<PAGE>   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 the ZEUS System
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 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 $7.5 million (70.6 percent) to $18.1 million in 1999
from $10.6 million in 1998. The increase resulted from a $1.2 million or 69.7
percent, increase in HERMES revenue and a $6.5 million, or 664.9 percent,
increase in ZEUS revenue. AESOP revenues were relatively flat, declining
$289,000 or 3.7 percent. Development revenues associated with pre-clinical ZEUS
activities in 1999 totaled $1.3 million, a 57.1 percent increase over the prior
year. Development revenues associated with HERMES in 1999 totaled $115,000.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                    PAGE 29
<PAGE>   2
Revenue increased $4.0 million (60.1 percent) to $10.6 million in 1998 from $6.6
million in 1997. The increase resulted from a $2.5 million, or 46.2 percent,
increase in AESOP revenue and a $1.5 million, or 686.5 percent, increase in
HERMES revenue. Development revenues associated with pre-clinical ZEUS
activities in 1998 totaled $807,000, a slight decrease from the prior year.

(GROSS PROFIT) Gross profit increased $2.8 million (46.4 percent) to $8.9
million in 1999 from $6.1 million in 1998. Gross margin decreased to 49.4
percent in 1999 as compared to 57.6 percent in 1998. The decrease in gross
margin was primarily due to costs associated with the ZEUS product line as costs
of future upgrades granted were recognized, and promotional accessories were
offered at little or no cost. Pressure on gross margins will continue until the
Company receives FDA clearance for the ZEUS System and is able to produce and
sell it at a greater volume.

Gross profit increased $2.3 million (62.2 percent) to $6.1 million in 1998 from
$3.7 million in 1997. Gross margin increased to 57.6 percent in 1998 as compared
to 56.7 percent in 1997. The increase in gross margin was primarily due to
significantly increased AESOP average selling prices and some efficiencies of
scale associated with increased unit production, offset in part by costs
associated with the ZEUS product line as older products in the field were
replaced with upgraded or new products.

(SELLING, GENERAL AND ADMINISTRATIVE) Selling, general and administrative
expenses increased $2.3 million (20.8 percent) to $13.4 million in 1999 as
compared to $11.1 million 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.

Selling, general and administrative expenses increased $3.3 million (42.7
percent) to $11.1 million in 1998 as compared to $7.8 million in 1997. The
increase was due mainly to the addition of sales and marketing personnel and
related costs necessary to support the increased sales of the Company.

(RESEARCH AND DEVELOPMENT) Research and development expenses increased $1.6
million (20.5 percent) to $9.5 million in 1999 as compared to $7.9 million in
1998, primarily as a result of additional personnel and increased research and
development efforts with respect to the HERMES and ZEUS platforms.

Research and development expenses increased $3.8 million (90.5 percent) to $7.9
million in 1998 as compared to $4.1 million in 1997, primarily as a result of
additional personnel and increased research and development efforts with respect
to the HERMES and ZEUS platforms, as well as for building additional research
and development, new product introduction and regulatory and clinical affairs
infrastructure.

(OTHER INCOME) Other income was $681,000 in 1999 compared to $1.4 million in
1998. Other income was almost entirely interest income derived from investments
in marketable securities. This decrease is a result of the reduced 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.

Other income was $1.4 million in 1998 compared to other expense of $1.0 million
in 1997. Other income in 1998 was almost entirely interest income derived from
proceeds from the Company's initial public offering which was completed in
August 1997. Other expense in 1997 included the amortization of $1.0 million of
financing costs attributable to the fixed conversion feature of a convertible
debenture and $442,000 of financing costs attributable to warrants issued in
connection with bridge debt, and was net of $776,000 of interest income derived
primarily from investing the proceeds of the Company's initial public offering.

(INCOME TAXES) Minimal provisions for state income taxes have been recorded on
the Company's pre-tax losses to date. At December 31, 1999, the Company had
federal and state net operating loss

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                    PAGE 30
<PAGE>   3
carryforwards of approximately $36.0 million and $7.5 million, respectively
which are available to offset future federal and state taxable income. These
carryforwards will expire on various dates through 2019. The Company has
provided a full valuation allowance on the deferred income tax asset because of
the uncertainty regarding its realization.

