.

research and development > Research and development expenses increased
$2,036,000 (21%) to $11,564,000 in 2000 as compared to $9,528,000 in 1999,
primarily as a result of additional personnel to support the development efforts
with respect to ZEUS and the cost of clinical trials. While the Company expects
development efforts to continue, we do not anticipate any significant increases
in development costs as the ZEUS product is expected to have various levels of
FDA approval over the next 18 months.

Research and development expenses increased $1,623,000 (21%) to $9,528,000 in
1999 as compared to $7,905,000 in 1998, primarily as a result of additional
personnel and increased research and development efforts with respect to HERMES
and ZEUS.

other expense / (income) > Other expense was $118,000 in 2000 compared to other
income of $681,000 in 1999. In 2000, other expense was almost entirely interest
expense from debt used to finance ongoing operations partially offset by
interest income earned at the beginning of the year. Other income in 1999 was
almost entirely interest income.

Other income was $681,000 in 1999 compared to $1,408,000 in 1998. Other income
was almost entirely interest income and decreased primarily due to the
decreasing level of investments in cash and marketable securities derived from
the proceeds of the Company's initial public offering in August 1997 as these
funds were used to support ongoing operations.

income taxes > Minimal provisions for state income taxes have been recorded on
the Company's pre-tax losses to date. At December 31, 2000, the Company had
federal and state net operating loss carryforwards of approximately $52,747,000
and $9,085,000, respectively which are available to offset future federal and
state taxable income. Federal carryforwards expire between fifteen and twenty
years after the year of loss and state carryforwards expire between five and
seven years after the year of loss. The Company has provided a full valuation
allowance on the deferred income tax asset because of the uncertainty regarding
its realization.

revenue (quarterly analysis) > Revenue and units shipped by quarter for the year
2000 is shown in the attached table:

               Revenue by product line for the three months ended
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                         Mar. 31, 2000    Jun. 30, 2000    Sep. 30, 2000   Dec. 31, 2000
                                         -------------    -------------    -------------   -------------
<S>                                         <C>               <C>             <C>             <C>
ZEUS robotic and surgical systems           $   (48)          $2,779          $3,236          $5,415
AESOP robotic and surgical systems              696            1,798           1,796           1,306
HERMES voice control center                    (113)             587             469             535
Development revenue                             365              334             183             128
Recurring revenue                               468              464             527             807
                                            -------           ------          ------          ------
                                            $ 1,368           $5,962          $6,211          $8,191
                                            =======           ======          ======          ======
</TABLE>

            Units shipped by product line for the three months ended

<TABLE>
<CAPTION>
                                         Mar. 31, 2000    Jun. 30, 2000    Sep. 30, 2000   Dec. 31, 2000
                                         -------------    -------------    -------------   -------------
<S>                                         <C>               <C>             <C>             <C>
ZEUS robotic and surgical systems             --                 6                6              10
AESOP robotic and surgical systems            12                31               29              26
HERMES voice control center                   --                59               40              56
</TABLE>

The company does not feel that there are material seasonal trends. Since the
first quarter of 1998, the company has had quarter over quarter increases in
revenues in all but three quarters. The Company is penetrating only a small
fraction of the total potential market for our products. We encounter no direct
competition for our AESOP or HERMES products. We have only one competitor for
our ZEUS product. Because our AESOP, HERMES, and ZEUS products are comprised of
relatively new technologies, and because the current customer profiles are made
up of early adopters that share our pioneering vision for these new
technologies, we do not believe that there is any statistical significance to
our quarterly increase or decrease variations in business levels. Our challenges
in increasing market share today involve market acceptance and adoption of these
new technologies. We believe that statistical significance in any increases or
decreases will not occur until the larger mass market acceptance and adoption of
our products takes place. In addition, the sales cycle for capital medical
equipment, especially innovative equipment such as that offered by the Company,
has at least a three to six month selling cycle. Thus, sales in the fourth
quarter originate in the third quarter, and sales in the first quarter originate
in the forth quarter of the prior year. In the fourth quarter, prospecting for
new sales will fall off since the focus is on closing sales for the current
calendar year and the fewer working days available due to the holiday season.

With the above understanding, the following analysis of the quarterly revenue
changes is as follows:

first quarter 2000 >  Revenue decreased $2,584,000 (65%) to $1,368,000 for the
three months ended March 31, 2000 from $3,952,000 for the same period in 1999.
The Company's HERMES and ZEUS product lines were principally responsible for the
revenue decrease. HERMES revenue of ($113,000) resulted from a retroactive price
adjustment on units sold in previous periods along with no significant systems
shipped to the Company's OEM initial HERMES alliance partner, Stryker
Corporation. ZEUS revenue of ($48,000) for the quarter resulted from a charge to
revenue for an under estimation of a product return. AESOP revenue of $696,000
decreased over the prior quarter level mainly as a result of lower unit sales.
During the forth quarter of 1999 and the first quarter of 2000 the Company was
re-training its sales force and focusing its efforts on new products, which
added to the reduced revenues in the quarter.

Second quarter 2000 >  Revenue increased $4,594,000 (336%) to $5,962,000 for
the three months ended June 30, 2000 from the prior quarter. The Company's ZEUS
and AESOP product lines were principally responsible for the revenue increase.
ZEUS revenue of $2,779,000 for the quarter increased $2,827,000 from prior
quarter and resulted mainly from shipments of four (4) systems and related
equipment to Kino Corporation and two (2) systems shipped to customers in the
United States. AESOP revenue of $1,798,000 for the quarter increased $1,102.000
over the previous quarter mainly as a result of an increased sales effort
worldwide resulting in additional systems sold in the quarter. HERMES revenue of
$587,000 for the quarter increased $700,000 from prior quarter due to increased
demand from our HERMES alliance partner, Stryker Corporation. Development
revenues of $ 334,000 declined $31,000 from the prior quarter as these revenues
will decrease over time, as the agreements begin to expire through 2001.
Recurring revenues of $464,000 declined $4,000 over the prior quarter.

third quarter 2000 >  Revenue increased $249,000 (4%) to $6,211,000 for the
three months ended September 30, 2000 from the prior quarter. The Company's ZEUS
product line was principally responsible for the revenue increase. ZEUS revenue
of $3,236,000 for the quarter increased $457,000 from the prior quarter resulted
from higher average sales price on the same number of units sold. Revenues from
our AESOP product line remained substantially unchanged during the quarter.
HERMES revenue of $469,000 for the quarter decreased $118,000 from the prior
quarter due to a decrease in orders from our HERMES alliance partner, Stryker
Corporation. Development revenues of $ 183,000 declined $151,000 from the prior
quarter as these revenues will decrease over time, as the agreements expire
through 2001. Recurring revenues of $527,000 increased $63,000 over the prior
quarter, as the installed base of robotic systems increased leading to more
demand for parts, accessories, supplies and service.

forth quarter 2000 >  Revenue increased $1,980,000 (32%) to $8,191,000 for the
three months ended December 31, 2000 from the prior quarter. The Company's ZEUS
product line was principally responsible for the revenue increase. ZEUS revenue
of $5,415,000 for the quarter increased $2,179,000 from the prior quarter
resulted from increased demand for our product with ten (10) systems shipped in
the quarter verses 6 systems each in the two previous quarters. AESOP revenue of
$1,306,000 for the quarter decreased $490,000 from the prior quarter due to
decreased domestic orders and a decrease in the average sales price as units
sold internationally are at a lower price. HERMES revenue of $535,000 for the
quarter increased $66,000 from the prior quarter due to increased in orders from
our HERMES alliance partner, Stryker Corporation. Development revenues of $
128,000 declined $55,000 from the prior quarter as these revenues will decrease
over time, as the agreements expire through 2001. Recurring revenues of $807,000
increased $280,000 over the prior quarter, as the installed base of robotic
systems increased leading to more demand for parts, accessories, supplies and
service.

