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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

|(Mark One)                                  |                                                                                         
|------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003
|OR                                         
|o                                           | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-31519

CURON MEDICAL, INC.(Exact name of registrant as specified in its charter)

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

46117 Landing Parkway
Fremont, CA 94538(Address of principal executive offices, including zip code)

(510) 661-1800(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

|Title of each class: |  | Name of each exchange on which registered:
|-------------------- |  | ------------------------------------------
|None                 |  | N/A                                       

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value(Title of Class)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and, (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12 b-2 of the
Act). Yes o    No ý

The
aggregate market value of stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 30, 2003 (which is the last
business day of Registrant's most recently completed second fiscal quarter), as reported on the NASDAQ SmallCap Market, was approximately $8.9 million.

The
number of shares of Common Stock outstanding as of February 20, 2004: 24,308,187 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12 and 13 of Part III of this Form 10-K incorporates information by reference from the registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

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CURON MEDICAL, INC.  FORM 10-K  TABLE OF CONTENTS

|         |  |                                                                                                                   |  | Page
|-------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                                                   |  |     
|Item 1.  |  | Business                                                                                                          |  | 1   
|Item 2.  |  | Properties                                                                                                        |  | 22  
|Item 3.  |  | Legal Proceedings                                                                                                 |  | 23  
|Item 4.  |  | Submission of Matters to a Vote of the Security Holders                                                           |  | 23  
|PART II  |  |                                                                                                                   |  |     
|Item 5.  |  | Market for registrant's Common Equity and Related Stockholder Matters                                             |  | 24  
|Item 6.  |  | Selected Financial Data                                                                                           |  | 26  
|Item 7.  |  | Management's Discussion and Analysis of Results of Operations and Financial Condition                             |  | 27  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 33  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                       |  | 34  
|         |  | Report of Independent Auditors                                                                                    |  | 35  
|         |  | Consolidated Balance Sheets at December 31, 2003 and December 31, 2002                                            |  | 36  
|         |  | Consolidated Statements of Operations for each of the Three Years in the Period Ended December 31, 2003           |  | 37  
|         |  | Consolidated Statements of Stockholders' Equity for each of the Three Years in the Period Ended December 31, 2003 |  | 38  
|         |  | Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 2003           |  | 39  
|         |  | Notes to Consolidated Financial Statements                                                                        |  | 40  
|         |  | Quarterly Financial Data (Unaudited)                                                                              |  | 54  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                              |  | 54  
|Item 9a  |  | Controls and Procedures                                                                                           |  | 54  
|PART III |  |                                                                                                                   |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                |  | 55  
|Item 11. |  | Executive Compensation                                                                                            |  | 55  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                                    |  | 55  
|Item 13. |  | Certain Relationships and Related Transactions                                                                    |  | 55  
|Item 14. |  | Principal Auditor Fees and Services                                                                               |  | 55  
|PART IV  |  |                                                                                                                   |  |     
|Item 15. |  | Exhibits, Financial Statements Schedules, and Reports on Form 8-K                                                 |  | 56  

This
Report on Form 10-K contains certain forward-looking statements regarding future events. These statements include statements relating to our
expectations as to the timing and success of our clinical trials and regulatory submissions, the mix of our sales and revenues derived from generators and handpieces, the rate of growth and success of
our international sales and marketing efforts, our expectations regarding increased operating expenses and net losses as our business expands, the timing of new product introductions. These
forward-looking statements involve risks and uncertainties. The cautionary statements set forth throughout this Report and, specifically, those contained in "Additional Risk Factors," commencing on
page 13, identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to,
failure to obtain regulatory approvals as anticipated, a slower rate of market acceptance of our products than expected, increased competition, continued adverse changes in general economic conditions
in the United States and internationally, including adverse changes in the specific markets for our products, adverse changes in customer order patterns,
pricing pressures, risks associated with foreign operations, failure to reduce costs or improve operating efficiencies, and our ability to attract, hire and retain key and qualified employees.

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PART I

Item 1. Business

Company Overview

Curon Medical, Inc was incorporated in Delaware in May 1997. We develop, manufacture and market innovative proprietary products for the treatment of
gastrointestinal disorders. Our products consist of radiofrequency generators and single-use disposable devices.

Our
first product, the Stretta® System, received United States Food and Drug Administration, or FDA, clearance in April 2000 for the treatment of gastroesophageal
reflux disease, or GERD, which affects approximately 14 million U.S. adults on a daily basis. In patients with GERD, acidic stomach contents reflux backward from the stomach into the esophagus,
causing a wide range of symptoms and complications, including, most commonly, persistent heartburn and chest pain. Unlike medication, which temporarily suppresses GERD symptoms, our Stretta System
applies radiofrequency energy to treat the causes of GERD. Our Stretta System consists of a disposable catheter with needle electrodes and our control module, which is a radiofrequency energy
generator. Using the Stretta System, the physician delivers temperature-controlled radiofrequency energy to the muscle of the lower esophageal sphincter and upper portion of the stomach. The delivery
of this energy creates thermal lesions that reabsorb over time, causing tissue contraction. Clinical studies show a significant reduction in GERD symptom scores, esophageal acid exposure, and use of
anti-secretory medications.