                              (FINANCIAL CONDITION)

Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $46.6 million as of December 31, 1999.
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, 1999, the Company's current ratio (current assets divided by
current liabilities) was 2.9 to 1 versus 8.1 to 1 at December 31, 1998,
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, 1999, the Company's use of cash in operating
activities of $14.3 million was primarily attributable to the net loss and also
to increases in accounts receivable and inventory in support of the Company's
revenue growth.

Cash outflow from purchases of plant and equipment was $1.5 million in 1999. The
Company currently has no material commitments for capital expenditures, but has
procured additional leased space in anticipation of continued business growth.
For the year ended December 31, 1999, net cash provided by financing activities
of $2.0 million was almost entirely attributable to the exercise of stock
options and warrants totaling $2.1 million.

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 2000. 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. The Company plans to raise additional funds through
public or private equity financing and is also planning to obtain a bank line of
credit. There can be no assurance that additional financing, if required, would
be available on acceptable terms, if at all. Management is confident that they
will be able to raise the funds necessary to sustain operations through December
31, 2000. If adequate funds are not available, the Company's business, financial
condition and results of operations would be materially adversely affected and
its ability to continue as a going concern would be at risk.

The Company's financial instruments include cash and short-term investment grade
debt securities. At December 31, 1999, 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
currency exposure at December 31, 1999.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                    PAGE 31
<PAGE>   4
                                 (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
HERMES and ZEUS product lines are important to the Company's future success and
neither product has achieved market acceptance. The ZEUS System 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 sole source suppliers for principal components of its AESOP and
ZEUS product lines. The Company's operations will continue to consume
significant amounts of cash and anticipated growth will place significant
demands on the Company's management 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, 1999 and under financial
condition above.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                    PAGE 32
<PAGE>   5
                     (CONSOLIDATED STATEMENTS OF OPERATIONS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
                                                     1999               1998               1997
---------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                <C>
Revenue                                          $ 18,058,000       $ 10,586,000       $  6,611,000
Cost of revenue                                     9,135,000          4,492,000          2,863,000
                                                 ------------       ------------       ------------
Gross profit                                        8,923,000          6,094,000          3,748,000
---------------------------------------------------------------------------------------------------
Research and development expense                    9,528,000          7,905,000          4,149,000
Selling, general and administrative expense        13,431,000         11,117,000          7,790,000
                                                 ------------       ------------       ------------
Loss from operations                              (14,036,000)       (12,928,000)        (8,191,000)
---------------------------------------------------------------------------------------------------
Other (income) expense, net                          (681,000)        (1,408,000)         1,015,000
                                                 ------------       ------------       ------------
Loss before income tax provision                  (13,355,000)       (11,520,000)        (9,206,000)
---------------------------------------------------------------------------------------------------
Income tax provision                                   20,000             25,000             13,000
Net loss                                         $(13,375,000)      $(11,545,000)      $ (9,219,000)
---------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
  Foreign currency translation adjustment             (33,000)                --                 --
                                                 ------------       ------------       ------------
Comprehensive loss                               $(13,408,000)      $(11,545,000)      $ (9,219,000)
---------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted           $      (1.57)      $      (1.45)      $      (2.12)
---------------------------------------------------------------------------------------------------
Weighted average shares outstanding -
basic and diluted                                   8,503,000          7,959,000          4,343,000
===================================================================================================
</TABLE>

                See accompanying notes to financial statements.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 33
<PAGE>   6
                   (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., a Delaware corporation and subsidiary, as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP
Woodland Hills, California
February 25, 2000

--------------------------------------------------------------------------------
                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 34
<PAGE>   7
                          (CONSOLIDATED BALANCE SHEETS)