FINANCIAL CONDITION

Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $64,284,000 as of December 31, 2000.
Until its initial public offering, the Company had primarily relied on proceeds
from issuance of preferred and common stock and bridge debt financing to fund
its operations.

At December 31, 2000, the Company's current ratio (current assets divided by
current liabilities) was 1.4 to 1 versus 2.9 to 1 at December 31, 1999,
reflecting the decrease in cash and marketable securities as the proceeds from
the initial public offering were used to support operations.

For the year ended December 31, 2000, the Company's use of cash in operating
activities of $14,531,000 was primarily attributable to the net loss and also to
increases in accounts receivable in support of the Company's revenue growth.

<PAGE>   3

Cash outflow from purchases of plant and equipment was $2,763,000 in 2000. The
Company currently has no material commitments for capital expenditures. For the
year ended December 31, 2000, net cash provided by financing activities of
$11,324,000 was primarily the result of equity offerings and debt incurred
during the course of the year. In May 2000 the Company announced signing a stock
purchase agreement with Kino Corporation for the sale and issuance of up to
$2,000,000 of the Company's Common Stock. In November 2000, the parties mutually
agreed to terminate this stock purchase agreement prior to performing any
obligations thereunder.

The Company's operations to date have consumed substantial amounts of cash, and
the Company expects its capital and operating expenditures to continue to exceed
proceeds from ongoing sales at least through 2001. The Company's need for
additional financing will depend upon numerous factors, including, but not
limited to, the extent and duration of the Company's future operating losses,
the level and timing of future revenues and expenditures, the progress and scope
of clinical trials, the timing and costs required to receive both United States
and international governmental approvals or clearances, market acceptance of new
products, the results and scope of ongoing research and development projects,
the costs of training physicians to become proficient in the use of the
Company's products and procedures, and the cost of developing appropriate sales
and marketing capabilities. To the extent that existing resources are
insufficient to fund the Company's activities, the Company will seek to raise
additional funds through public or private financing. As part of this plan in
February, 2001 the Company raised $10,024,000, ($3 million of which was used to
repay the note payable to a shareholder, and $2 million of which is subject to
shareholder approval at the Company's annual meeting in May 2001) in a private
placement transaction (see Note 14). In April, 2001, the Company secured an
equity-based line of credit from Societe Generale. Under the terms of this line
of credit the Company may draw down as much as $12,000,000 in exchange for
registered shares of the Company's common stock. The company is capable of
drawing down $1.5 million even with low financial trading volumes. There is a
minimum draw down of $3.0 million over the life of the agreement. We believe
that our current cash and cash equivalents, together with available borrowings
under our equity line of credit, will be sufficient to meet our anticipated cash
requirements for working capital and capital expenditures for at least 12
months. If we require further capital to grow our business, execute our
operating plan or obtain FDA approvals at any time in the future or any other
reasons we may seek to sell additional equity or debt securities, which may
result in additional dilution to our stockholders. There is no assurance that
adequate funds would be available on acceptable terms, if at all.

The Company's financial instruments include cash and short-term investment grade
debt securities. At December 31, 2000, the carrying values of the Company's
financial instruments approximated their fair values based on current market
prices and rates. It is the Company's policy not to enter into derivative
financial instruments. The Company does not currently have material foreign
currency exposure as the majority of its international transactions are
denominated in U.S. currency. Accordingly, the Company does not have significant
overall currency exposure at December 31, 2000.

RISK FACTORS

The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
summarizes some of these risks which could affect the Company's actual future
results and could cause them to differ materially from any forward-looking
statements made by the Company.

The Company has a limited operating history and has not yet made a profit. The
ZEUS product line is important to the Company's future success and has not
achieved market acceptance. ZEUS has not yet achieved United States regulatory
clearance. Government regulation of the medical device industry is strict and
the regulatory clearance process is generally lengthy, expensive and uncertain.
There are alternative treatments and procedures to using the Company's products.
The Company's products are subject to rapid technological change. The success of
the Company, in part, is based on its ability to obtain patent protection for
its products. The Company is dependent on single source suppliers for principal
components of its AESOP and ZEUS product lines. The Company's anticipated growth
will place significant demands on the Company's management and resources,
particularly in research and development and sales and marketing.

A more detailed discussion of factors that could affect the Company's future
results can be found in the "Risk Factors" section of the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

<PAGE>   4

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Computer Motion Inc.:

     We have audited the accompanying consolidated balance sheets of Computer
     Motion Inc. and subsidiary (a Delaware corporation) as of December 31, 2000
     and 1999, and the related consolidated statements of operations,
     shareholders' equity and cash flows for the three years ended December 31,
     2000. These financial statements are the responsibility of the Company's
     management. Our responsibility is to express an opinion on these financial
     statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
     accepted in the United States. Those standards require that we plan and
     perform the audit to obtain reasonable assurance about whether the
     financial statements are free of material misstatement. An audit includes
     examining, on a test basis, evidence supporting the amounts and disclosures
     in the financial statements. An audit also includes assessing the
     accounting principles used and significant estimates made by management, as
     well as evaluating the overall financial statement presentation. We believe
     that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
     present fairly, in all material respects, the financial position of
     Computer Motion, Inc. as of December 31, 2000 and 1999, and the results
     of their operations and their cash flows for the three years ended
     December 31, 2000 in conformity with accounting principles generally
     accepted in the United States.


/s/ ARTHUR ANDERSEN LLP


Los Angeles, California
April 10, 2001

<PAGE>   5

                              COMPUTER MOTION, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                (Amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        2000          1999          1998
                                                      --------      --------      --------
<S>                                                   <C>           <C>           <C>

Revenue                                               $ 21,732      $ 18,058      $ 10,586
Cost of Revenue                                          8,577         9,135         4,492
                                                      --------      --------      --------
Gross profit                                            13,155         8,923         6,094
                                                      --------      --------      --------

Gross profit %                                              61%           49%           58%

Research and development expense                        11,564         9,528         7,905
Selling, general and administrative expense             17,798        13,431        11,117
                                                      --------      --------      --------
Loss from operations                                   (16,207)      (14,036)      (12,928)

Interest income                                            140           700         1,448
Interest expense                                          (189)          (12)          (38)
Translation loss                                           (44)           --            (3)
Other income/(expense)                                     (25)           (7)            1
                                                      --------      --------      --------
Loss before income taxes                               (16,325)      (13,355)      (11,520)

Income tax provision                                        24            20            25
                                                      --------      --------      --------
Net loss                                               (16,349)      (13,375)      (11,545)

Other comprehensive income, net of tax:
  Foreign currency translation adjustment                  (21)          (33)           --
                                                      --------      --------      --------
Comprehensive loss                                     (16,370)      (13,408)      (11,545)

Dividend to warrant holders                              1,362            --            --
                                                      --------      --------      --------
Net loss available to common shareholders             $(17,711)     $(13,375)     $(11,545)
                                                      ========      ========      ========

Weighted average common shares outstanding
  used to compute net loss per share-basic diluted       9,309         8,503         7,959
                                                      ========      ========      ========