<TABLE>
<CAPTION>
ASSETS                   DECEMBER 31,                     1999               1998
---------------------------------------------------------------------------------
<S>                                               <C>                <C>
Current assets
  Cash and cash equivalents                       $  4,297,000       $  5,577,000
  Marketable securities                              3,224,000         15,736,000
  Accounts receivable, net of allowance
     for doubtful accounts of $1,265,000
     in 1999 and $254,000 in 1998                    6,203,000          2,856,000
  Inventories
     Raw materials                                   2,899,000          1,588,000
     Work in process                                   942,000            344,000
     Finished goods                                  1,168,000          1,349,000
                                                  ------------       ------------
  Total inventories                                  5,009,000          3,281,000
  Prepaid expenses                                     332,000            347,000
                                                  ------------       ------------
Total current assets                                19,065,000         27,797,000
---------------------------------------------------------------------------------
Furniture and fixtures                               1,157,000            950,000
Computer equipment                                   2,061,000          1,307,000
Machinery and equipment                              2,341,000          1,807,000
Accumulated depreciation                            (2,626,000)        (1,689,000)
                                                  ------------       ------------
Property and equipment, net                          2,933,000          2,375,000
---------------------------------------------------------------------------------
Other assets                                         1,363,000            272,000
---------------------------------------------------------------------------------
Total assets                                      $ 23,361,000       $ 30,444,000
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------
Current liabilities
  Accounts payable                                $  3,235,000       $  1,623,000
  Accrued expenses                                   2,917,000          1,820,000
  Deferred revenue                                     317,000                 --
                                                  ------------       ------------
Total current liabilities                            6,469,000          3,443,000
---------------------------------------------------------------------------------
  Deferred revenue                                     970,000                 --
  Other liabilities                                    103,000            131,000
                                                  ------------       ------------
Total liabilities                                    7,542,000          3,574,000

Commitments and contingencies (Note 6)
---------------------------------------------------------------------------------

Shareholders' equity
  Preferred stock
     Authorized -- 5,000,000 shares
     Issued and Outstanding -- none
  Common stock -- $.001 par value
     Authorized -- 25,000,000 shares
     Issued & Outstanding -- 1999 - 8,745,442
     shares; 1998 - 8,353,725 shares                     9,000              8,000
  Additional paid-in capital                        62,663,000         60,813,000
  Deferred compensation                               (247,000)          (753,000)
Accumulated deficit                                (46,573,000)       (33,198,000)
Accumulated comprehensive loss                         (33,000)                --
                                                  ------------       ------------
Total shareholders' equity                          15,819,000         26,870,000
---------------------------------------------------------------------------------
Total liabilities and shareholders' equity        $ 23,361,000       $ 30,444,000
=================================================================================
</TABLE>

                 See accompanying notes to financial statements.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 35
<PAGE>   8
           (CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT))