Net loss available to common shareholders
  per share-basic and diluted                         $  (1.90)     $  (1.57)     $  (1.45)
                                                      --------      --------      --------
</TABLE>


           See accompanying notes to consolidated financial statements

<PAGE>   6




                           CONSOLIDATED BALANCE SHEETS
                    (Amounts in thousands, except par value)



<TABLE>
<CAPTION>
ASSETS                                                                              2000             1999
                                                                                 ----------       ----------
<S>                                                                              <C>              <C>
Current assets:
     Cash and cash equivalents                                                   $    1,551       $    4,297
     Marketable securities                                                                -            3,224
     Accounts receivable, net of allowance for doubtful accounts
         of $1,374 in 2000 and $1,203 in 1999                                        12,117            6,203
     Inventories                                                                      4,681            5,009
     Prepaid expenses                                                                   440              332
                                                                                 ----------       ----------
Total current assets                                                                 18,789           19,065
                                                                                 ----------       ----------

     Furniture and fixtures                                                           1,865            1,157
     Computer equipment                                                               2,433            2,061
     Machinery and equipment                                                          3,759            2,341
     Accumulated depreciation                                                        (3,825)          (2,626)
                                                                                 ----------       ----------
Property and equipment, net                                                           4,232            2,933
                                                                                 ----------       ----------

Other assets                                                                             68            1,363
                                                                                 ----------       ----------

Total assets                                                                     $   23,089       $   23,361
                                                                                 ==========       ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Note payable to shareholder                                                 $    3,000       $       --
     Accounts payable                                                                 4,431            3,235
     Accrued expenses                                                                 3,486            2,917
     Deferred revenue                                                                 2,185              317
                                                                                 ----------       ----------
Total current liabilities                                                            13,102            6,469
                                                                                 ----------       ----------

Deferred revenue                                                                      1,400              970
Other liabilities                                                                        75              103
                                                                                 ----------       ----------
Total liabilities                                                                    14,577            7,542
                                                                                 ----------       ----------
Commitments and contingencies (Note 8)

Shareholders' equity:
     Preferred stock, authorized 5,000 shares, issued and outstanding; none               -                -
     Common stock, $.001 par value, authorized 25,000 shares
         issued and outstanding; 2000- 10,151 shares; 1999- 8,745 shares                 10                9
     Additional paid-in capital                                                      73,445           62,663
     Deferred compensation                                                             (605)            (247)
     Accumulated deficit                                                            (64,284)         (46,573)
     Other comprehensive loss                                                           (54)             (33)
                                                                                 ----------       ----------
Total shareholders' equity                                                            8,512           15,819
                                                                                 ----------       ----------

Total liabilities & shareholders' equity                                         $   23,089       $   23,361
                                                                                 ==========       ==========
</TABLE>


           See accompanying notes to consolidated financial statements



<PAGE>   7



                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                                          OTHER          TOTAL
                                           COMMON      ADDITIONAL       DEFERRED       ACCUMULATED    COMPREHENSIVE   SHAREHOLDERS'
                                           STOCK     PAID-IN CAPITAL  COMPENSATION       DEFICIT          LOSS           EQUITY
                                         ---------   ---------------  ------------     -----------    -------------   -------------
<S>                                      <C>         <C>              <C>              <C>            <C>             <C>
Balance, December 31, 1997               $       8      $  58,341       $  (1,781)      $ (21,653)             $-       $  34,915
Common stock issued                              -             46               -               -               -              46
Exercise of options                              -          1,094               -               -               -           1,094
Exercise of warrants                             -          1,471               -               -               -           1,471
Amortization of deferred compensation            -           (400)          1,028               -               -             628
Stock purchase plan                              -            276               -               -               -             276
IPO expenses and other                           -            (15)              -               -               -             (15)
Net loss                                         -              -               -         (11,545)              -         (11,545)
                                         ---------      ---------       ---------       ---------       ---------       ---------
Balance, December 31, 1998                       8         60,813            (753)        (33,198)              -          26,870
                                         ---------      ---------       ---------       ---------       ---------       ---------


Exercise of options                              1          1,836               -               -               -           1,837
Exercise of warrants                             -             37               -               -               -              37
Amortization of deferred compensation            -           (270)            506               -               -             236
Stock purchase plan                              -            262               -               -               -             262
Other                                            -            (15)              -               -               -             (15)
Unrealized loss -  translation                   -              -               -               -             (33)            (33)
Net loss                                         -              -               -         (13,375)              -         (13,375)
                                         ---------      ---------       ---------       ---------       ---------       ---------
Balance, December 31, 1999                       9         62,663            (247)        (46,573)            (33)         15,819
                                         ---------      ---------       ---------       ---------       ---------       ---------


Common stock issued                              -          4,923               -               -               -           4,923
Exercise of options                              -            376               -               -               -             376
Exercise of warrants                             1          3,416               -               -               -           3,417
Deferred compensation associated with
  stock options issued to non-employees          -            605            (605)              -               -               -
Amortization of deferred compensation            -              -             247               -               -             247
Stock purchase plan                              -            100               -               -               -             100
Dividend to warrant holders                      -          1,362               -          (1,362)              -               -
Unrealized loss -  translation                   -              -               -               -             (21)            (21)
Net loss                                         -              -               -         (16,349)              -         (16,349)
                                         ---------      ---------       ---------       ---------       ---------       ---------
Balance, December 31, 2000               $      10      $  73,445       $    (605)      $ (64,284)      $     (54)      $   8,512
                                         ---------      ---------       ---------       ---------       ---------       ---------
</TABLE>


<TABLE>
<CAPTION>
                                                                             COMMON SHARES
                                       ------------------------------------------------------------------------------------------
                                                  2000                            1999                            1998
                                       -------------------------       -------------------------       --------------------------
<S>                                    <C>                             <C>                             <C>
Beginning balance                                8,745                           8,354                           7,671
Issued                                             646                               -                              91
Exercise of options                                 87                             354                             255
Exercise of warrants                               659                               8                             310
Stock purchase plan                                 14                              29                              27
                                             ----------                      ----------                      ----------
Ending balance                                  10,151                           8,745                           8,354
                                             ----------                      ----------                      ----------
</TABLE>



           See accompanying notes to consolidated financial statements

<PAGE>   8

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                 2000             1999             1998
                                                                              ----------       ----------       ----------
<S>                                                                           <C>              <C>              <C>

Cash Flows from operating activities:
  Net Loss                                                                    $  (16,349)      $  (13,375)      $  (11,545)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation and amortization                                                  1,397              937              518
    Provision for doubtful accounts                                                  931            1,011              298
    Loss on disposal of fixed assets                                                  73                8                5
    Common stock and options issued for services                                     471               50               46
    Amortization of deferred compensation                                            247              236              628
  Decrease (increase) in:
    Accounts receivable                                                           (5,630)          (4,358)          (1,350)
    Inventories                                                                      328           (1,728)          (2,289)
    Prepaid expenses                                                                (108)              15              (65)
    Other assets                                                                      74           (1,091)               -
  Increase (decrease) in:
    Accounts payable                                                               1,196            1,612              405
    Accrued expenses                                                                 569            1,097              849
    Other liabilities                                                                (28)               -                -
    Deferred revenue                                                               2,298            1,259                -
                                                                              ----------       ----------       ----------
Net cash used in operating activities                                            (14,531)         (14,327)         (12,500)
                                                                              ----------       ----------       ----------

Cash flows from investing activities:
    Purchase of property and equipment                                            (2,763)          (1,503)          (1,784)
    Purchase of marketable securities                                                 --               --           (5,557)
    Sale of marketable securities                                                  3,224           12,512               --
                                                                              ----------       ----------       ----------
Net cash provided by (used in) investing activities                                  461           11,009           (7,341)
                                                                              ----------       ----------       ----------

Cash Flows from financing activities:
    Repayment of debt                                                                  -                -              (78)
    Proceeds from note payable to shareholder                                      3,000                -                -
    Proceeds from common stock issues and warrants
      exercised                                                                    7,969              249            1,747
    Proceeds from IPO, net of expenses                                                 -                -              (35)
    Proceeds from exercise of stock options                                          376            1,836            1,094
    Comprehensive loss and other                                                     (21)             (47)             135
                                                                              ----------       ----------       ----------
Net cash provided by financing activities                                         11,324            2,038            2,863
                                                                              ----------       ----------       ----------

Decrease in cash and cash equivalents                                             (2,746)          (1,280)         (16,978)
Cash and cash equivalents at beginning of year                                     4,297            5,577           22,555
                                                                              ----------       ----------       ----------
Cash and cash equivalents at end of year                                      $    1,551       $    4,297       $    5,577
                                                                              ----------       ----------       ----------

<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                              --------------------------------------------
                                                                                 2000             1999             1998
                                                                              ----------       ----------       ----------
<S>                                                                           <C>              <C>              <C>
Supplemental cash flow disclosure
Cash paid for:
     Interest                                                                 $      189       $       12       $       38
     Income taxes                                                                     23                8                3
Non-cash investing and financing activities
     Dividend to warrant holders                                                   1,362                -                -
     Deferred compensation for options issued to non-employees                $      605       $        -       $        -
                                                                              ----------       ----------       ----------
</TABLE>


           See accompanying notes to consolidated financial statements


<PAGE>   9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

significant risks > The company has incurred losses of $16,370,000, $13,408,000
and $11,545,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. As of December 31, 2000, the company has an accumulated deficit of
$64,284,000. The company's operations to date have consumed substantial amounts
of cash and the company expects its capital and operating expenditures will
exceed its revenues for at least the next year. Management believes that its
current cash and cash equivalents on hand along with its preferred stock
financing obtained in February 2001 and its equity line of credit financing
facility closed in April 2001 (See note 14) will allow them to maintain its
operations, fund working capital and capital expenditures through at least
December 31, 2001.

The Company's needs for additional financing will depend upon numerous factors,
including, but not limited to, the progress and scope of ongoing research and
development projects, the costs of training of physicians to become proficient
in the use of the company's products and procedures, the ability to obtain
required FDA approvals, its ability to successfully defend itself it any patent
current or future patent litigation (see Notes 8 and 14) and the ability to
Company's customers to be able to obtain medical reimbursement from third party
payors. If the Company requires further capital to grow the business, execute
its operating plan or obtain FDA approvals at any time in the future or for any
other reasons, the company may seek to sell additional equity or debt. There is
not assurance that adequate funds would be available on acceptable terms, if at
all. If the company is unable to make it's plan or unable to raise additional
necessary capital in the future, they may be required to significantly curtail
its operations or obtain funding through the relinquishment of significant
technology or markets.

nature of operations > Computer Motion, Inc. develops and markets proprietary
robotic and computerized surgical systems that enhance a surgeon's performance
and centralize and simplify a surgeon's control of the operating room. The
Company's primary efforts are directed toward developing and commercializing
medical robots and intelligent interface modalities which will enable new
minimally invasive surgical procedures and enhance the surgical team's overall
productivity. The Company's objective is to be the world's leading provider of
robotic and computerized surgical systems.

consolidation > The consolidated financial statements include the accounts of
the Company and its wholly-owned French subsidiary, Computer Motion, S.A.
Intercompany transactions and balances have been eliminated in consolidation.

reclassifications > Certain reclassifications of previously reported amounts
have been made to conform with the current year presentation.

use of estimates > Preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

revenue recognition > The Company applies the provisions of Staff Accounting
Bulleting No. 101 (SAB 101) when recognizing revenue. SAB 101 states that the
revenue generally is realized or realizable and earned when all of the following
criteria are met: a) persuasive evidence of an arrangement exists, b) delivery
has occurred or the services have been rendered , c) the seller's price to the
buyer is fixed or determinable, and d) collectibility is reasonably assured.

The Company recognizes revenue from the sale of products to end-users, including
supplies and accessories, once shipment has occurred , (as the Company's general
terms are FOB shipping point. In those few cases where the customers terms are
FOB their plant, revenue is not recognized until the Company receives a signed
delivery and acceptance certificate), and all of the conditions of SAB 101
(items a). through d). as identified above) have been met. Revenue is recognized
from the performance of services as the services are performed.

The Company recognizes revenue from the sale of products to distributors,
including supplies and accessories, once shipment has occurred, (as the
Company's general terms are FOB shipping point ), and all of the conditions of
SAB 101 have been met. The Company's distributors do not have rights of return
or cancellation. Revenue from distributors which does not meet all of the
requirements of SAB 101 are deferred and recognized upon the sale of the product
to the end user.

Revenues from product sales to financing institutions are not recognized by the
Company until a purchase order is received, the product has been shipped and the
funding by the financing institution has been approved. The Company recognized
revenues from sales to third party institutions of $1,379,646, $1,880,000 and
$3,511,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

The Company defers revenue from the sale of extended warranties, product
upgrades and other contractual items and recognizes them over the life of the
contract or upon shipment to the customer, as applicable.

Shipments of products to be used for demonstration purposes or prototype
products used in development programs are reflected as consigned inventory and
are included in the property and equipment balance in the accompanying
consolidated balance sheets. Revenue recognized on the rental of this equipment
is recognized as development revenue over the term of the agreement.

The Company records revenue net of commissions paid to agents in accordance with
Emerging Issues Task Force (EITF) No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent."

net loss per share > Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share," requires presentation of both basic and diluted net
loss per share in the financial statements. The Company's basic net loss per
share is the same as its diluted net loss per share because inclusion of
outstanding stock options and warrants in the calculation is antidilutive. Basic
and diluted loss per share is calculated by dividing net loss available to
common

<PAGE>   10

shareholders by the weighted average number of common shares outstanding for the
period.

The net loss available to common shareholders for the year ended December 31,
2000 has been adjusted to include the fair value of 361,530 additional warrants
provided to certain warrant holders as an incentive to exercise their existing
warrants. The Black Scholes impact of this additional issuance is treated as a
dividend in the net loss available to common shareholders computation for loss
per share.

cash equivalents > Cash equivalents consisting of liquid investments with a
maturity of three months or less when purchased and are stated at cost which
approximates market.

property and equipment > Property and equipment are stated at cost and are
depreciated using the straight-line method based on useful lives of seven years
for furniture and fixtures and three to seven years for machinery and equipment
and three years for computer equipment.

software development costs > The Company internally produces and develops
software to run its hardware products. Costs to develop this software are
accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold Leased,
or Otherwise Marketed", which requires the Company to capitalize software
development costs when "technological feasibility" of the product has been
established and future revenues assure recovery of the capitalized amounts.
Because of the relatively short time period between "technological feasibility"
and product release, the Company has not capitalized any software development
costs as of December 31, 1999 or December 31, 2000."

stock-based compensation > SFAS No. 123. "Accounting for Stock-based
Compensation" (SFAS 123) encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic-value method prescribed in Accounting Principles board Opinion No. 25,
"Accounting for Stock Issued to Employees.