<TABLE>
<CAPTION>
                                                                                                  ACCUMULATED         TOTAL
                               PREFERRED        COMMON         ADDITIONAL        DEFERRED       DEFICIT & COMP-    SHAREHOLDERS'
                                 STOCK           STOCK      PAID-IN CAPITAL    COMPENSATION     REHENSIVE LOSS   EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>              <C>          <C>                <C>              <C>              <C>
Balance
  December 31, 1996           $ 3,716,000      $   2,000      $    537,000      $  (515,000)     $(12,434,000)     $ (8,694,000)
---------------------------------------------------------------------------------------------------------------------------------
Common stock issued                    --          1,000         1,216,000               --                --         1,217,000
Stock issued on IPO                    --          3,000        36,737,000               --                --        36,740,000
Conversion of preferred
  to common net of
  issuance costs               (3,716,000)         2,000        12,176,000               --                --         8,462,000
Exercise of options                    --             --           272,000               --                --           272,000
Exercise of warrants,
  net of issuance costs                --             --           168,000               --                --           168,000
Deferred compensation,
  net of amortization                  --             --         2,323,000       (1,266,000)               --         1,057,000
Conversion of debt
  to common                            --             --         5,074,000               --                --         5,074,000
Redemption premium                     --             --          (240,000)              --                --          (240,000)
Stock purchase plan                    --             --            78,000               --                --            78,000
Net loss                               --             --                --               --        (9,219,000)       (9,219,000)
                              -----------      ---------      ------------      -----------      ------------      ------------
Balance December 31, 1997              --          8,000        58,341,000       (1,781,000)      (21,653,000)       34,915,000
---------------------------------------------------------------------------------------------------------------------------------
Common stock issued                    --             --            46,000               --                --            46,000
Exercise of options                    --             --         1,094,000               --                --         1,094,000
Exercise of warrants                   --             --         1,471,000               --                --         1,471,000
Amortization of
  deferred compensation                --             --          (400,000)       1,028,000                --           628,000
Stock purchase plan                    --             --           276,000               --                --           276,000
IPO expenses and other                 --             --           (15,000)              --                --           (15,000)
Net loss                               --             --                --               --       (11,545,000)      (11,545,000)
                              -----------      ---------      ------------      -----------      ------------      ------------
Balance
  December 31, 1998                    --          8,000        60,813,000         (753,000)      (33,198,000)       26,870,000
---------------------------------------------------------------------------------------------------------------------------------
Common stock issued                    --             --                --               --                --                --
Exercise of options                    --          1,000         1,836,000               --                --         1,837,000
Exercise of warrants                   --             --            37,000               --                --            37,000
Amortization of
  deferred compensation                --             --          (270,000)          506,000               --           236,000
Stock purchase plan                    --             --           262,000               --                --           262,000
Other                                  --             --           (15,000)              --                --           (15,000)
Unrealized loss -
  translation                          --             --                --               --           (33,000)          (33,000)
Net loss                               --             --                --               --       (13,375,000)      (13,375,000)
                              -----------      ---------      ------------      -----------      ------------      ------------
Balance
  December 31, 1999           $        --      $   9,000      $ 62,663,000      $  (247,000)     $(46,606,000)     $ 15,819,000
=================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                              COMMON SHARES                       PREFERRED SHARES
                                   1997          1998          1999           1997         1998     1999
--------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>           <C>            <C>            <C>      <C>
Beginning balance                1,734,289     7,670,589     8,353,725      1,474,545        --       --
--------------------------------------------------------------------------------------------------------
Issued                             125,734        91,747            --        323,871        --       --
Issued on IPO                    2,875,000            --            --             --        --       --
Exercise of options                187,653       254,780       354,478             --        --       --
Conversion of preferred          2,344,387            --            --     (1,798,416)       --       --
Exercise of warrants                31,051       309,827         8,189             --        --       --
Conversion of debt                 363,743            --            --             --        --       --
Stock purchase plan                  8,732        26,782        29,050             --        --       --
                                 ---------     ---------     ---------     ----------      ----     ----
Ending balance                   7,670,589     8,353,725     8,745,442             --        --       --
========================================================================================================
</TABLE>

                 See accompanying notes to financial statements.

--------------------------------------------------------------------------------
                                COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 36
<PAGE>   9
                     (CONSOLIDATED STATEMENTS OF CASH FLOWS)

<TABLE>
<CAPTION>
                            YEARS ENDED DECEMBER 31,                  1999              1998              1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>               <C>
Cash Flows from Operating Activities:
  Net loss                                                       $(13,375,000)     $(11,545,000)     $ (9,219,000)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
       Depreciation and amortization                                  937,000           518,000           379,000
       Provision for doubtful accounts                              1,011,000           298,000            28,000
       Loss on sale of fixed assets                                     8,000             5,000             1,000
       Common stock and options issued for services                    50,000            46,000            66,000
       Financing cost of warrants issued with debt and fixed
          conversion of convertible debenture                              --                --         1,442,000
       Compensation for stock options, warrants and
          common stock issued below fair market value                 236,000           628,000         1,057,000
Decrease/(increase) in:
       Accounts receivable                                         (4,358,000)       (1,350,000)         (747,000)
       Inventories                                                 (1,728,000)       (2,289,000)         (347,000)
       Prepaid expenses                                                15,000           (65,000)         (195,000)
       Other assets                                                (1,091,000)               --                --
Increase/(decrease) in:
       Accounts payable                                             1,612,000           405,000           316,000
       Accrued expenses                                             1,097,000           849,000           212,000
       Deferred revenue and other liabilities                       1,259,000                --                --
                                                                 ------------      ------------      ------------
Net cash used in operating activities                             (14,327,000)      (12,500,000)       (7,007,000)
-----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
  Purchases of property and equipment                              (1,503,000)       (1,784,000)         (816,000)
  Decrease/(increase) in marketable securities                     12,512,000        (5,557,000)      (10,179,000)
                                                                 ------------      ------------      ------------
Net cash provided by (used in) investing activities                11,009,000        (7,341,000)      (10,995,000)
-----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
  Repayment of debt                                                        --           (78,000)       (4,488,000)
  Proceeds from common stock issued and warrants
     exercised, net of repurchases                                    249,000         1,747,000         5,470,000
  Proceeds from IPO, net of expenses                                       --           (35,000)       36,740,000
  Proceeds from preferred stock issuance                                   --                --         2,341,000
  Proceeds from exercise of stock options                           1,836,000         1,094,000           272,000
  Other                                                               (47,000)          135,000          (211,000)
                                                                 ------------      ------------      ------------
Net cash provided by financing activities                           2,038,000         2,863,000        40,124,000
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash                                        (1,280,000)      (16,978,000)       22,122,000
Cash and cash equivalents at beginning of period                    5,577,000        22,555,000           433,000
                                                                 ------------      ------------      ------------
Cash and cash equivalents at end of period                       $  4,297,000      $  5,577,000      $ 22,555,000
=================================================================================================================
</TABLE>