The Company accounts for option and warrant grants to non-employees using the
guidance of SFAS 123 and EITF No. 96-18 whereby the fair value of such option
and warrant grants are determined using the Black Scholes valuation model at the
earlier of the date which the non-employees' performance is completed or a
performance commitment is reached.

research and development > Research and development expenses are charged to
operations as incurred and totaled $11,564,000, $9,528,000, and $7,905,000 in
2000, 1999, and 1998 respectively.

income taxes > The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using the enacted tax rate in
effect for the years in which the differences are expected to reverse.

The tax reform act of 1986 contains provisions that may limit the net operating
loss carryforwards available to be used in any given year in the event of
significant changes in ownership interests. The Company does not believe that
ownership changes to date have had an impact on its ability to utilize these
carryforwards. There can be no assurance that ownership changes in the future
will not significantly limit the Company's ability to use existing or future net
operating loss or tax credit carryforwards.

inventories > Inventories, which include materials, labor and overhead are
stated at the lower of cost or market. The Company uses the first-in, first-out
(FIFO) method to value inventories.

The components of inventory were as follows:

<TABLE>
<CAPTION>
                                    2000              1999
                               ------------      ------------
<S>                            <C>               <C>
Raw materials                  $  1,983,000      $  2,899,000
Work in process                     276,000           942,000
Finished goods                    2,422,000         1,168,000
                               ------------      ------------
                               $  4,681,000      $  5,009,000
                               ------------      ------------
</TABLE>

patents, trademarks and other intangibles > Patents, trademarks and other
intangibles are carried at cost less accumulated amortization that is calculated
on the straight-line basis over the useful lives of the assets.

other comprehensive loss > The Company accounts for other comprehensive loss in
accordance with SFAS No. 130, "Reporting Comprehensive Income". SFAS 130
requires certain financial statement components, such as net unrealized holding
gains or losses and cumulative translation adjustments, which prior to the
adoption of SFAS 130 were reported separately in shareholders' equity, to be
included in other comprehensive income (loss). The Company reports comprehensive
loss in the consolidated statements of shareholders' equity.

segment reporting > The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements.

fair value of financial instruments > The carrying value for cash and cash
equivalents, accounts receivable, note payable to shareholder and accounts
payable approximates fair value because of the short maturity of these
instruments.


<PAGE>   11

recent accounting pronouncements > In March 2000, the Financial Accounting
Standards Board (FASB) issued interpretation No. 44 (Fin 44). "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion 25." FIN 44 clarifies the application of APB No. 25 for certain issues,
including the definition of an employee, the treatment of the acceleration of
stock options and the accounting treatment for options assumed in business
combinations. FIN 44 became effective on July 1, 2000, but is applicable for
certain transactions dating back to December 1998. The adoption of FIN 44 did
not have a material impact on the Company's financial position or results of
operations.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101. "Revenue Recognition in Financial Statements"
SAB No. 101 expresses the views of the SEC staff in applying generally accepted
accounting principles to certain revenue recognition issues. The Company has
adopted the provisions of SAB No. 101 in the first quarter of fiscal 2000 and
its adoption did not have a material impact on its financial position or its
results of operations.

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of fiscal year 2001
pursuant to SFAS No. 137 (issued in June 1999), which delays the adoption of
SFAS 133 until that time. The Company expects that the adoption of SFAS No. 133
will not have a material impact on its financial position or its results of
operations.

NOTE 2: STOCK PURCHASE AND OPTION PLANS

stock purchase > The Company's employee stock purchase savings plan allows
participating employees to purchase, through payroll deductions, shares of
common stock at 85% of the fair market value at specified dates. Under the terms
of the plan, 129,668 shares of common stock have been reserved for purchase by
plan participants. Employees purchased 14,227, 29,050 and 26,782 shares in 2000,
1999 and 1998 respectively. At December 31, 2000 50,837 shares were available
for purchase under the plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation".

stock options > Under the terms of the Company's stock option plans, 3,996,017
shares of common stock have been reserved for issuance to directors, officers
and employees and to others. Stock options are generally exercisable over
periods up to 10 years from date of grant and may be "incentive stock options"
or "non-qualified stock options." Options generally vest evenly over four years.
At December 31, 2000 there were a maximum of 301,701 shares available for grant
and 2,754,503 options outstanding of which 830,515 shares were exercisable at a
weighted average exercise price of $7.43 per share. The weighted average
contractual life of options outstanding December 31, 2000 was 8.3 years. The
weighted average fair value of options granted for the year ended December 31,
2000, 1999 and 1998 were $4.70, $6.84 and $5.34, respectively. Stock option
activity was as follows:

<TABLE>
<CAPTION>
                                    Options      Weighted Average
                                  Outstanding     Exercise Price
                                  -----------    ----------------
<S>                               <C>            <C>
Beginning balance 12-31-97         1,733,475         $ 6.34
Granted                              657,950          10.61
Canceled                            (471,197)          9.12
Exercised                           (254,780)          4.30
                                   ---------         ------
Balance 12-31-98                   1,665,448         $ 7.10
Granted                              861,175         $10.37
Canceled                            (476,935)          9.30
Exercised                           (354,478)          5.18
                                   ---------         ------
Balance 12-31-99                   1,695,210         $ 8.54
                                   ---------         ------
</TABLE>

<PAGE>   12

Granted                            1,391,580       $       7.82
Canceled                            (245,256)              9.96
Exercised                            (87,031)              4.32
                                ------------       ------------
Balance 12-31-00                   2,754,503       $       8.18
                                ------------       ------------


The following table summarizes information concerning outstanding and
exercisable option at December 2000.

<TABLE>
<CAPTION>
                                    WEIGHTED          WEIGHTED                           WEIGHTED
                                     AVERAGE           AVERAGE                            AVERAGE
                                    REMAINING         EXERCISE           PRICE           NUMBER OF            PRICE
                                     NUMBER          CONTRACTUAL          PER             OPTIONS             PER
        RANGE OF EXERCISE          OUTSTANDING          LIFE             SHARE           EXERCISABLE          SHARE
----------------------------       ------------      -----------       ------------      ------------      ------------
<S>             <C>                <C>               <C>               <C>               <C>               <C>
             -        1.5000             15,559              2.8       $       0.49            15,559      $       0.49
        1.5000        2.2500              3,112              4.5               1.54             3,112              1.54
        2.2500        3.3750              5,138              5.9               2.88             3,138              2.73
        3.3750        5.0625            769,884              7.5               4.75           399,778              4.62
        5.0625        7.5938             48,350              9.6               6.39             1,250              6.88
        7.5938       11.3906          1,803,385              8.7               9.47           361,962             10.12
       11.3906       17.0859            109,075              7.9              13.36            45,716             13.69
--------------  ------------       ------------      -----------       ------------      ------------      ------------
                                      2,754,503              8.3       $       8.18           830,515      $       7.43
--------------  ------------       ------------      -----------       ------------      ------------      ------------
</TABLE>


In the opinion of management, all options have been granted at not less than
fair market value at dates of grant. When stock options are exercised, the par
value is credited to common stock and the excess of the proceeds over the par
value is credited to additional paid-in capital. When non-qualified options are
exercisable, or when incentive stock options are exercised and sold within a
one-year period, the Company realizes income tax benefits based on the
difference between the fair value of the stock on the date of exercise and the
stock option exercise price. These tax benefits do not affect the income tax
provision, but rather are credited directly to additional paid-in capital.

Pursuant to the terms of the plans, the Company has issued options to
non-employees for services. The fair market value of the stock option at the
grant date is estimated using the Black-Scholes valuation model. In 2000,
options issued to non-employees totaled 92,000 shares, with a weighted average
exercise price of $8.125 and a weighted average fair value of $3.61. The related
compensation expense recognized by the Company totaled $114,000 in 2000. In
1999, options issued to non-employees totaled 75,000 shares, with a weighed
average exercise price of $10.00 and a weighted average fair value of $6.69. The
related compensation expense recognized by the Company totaled $50,000 in 1999.
No options were issued to non-employees in 1998. Compensation related to options
issued for services is recognized ratably over a five year service period.

The Company issued certain common stock and warrants and granted certain stock
options at prices less than the estimated fair market value of the common stock.
The difference between the issuance or grant price and the estimated fair market
value at date of issuance or grant is reflected as compensation expense.
Compensation expense of $143,080, $236,000 and $628,000 was recognized in 2000,
1999 and 1998, respectively. At December 31, 2000 deferred (unamortized)
compensation expense relating to stock options was $103,550 and will be
recognized as compensation expense over the balance of the vesting period of the
stock options.

Under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," the Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related accounting interpretations. Accordingly, no compensation
expense has been recognized related to the granting of stock options, except as
noted above. If compensation expense related to stock options was determined
based upon their grant date fair value consistent with the methodology
prescribed under SFAS No. 123 the Company's net loss and basic loss per share
would have been increased by $3,757,000 ($.40 per share), $2,406,332 ($.28 per
share) and $1,295,000 ($.16 per share) for 2000, 1999 and 1998, respectively.
The fair market value of the warrants and stock options at the grant date was
estimated using the Black-Scholes valuation model with the following weighted
average assumptions.

<PAGE>   13
<TABLE>
<CAPTION>

DECEMBER 31,                                  2000       1999      1998
                                              -----      -----     -----
<S>                                          <C>        <C>        <C>
Expected life (years)                          7.0        7.0       7.0
Interest rate                                  5.8%       5.5%      5.5%
Volatility                                    63.0%      63.0%     40.0%
Dividend yield                                 0.0%       0.0%      0.0%
                                              -----      -----     -----
</TABLE>

NOTE 3: COMMON STOCK WARRANTS

The Company has issued warrants to purchase common shares, which are exercisable
over periods of up to 7 years from date of issuance. At December 31, 2000, all
outstanding warrants were exercisable. Warrant information is as follows:

<TABLE>
<CAPTION>
                                             Options      Weighted Average
                                           Outstanding     Exercise Price
                                           -----------    ----------------
<S>                                        <C>            <C>
Balance 12-31-97                            1,626,910        $     5.34
Exercised                                    (309,827)       $     4.75
                                           ----------        ----------
Balance 12-31-98                            1,317,083        $     5.48
                                           ----------        ----------
Exercised                                      (8,189)       $     4.57
Balance 12-31-99                            1,308,894        $     5.48
                                           ----------        ----------
Granted                                       361,533        $     9.17
Exercised                                    (659,438)       $     5.18
                                           ----------        ----------
Balance 12-31-00                            1,010,989        $     6.08
                                           ----------        ----------
</TABLE>

NOTE 4: DIVIDEND TO WARRANT HOLDERS

On August 31, 2000, the Company offered current warrant holders an incentive to
exercise their warrants. On all warrants exercised prior to September 22, 2000
an additional five year warrant would be issued for 55% of the total warrants
exercised. Warrants totaling 657,332 shares were exercised and new five year
warrants totaling 361,530 shares were issued at $9.178 per warrant. The exercise
price per share for all shares of common stock subject to the additional
warrants is 110% of the average closing price per share as reported on the
Nasdaq National Market for the ten trading days prior to August 31, 2000. The
fair market value of the warrants at the grant date was estimated using the
Black-Scholes valuation model of $1,362,000, which was charged to accumulated
deficit and credited to additional paid-in capital. The Company relied on the
exemption provided by Section 4(2) of the Securities Act of 1933 in connection
with the issuance of the new 5-year warrants. No underwriters were engaged in
connection with this offering. Proceed from the conversion of the original
warrants, and proceeds to be paid to the Company upon the exercise of the
replacement warrants, have been used and shall continue to be used for working
capital and other general corporate purposes.

NOTE 5: INCOME TAX PROVISION

Income tax for all years presented consisted of minimum state income and
franchise taxes. Net deferred income tax assets at December 31, 2000 and 1999
consisted of the following:

<TABLE>
<CAPTION>
                                                  2000              1999
                                              ------------      ------------
<S>                                           <C>               <C>
Allowance for doubtful accounts               $  1,038,000      $    504,000
Accrued liabilities                                684,000            715,000
Depreciation and amortization                      432,000            137,000
Uniform capitalization costs                             -            358,000
Net operating loss carryforwards                18,737,000          12,854,00
Tax credits                                      2,607,000          1,530,000
Deferred revenue                                         -            513,000
Capitalized research and development costs       2,356,000          1,094,000
Other                                              264,000            382,000
                                              ------------       ------------
Total deferred income tax asset                 26,118,000         18,087,000
Valuation reserve                              (26,118,000)       (18,087,000)
                                              ------------       ------------
Net deferred income tax asset                 $          -       $          -
                                              ============       ============
</TABLE>

The income tax provision reconciles to the amount computed by applying the
federal statutory rate to loss before taxes as follows:

<TABLE>
<CAPTION>
                                     2000           1999           1998
                                 -----------    -----------    -----------
<S>                              <C>            <C>            <C>
Expected federal benefit         $(5,551,000)   $(4,541,000)   $(3,917,000)
State income taxes, net of
  federal income tax effect           24,000         20,000         25,000
Tax benefits not recognized        5,551,000      4,541,000      3,917,000
                                 -----------    -----------    -----------
Income tax provision             $    24,000    $    20,000    $    25,000
                                 ===========    ===========    ===========
</TABLE>

At December 31, 2000, the Company had federal and state net operating loss (NOL)
carryforwards of approximately $52,747,000 and $9,085,000, respectively and
research and development tax credit carryforwards of approximately

<PAGE>   14

$2,566,000. The federal tax credit and NOL carryforwards expire between fifteen
and twenty years from the year of loss and are restricted if significant changes
in ownership occur. The state NOL carryforwards expire between five and seven
years from the year of loss. The Tax Reform Act of 1986 contains provisions that
may limit the net operating loss carryforwards available to be used in any given
year in the event of significant changes in ownership interests. The Company
does not believe that ownership changes to date have had an impact on its
ability to utilize these carryforwards. There can be no assurance that ownership
changes in the future will not significantly limit the Company's ability to use
existing or future net operating loss or tax credit carryforwards.

Realization of deferred tax assets is dependent on generating sufficient taxable
income during the periods in which the temporary differences will reverse.
Because the Company is uncertain when it may realize the benefit of its tax
assets, the Company has placed a valuation allowance against the total amount of
the deferred tax assets.

NOTE 6: FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK

financial instruments > Marketable securities consist of bank certificates of
deposit, commercial paper and corporate bonds, all of which by policy must
mature within 360 days. Under Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," all
marketable securities are classified as held to maturity and are carried at
amortized cost which closely approximates fair market value. Interest income
earned totaled $139,707, $700,000 and $1,448,000 in 2000, 1999 and 1998, at
December 31, respectively.