                 See accompanying notes to financial statements.

--------------------------------------------------------------------------------
                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 37
<PAGE>   10
                  (NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)

                   (NOTE 1 > SIGNIFICANT ACCOUNTING POLICIES)

(NATURE OF OPERATIONS AND RISKS) 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.

Like other companies at this stage of development and in this industry, the
Company's future success is subject to numerous risks including the uncertainty
of design, development and manufacturing of new products, regulatory clearances
and approvals, developing its markets, acceptance of its products, reimbursement
for its products, financing its operations, managing its growth and competition.

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 2000. 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. The Company plans to raise additional funds through
public or private equity financing and is also planning to obtain a bank line of
credit. There can be no assurance that additional financing, if required, would
be available on acceptable terms, if at all. Management is confident that they
will be able to raise the funds necessary to sustain operations through December
31, 2000. If adequate funds are not available, the Company's business, financial
condition and results of operations would be materially adversely affected and
its ability to continue as a going concern would be at risk.

(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
generally accepted accounting principles 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 recognizes revenue from the sale of product
and from the performance of services as products are shipped and as services are
performed. The company defers revenue from the sale of extended warranties and
other contracts and recognizes it over the life of the contracts.

(FOREIGN CURRENCY TRANSLATION) The assets and liabilities of Computer Motion
S.A. are translated into U.S. dollars at exchange rates in effect on reporting
dates, while capital accounts are translated at historical rates. Income
statement items are translated at average exchange rates in effect during the

--------------------------------------------------------------------------------
                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 38
<PAGE>   11
financial statement period. The cumulative effect of translation is recorded as
a separate component of shareholders' equity.

(NET LOSS PER SHARE) Basic net loss per share is calculated on a basis
equivalent to diluted net loss per share since inclusion of the Company's
outstanding stock options and warrants in the calculation is antidilutive. Net
loss per share is based on the weighted average number of common shares
outstanding during the financial statement period.

(CASH EQUIVALENTS) Cash equivalents, consisting of liquid investments with a
maturity of three months or less when purchased, 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.

(RESEARCH AND DEVELOPMENT) Research and development expenses are charged to
operations as incurred and totaled $9,528,000, $7,905,000 and $4,149,000 in
1999, 1998 and 1997 respectively.

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

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

(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.

                   (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 29,050, 26,782 and 8,732 shares in 1999,
1998 and 1997 respectively. At December 31, 1999, 65,104 shares were available
for purchase under the plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation".

(STOCK OPTIONS) Under the terms of the Company's stock option plans, 3,493,361
shares of common stock have been reserved for issuance to directors, officers
and employees and to others upon the grant of restricted stock or the exercise
of stock options. 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,
1999, there were a maximum of 945,376 shares available for grant and 1,695,210
options outstanding, of which 596,728 shares were exercisable at a weighted
price of $6.18 per share. The weighted average contractual life of options
outstanding at December 31, 1999 was 8.2 years. Stock option activity was as
follows:

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                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                    PAGE 39

<PAGE>   12

<TABLE>
<CAPTION>
                                         OPTIONS                 WEIGHTED AVG.
                                       OUTSTANDING              EXERCISE PRICE
--------------------------------------------------------------------------------
<S>                                    <C>                      <C>
       Balance - 12/31/96               1,341,760                  $ 4.01
--------------------------------------------------------------------------------
       Granted                            650,789                  $ 8.44
       Canceled                           (71,421)                 $ 4.57
       Exercised                         (187,653)                 $ 1.45
       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>

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 of the shares issued 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 exercised, 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. Options issued to non-employees totaled 75,000 and
the related compensation expense recognized by the company totaled $50,000 in
1999. Compensation related to options issued for services is recognized ratably
over the service period.

During February 1999, the Company issued a total of 130,000 options to sales
personnel of the Company. Vesting rights for these options were contingent on
the Company meeting certain sales performance criteria. No compensation expense
was required in 1999 due to there being no variance between the exercise price
and fair market value of the options on the date the performance criteria was
met.

The Company issued certain common stock and warrants and granted certain stock
options at prices perceived by the Securities and Exchange Commission to be 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
$236,000, $628,000 and $1,057,000 was recognized in 1999, 1998 and 1997
respectively. At December 31, 1999, deferred (unamortized) compensation expense
relating to stock options was $247,000 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 $2,406,332, ($.28 per share), $1,295,000 ($.16 per
share) and $718,000 ($.17 per share) for 1999, 1998 and 1997, respectively. The
fair market value of the warrants and stock

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                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 40
<PAGE>   13
options at the grant date was estimated using the Black-Scholes model with the
following weighted average assumptions:

                                                 1999         1998         1997
--------------------------------------------------------------------------------
Expected life (years)                             7.0          7.0          7.0
Interest rate                                     5.5%         5.5%         6.0%
Volatility                                       63.0%        40.0%        10.0%
Dividend yield                                    0.0%         0.0%         0.0%
================================================================================

                        (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, 1999, all
outstanding warrants were exercisable. Warrant information is as follows:

<TABLE>
<CAPTION>
                                                                  WEIGHTED AVG.
                                          WARRANTS OUTSTANDING    EXERCISE PRICE
--------------------------------------------------------------------------------
<S>                                       <C>                     <C>
Balance - 12/31/96                              1,301,288              $5.18
--------------------------------------------------------------------------------
Granted                                           356,673              $7.43
Exercised                                         (31,051)             $5.23
                                                ---------              -----
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
================================================================================
</TABLE>

                         (NOTE 4 > 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, 1999 and 1998
consisted of the following:

<TABLE>
<CAPTION>
                                                     1999              1998
--------------------------------------------------------------------------------
<S>                                              <C>               <C>
Allowance for doubtful accounts                  $    504,000      $    102,000
Accrued liabilities                                   674,000            80,000
Deferred rent                                          41,000            53,000
Depreciation and amortization                         137,000            74,000
Uniform capitalization costs                          358,000           337,000
Net operating loss carryforwards                   12,854,000         9,950,000
Tax credits                                         1,530,000           771,000
Deferred revenue                                      513,000                --
Capitalized research and development costs          1,094,000                --
Other                                                 382,000            52,000
                                                 ------------      ------------
Total deferred income tax asset                    18,087,000        11,419,000
Valuation reserve                                 (18,087,000)      (11,419,000)
                                                 ------------      ------------
Net deferred income tax asset                    $         --      $         --
================================================================================
</TABLE>

                                 COMPUTER MOTION
                               1999 ANNUAL REPORT
                                    PAGE 41
<PAGE>   14

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

<TABLE>
<CAPTION>
                                      1999             1998             1997
--------------------------------------------------------------------------------
<S>                               <C>              <C>              <C>
Expected federal benefit          $(4,541,000)     $(3,917,000)     $(3,222,000)
State income taxes, net of
  federal income tax effect            20,000           25,000           13,000
Tax benefits not recognized         4,541,000        3,917,000        3,222,000
                                  -----------      -----------      -----------
Income tax provision              $    20,000      $    25,000      $    13,000
================================================================================
</TABLE>

At December 31, 1999, the Company had federal and state net operating loss (NOL)
carryforwards of approximately $36,000,000 and $7,500,000, respectively and
research and development tax credit carryforwards of approximately $1,530,000.
The federal tax credit and NOL carryforwards expire twenty years from the year
of loss and are restricted if significant changes in ownership occur. The state
NOL carryforwards expire in five to seven years from the year of loss.

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 deferred
tax assets.

          (NOTE 5 > FINANCIAL INSTRUMENTS AND OFF-BALANCE STREET 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 $700,000, $1,448,000 and $776,000 in 1999, 1998 and 1997
respectively.