The Company's investment portfolios consist of the following:

<TABLE>
<CAPTION>
                                        2000                     1999
                                   ------------             ------------
<S>                                <C>                      <C>
Commercial paper                              -                  698,000
Corporate bonds                               -                2,499,000
Cash                                  1,551,000                4,294,000
Interest receivable                           -                   30,000
                                   ------------             ------------
Total                              $  1,551,000             $  7,521,000
                                   ------------             ------------
</TABLE>


At December 31, 2000, cash of $50,000 was restricted and pledged as collateral
for a letter of credit.

concentration of risk > Trade accounts receivable and certain marketable
securities are the financial instruments which may subject the Company to
concentration of credit risk. Although the Company does not anticipate
collection problems with its receivables, payment is contingent to a certain
extent upon the economic condition of the hospitals which purchase the Company's
products. The credit risk associated with receivables is limited due to the
dispersion of the receivables over a number of customers in a number of
geographic areas. The Company monitors credit worthiness of its customers to
which it grants credit terms in the normal course of business. Marketable
securities are placed with high credit qualified financial institutions and
Company policy limits the credit exposure to any one financial instrument;
therefore, credit loss is reduced. At December 31, 2000, The Company had
$1,111,000 cash in excess of Federal Deposit Insurance Corporation (FDIC)
insurance coverage.

For the year ended December 31, 2000 the Company had one customer that accounted
for approximately 21% of the revenue for the year and 18% of accounts receivable
and a second customer that accounted for approximately 10% of the revenue for
the year and 15% of accounts receivable. At December 31, 1999 and 1998 no single
customer accounted for more than 10% of revenue or accounts receivable
respectively.

A sub-assembly of the robotic arms, which are a major component of the Company's
AESOP and ZEUS products is purchased from a single supplier. The Company
believes that other suppliers would be available for the sub-assembly, if
necessary.

NOTE 7: NOTE PAYABLE TO SHAREHOLDER

During the year ended December 31, 2000 the Company issued to a principal
shareholder a demand note for $3,000,000 with interest at the prime rate. The
note is secured by the assets of the Company. In February 2001 the note and
accrued interest thereon was paid from the proceeds of the Preferred Stock
offering (see Note 14).
<PAGE>   15

NOTE 8: COMMITMENTS AND CONTINGENCIES

leases > Rent expense for the years ended December 31, 2000, 1999 and 1998 was
$891,000, $667,000 and $629,000, respectively. As of December 31, 2000, the
Company had the following minimum lease payments for certain facilities and
equipment under operating leases: 2001-$900,000; 2002-$853,000; 2003-$870,000;
2004-$890.000 and thereafter $1,794,000.

contingencies > The Company is involved in various claims arising in the normal
course of business. Management is of the opinion that the ultimate resolution of
all such matters will not have a material effect on the accompanying financial
position or operating results.

On May 10, 2000, the Company filed suit against Intuitive Surgical Inc.
alleging that the Intuitive Surgical da Vinci surgical robot system infringes
on the Company's United States Patent Nos. 5,878,193; 5,524,180; 5,762,458;
6,001,108; 5,815,640; 5,907,664; 5,855,583. On June 1, 2000, the Company filed
an amended complaint alleging that Intuitive Surgical has also infringed the
Company's recently issued United States Patent No. 6,063,095. On November 1,
2000, the Company filed another amended complaint further alleging that
Intuitive Surgical is infringing on the Company's recently issued United States
Patent No. 6,102,850. The Company's complaint seeks damages for lost profits,
injunctive relief enjoining any future infringement of its patent rights,
treble damages and attorneys fees.

On June 30, 2000, Intuitive Surgical served its Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent invalidity and
unenforceability. Other than a request for attorney's fees, Intuitive Surgical
has not requested any damages. The Company has served discovery requests
seeking a statement of the facts that support Intuitive Surgical's defenses.
Intuitive Surgical has provided partial responses to the Company's discovery.
The responses have been served under seal and the Company is not privy to much
of the information to Intuitive Surgical's underlying intentions.
On or about December 7 and 8, 2000, the United States Patent Office granted
three of Intuitive Surgical's petitions for a declaration of an Interference
relating to the Company's 5,878,193, 5,907,664 and 5,855,583 patents.

purchase commitments > The Company has purchase agreements with two suppliers
with purchase commitments totaling $1,533,000 at December 31, 2000.

NOTE 9:  FINANCING ARRANGEMENTS

The Company can, if leasing arrangements are requested by a customer, provide a
third party financing institution to facilitate the transaction. Once the
financing institution and the customer agree upon the financing terms, the
Company sells the product to the financing institution without recourse.
Revenues from product sales to financing institutions are not recognized by the
Company until a purchase order is received, the product has been shipped and the
funding by the financing institutions has been approved. The Company recognized
revenues from sales to third party institutions of $1,379,646, $1,880,000 and
$3,511,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

NOTE 10: PROFIT SHARING PLAN

The Company's defined contribution profit sharing plan (the "Plan") includes
features under Section 401(k) of the Internal Revenue code. All employees are
eligible to participate in the Plan after meeting certain minimum service
requirements. Employees may make discretionary contributions to the Plan subject
to Internal Revenue Service limitations. Employer contributions to the Plan were
$69,000 $63,000 and $56,000 in 2000, 1999 and 1998, respectively.

NOTE 11: SEGMENTS OF BUSINESS

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to shareholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. The Company's chief decision making
group, as defined under SFAS 131 is the Executive Staff. To date, the Executive
Staff has viewed the Company's operations as principally one market: proprietary
robotic and computerized surgical systems for the medical device industry. Sales
by product lines within this market are as follows:


<TABLE>
<CAPTION>
                                                     For the Years Ended December 31,
                                               ---------------------------------------------
                                                   2000             1999             1998
                                               -----------      -----------      -----------
<S>                                            <C>              <C>              <C>
ZEUS robotic and surgical systems              $11,382,000      $ 6,173,000      $   180,000
AESOP robotic and surgical systems               5,596,000        6,480,000        6,653,000
HERMES voice control center                      1,478,000        2,760,000        1,434,000
Development revenue                              1,010,000        1,382,000        1,103,000
Recurring revenue                                2,266,000        1,263,000        1,216,000
                                               -----------      -----------      -----------
                                               $21,732,000      $18,058,000      $10,586,000
                                               -----------      -----------      -----------
</TABLE>

Export sales are made by the United States operations to the following
geographic locations:

<TABLE>
<CAPTION>
                                      For the Years Ended December 31,
                                ------------------------------------------
                                   2000            1999            1998
                                ----------      ----------      ----------
<S>                             <C>            <C>             <C>
Canada                          $  260,000      $  837,000      $   65,000
Europe and the Middle East       3,986,000       5,411,000       1,031,000
Asia                             4,802,000         732,000         194,000
South America                      242,000               -               -
                                ----------      ----------      ----------
                                $9,290,000      $6,980,000      $1,290,000
                                ----------      ----------      ----------
                                       43%             39%             12%
</TABLE>

<PAGE>   16


The relative impact of foreign currency fluctuations on export sales is not
significant as product and settlement are generally based on the U.S. dollar.

NOTE 12: SHAREHOLDER RIGHTS PLAN

In June, 1999, the Board of Directors approved a Shareholder Rights Plan and
declared a dividend distribution of one right for each outstanding share of the
Company's outstanding Common Stock to stockholders of record on the close of
business June 28, 1999. Each right entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock ($.001
par value) at a price of $70 (subject to adjustment). Subject to extension by
the Board of Directors, the rights will separate from the Common Stock and a
distribution will occur upon the earlier of ten days following a public
announcement of a person, persons, or other affiliated entity having acquired or
obtained the right to acquire beneficial ownership of 20 percent or more of the
outstanding shares of Common Stock, or ten business days following the
distribution of the rights of a person, persons or affiliated entity
beneficially owning 20 percent or more of the outstanding shares of Common
Stock. In the event that at any time following the distribution of the rights a
person, persons or other affiliated entity obtains more than 20 percent of the
outstanding shares of Common Stock, engages in any "self-dealing" transactions
as set forth in the Right Agreement or an event occurs which results in an
increase in a person, persons or other affiliated entity's ownership interest by
more than one-half of one percent, each holder of a right will thereafter have
the right to receive Common Stock (or in certain circumstances, cash, property
or other securities) having a value equal to two times the exercise price or the
right. In conjunction with the above all rights beneficially owned (and under
certain circumstances previously beneficially owned) by the person, persons or
other affiliated entity triggering the exercisability of the rights, shall be
null and void. However, rights may not be exercisable if the Board of Directors
deems a tender or exchange offer to b a "Permitted Offer" in the best interest
of the Company and its stockholders. A "Permitted Offer" does not trigger the
exercisability of the right and any time prior to the rights becoming
exercisable, the Company may redeem the rights (in whole only) at a price of
$.01 per right.

NOTE 13: SHAREHOLDERS' EQUITY

In August 1997, the Company reincorporated in Delaware and effected a reverse
stock split of its existing common and preferred stock of 1 for 1.928 shares.
This reincorporation and reverse stock split have been retroactively reflected
in the accompanying financial statements. All shares of preferred stock were
converted to common stock upon the Company's initial public offering in August
1997.

preferred stock > At December 31, 2000, the Company had 5,000,000 shares of
undesignated preferred stock authorized and available for future issuance, none
of which had been issued. The Company's Board of Directors, at its sole
discretion, may determine, fix and alter dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any such series,
and may determine the designation, terms and conditions of the issuance of any
such shares.

common stock > During the year ended December 31, 2000, stock option, warrant
exercises and issuances of common stock under the Company's Employee Stock
Purchase Plan increased the number of common shares by 760,696. In addition the
company issued 644,764 shares of common stock for services rendered and a
private placement investment.

NOTE 14:  SUBSEQUENT EVENTS (UNAUDITED)

On February 16, 2001, The Company, sold and issued 10,024 shares of Series B
Convertible Preferred Stock at a purchase price of $1,000 per share for an
aggregate amount of $10,024,000 and concurrently therewith issued warrants for


<PAGE>   17

the purchase of up to 558,762 shares of the Company" common stock, in a private
placement with several investors. The Preferred Stock has a three year maturity
and is initially convertible into shares of the Company's common stock at $5.77
per share. This conversion price may be reset at the six and nine month
anniversary of the initial issuance if the average market price for Computer
Motion's common stock in the twenty days prior to the reset date, drops below
the initial conversion price. This conversion price adjustment is subject to a
price floor of $2.72. The investors shall receive a preferred annual dividend
payable in stock or cash, at the company's option, at a rate of 4.90%. In
addition, the investors were granted 5-year warrants to purchase an aggregate of
approximately 558,762 shares of the Company's common stock at an exercise price
of $8.15 per share. Securities and Exchange Commission (SEC) and National
Association of Stock Dealers and Automated Quotation (NASDAQ) rules require
shareholder approval for private financings in excess of 20% of the total shares
outstanding. With the warrants granted to investors and with the potential for a
recalculation of the conversion price, this 20% level may be exceeded. Computer
Motion will be asking for shareholder approval for this financing at the regular
shareholders meeting to be held in mid May.

On March 9, The Company had a special meeting of shareholders to consider and
vote upon two proposals. The first proposal is to amend the Company's Second
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock from 25,000,000 shares to
50,000,000 shares and to increase the authorized number of overall shares from
30,000,000 to 55,000,000. The second proposal is to adopt an amendment to the
Company's 1997 Stock Incentive Plan to increase the number of shares issuable
thereunder by 2,000,000 shares and to provide for automatic annual increases of
750,000 shares to this number on January 1st of each year. The result of the
shareholders vote approved both proposals.

        On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that the Company's ZEUS Platform infringes upon Brookhill-Wilks United
States Patent Nos. 5,217,005 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorneys fees and increased damages alleging willful patent
infringement. The Company does not believe that its ZEUS Platform currently
infringes either patent. On March 21, 2001, the Company served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability.

        On March 30, 2001, Intuitive Surgical Inc. and IBM Corporation filed
suit alleging that the Company's AESOP, ZEUS and HERMES products infringe United
States Patent No. 6,201,984 which was recently issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent injunction, and
costs and attorneys fees. A preliminary review of the claims of this patent
reveals that each claim is limited to a surgical system employing voice
recognition for control of a surgical instrument. As this patent was only
recently issued and as the Company has not had prior notice of this patent or
the claims of this patent, the Company is currently evaluating the allegations
of patent infringement and the validity of the patent.

        The company believes that these lawsuits are without merit and plans to
vigorously defend itself.

        In April, 2001, the Company secured an equity-based line of credit from
Societe Generale. Under the terms of this line of credit the Company may draw
down as much as $12,000,000 in exchange for registered shares of the Company's
common stock. The draw downs are based on minimum amounts per day are subject
to trade volume terms as defined in the agreement. The company currently would
be eligible to draw on $1.5 million of this line.

NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly data for 2000, 1999 and 1998 was as follows:

<TABLE>
<CAPTION>
                                   FIRST QUARTER     SECOND QUARTER    THIRD QUARTER     FOURTH QUARTER
                                   -------------     --------------    -------------     --------------
<S>                                <C>               <C>               <C>               <C>
Year ending December 31, 2000
     Revenue                       $ 1,368,000       $ 5,962,000       $ 6,211,000       $ 8,191,000
     Gross profit                  $   679,000       $ 3,580,000       $ 3,666,000       $ 5,230,000
     Net loss                      $(5,019,000)      $(3,609,000)      $(3,597,000)      $(4,124,000)
     Loss per share                $     (0.57)      $     (0.41)      $     (0.52)      $     (0.41)
                                   -----------       -----------       -----------       ------------


Year ending December 31, 1999
     Revenue                       $ 3,952,000       $ 4,699,000       $ 5,358,000       $ 4,049,000
     Gross profit                  $ 2,238,000       $ 2,720,000       $ 3,215,000       $   750,000
     Net loss                      $(2,736,000)      $(2,387,000)      $(1,982,000)      $(6,270,000)
     Loss per share                $     (0.33)      $     (0.28)      $     (0.23)      $      (0.72)
                                   -----------       -----------       -----------       ------------


Year ending December 31, 1998
     Revenue                       $ 2,077,000       $ 2,274,000       $ 2,807,000       $ 3,428,000
     Gross profit                  $ 1,184,000       $ 1,323,000       $ 1,589,000       $ 1,998,000
     Net loss                      $(2,730,000)      $(3,004,000)      $(2,994,000)      $(2,817,000)
     Loss per share                $     (0.35)      $     (0.38)      $     (0.37)      $      (0.35)
                                   -----------       -----------       -----------       ------------
</TABLE>