The Company's investment portfolios consist of the following:

<TABLE>
<CAPTION>
                                                    1999                  1998
--------------------------------------------------------------------------------
<S>                                              <C>                 <C>
Certificates of deposit                          $       --          $ 1,000,000
Commercial paper                                    698,000            8,686,000
Corporate bonds                                   2,499,000            9,068,000
Cash                                              4,294,000            2,350,000
Interest receivable                                  30,000              209,000
                                                 ----------          -----------
Total                                            $7,521,000          $21,313,000
================================================================================
</TABLE>

(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
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.

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.

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                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 42
<PAGE>   15
                    (NOTE 6 > COMMITMENTS AND CONTINGENCIES)

(LEASES) Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$667,000, $629,000 and $364,000, respectively. As of December 31, 1999, the
Company had the following minimum lease payments for certain facilities and
equipment under operating leases: 2000-$805,000; 2001-$828,000; 2002-$845,000;
2003-$869,000; 2004-$893,000 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
statements.

                        (NOTE 7 > FINANCING ARRANGEMENTS)

The Company has arrangements with several third-party finance institutions,
whereby the Company sells its leases, primarily without recourse. The Company
recognized approximately $1,880,000, $3,511,000 and $1,331,000 in revenues from
leases sold in 1999, 1998 and 1997, respectively. At December 31, 1999,
approximately $165,000 had not been collected on leases sold with recourse for
which the Company is contingently liable. The Company intends to no longer sell
leases with recourse.

                         (NOTE 8 > 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
$63,000, $56,000 and 0 in 1999, 1998 and 1997 respectively.

                           (NOTE 9 > GEOGRAPHIC AREA)

The Company operates in a single industry segment, the medical device industry.
Export sales from the United States were $6,143,000, $1,225,000 and $1,871,000
in 1999, 1998 and 1997 respectively primarily to Europe and Asia.

                       (NOTE 10 > 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
commencement of a tender offer that would result in a person, persons or other
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 of 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 be 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.

--------------------------------------------------------------------------------
                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 43
<PAGE>   16
                         NOTE 11 > SHAREHOLDERS' EQUITY

In August 1997, the Company reincorporated in Delaware and effected a reverse
stock split of its existing common and preferred stock 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, 1999, 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, 1999, stock option and warrant
exercises and issuances of common stock under the Company's Employee Stock
Purchase Plan increased the number of common shares by 391,717. Effective May
1997, a corporation which had invested $4,000,000 in the form of a convertible
note converted its note and all accrued interest thereon into 363,743 shares of
the Company's common stock. Financing costs of $1,000,000 relating to the fixed
conversion feature of this note were expensed in 1997.

          (NOTE 12 > SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION)

Cash paid for income taxes was $8,085, $3,462, and $1,500 for 1999, 1998 and
1997 respectively. Cash paid for interest was $11,703, $37,776 and $332,202 for
1999, 1998 and 1997 respectively.

    (NOTE 13 > EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT (UNAUDITED))

In March 2000, the Company's Chief Executive Officer made a convertible loan to
the Company in the amount of $3,000,000. Interest on the convertible loan
accrues at the prime rate. The convertible loan shall be due and payable on
demand upon (a) the earlier of the first anniversary of the 2000 Annual Meeting,
if the stockholders decline to approve the conversion of the note, or (b) at any
time after March 29, 2002. All of the principal and accrued interest outstanding
shall automatically be converted into common stock upon the approval of the
conversion by the Company's stockholders at the Company's 2000 Annual Meeting.

                (NOTE 14 > QUARTERLY FINANCIAL DATA (UNAUDITED))

Quarterly data for 1999 and 1998 was as follows:

<TABLE>
<CAPTION>
                                 FIRST QUARTER    SECOND QUARTER    THIRD QUARTER   FOURTH QUARTER
--------------------------------------------------------------------------------------------------
<S>                               <C>              <C>              <C>             <C>
Year Ended 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 Ended 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>

In the fourth quarter of 1999 the Company recorded certain year-end adjustments
related to collectibility of accounts receivable which increased the net loss by
approximately $990,000.

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                                 COMPUTER MOTION
                               1999 ANNUAL REPORT

                                     PAGE 44