We
commercially launched the Stretta System in May 2000. As of December 31, 2003, we have sold 252 control modules in the United States and approximately 5,500 patients
have been treated with the Stretta procedure.

Our
second product, the Secca® System, is a radiofrequency energy-based system for treatment of fecal incontinence. Fecal incontinence is caused by damage to the anal
sphincter from childbirth, surgery, neurological disease, injury or age, and affects up to 16 million adults in the United States. Using the Secca System, physicians deliver radiofrequency
energy to the muscle of the anal canal. Clinical studies have shown a reduction in fecal incontinence symptoms and improvement in general quality of life. In March 2002, we received 510(k)
clearance from the FDA to market the Secca System for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback. We
undertook a limited test launch of Secca in June 2002, and fully launched the product commercially in May 2003.

We
have a direct sales force to market and sell our products in the United States. We market the Stretta System, as an alternative to anti-reflux surgery, primarily to high
volume general surgeons and gastroenterologists. In the United States, we estimate that there are approximately 4,000 general surgeons and 9,000 gastroenterologists who actively perform endoscopy. We
market the Secca System primarily to colon and rectal surgeons and to those general surgeons who perform colorectal surgery. We estimate that there are approximately 1,000 colon and rectal surgeons
and up to 2,000 general surgeons that perform colorectal surgery in the United States.

Our
Stretta System has also received European, Australian and Canadian regulatory approval, and our Secca System has also received regulatory approval in Europe. We incorporated a
subsidiary company in Belgium in March 2001 to manage distribution of our products in Europe, the Middle East and Africa. In March 2003, we entered into distribution agreements for the
Stretta System in Switzerland, Austria, and the Netherlands, and to date have international distribution agreements with a distributor for the Far East, giving us representation in the Peoples
Republic of China, Taiwan, Hong Kong, South Korea, Singapore, Malaysia, Indonesia, Vietnam, Thailand, India and the Philippines. To date, we have international distribution agreements for the Stretta
System in 17 European and Middle Eastern countries and in South Africa. The Secca System will also be sold through distributors in Europe. The first European Secca procedures were performed in
Germany, Denmark and Italy in

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March 2002,
as part of our clinical trials. The first international commercial Secca procedure was performed in March 2003.

The
American Medical Association recently issued a Category III CPT code for the Stretta procedure to take effect January 1, 2004, which will make it easier for physicians
to code for the procedure from that date. We anticipate that a Category I CPT code will be published in draft form in July 2004 to take effect in January 2005.

Business Strategy

Our strategy is to establish our Stretta and Secca Systems as standard treatment options for patients with GERD and fecal incontinence, respectively. We believe
that our products offer substantial improvements over the current treatment options in the care of patients with these disorders.

The
typical Stretta patient has not achieved adequate symptom control on, or is intolerant of, escalated medical therapy, or does not wish to continue indefinite
anti-secretory medication use. Until recently, the only option for these patients has been a surgical anti-reflux procedure. We believe that the Stretta System offers several
significant benefits over anti-reflux surgery, including that it is most commonly an outpatient procedure rather than inpatient surgery, that it is typically performed under conscious
sedation rather than general anesthesia, and that it has a lower incidence of side effects and complications. Patients also return to normal activities faster after the Stretta procedure than after
anti-reflux surgery. Due to these features, the Stretta procedure is significantly less expensive than anti-reflux surgery, and thus insurance companies benefit through cost
savings.

The
Secca procedure offers a treatment option for patients with fecal incontinence who have failed more conservative therapies such as diet modification and biofeedback. Currently, fecal
incontinence patients have few treatment options. These options include fiber therapy, anti-diarrheal medications, biofeedback therapy, and major surgery, which may involve reconstruction
of the sphincter muscle or implantation of a continence device. These therapies have only modest effectiveness, and we believe that there is a need for a minimally invasive treatment option that may
be offered to patients as an alternative to major surgery. We believe that the Secca procedure has several significant benefits over surgery, including that it is most commonly an outpatient procedure
rather than inpatient surgery, that it is typically performed under conscious sedation rather than general anesthesia, and that it has a lower incidence of side effects and complications. Recovery
after incontinence surgery may take several months, whereas patients who have the Secca procedure may usually return to their normal daily activities the following day.

We
have established both a direct and indirect sales and distribution network in the United States to target the approximately 4,000 hospital endoscopy suites and approximately 4,000
ambulatory treatment centers. We currently have eight salespeople, a direct sales vice president, an indirect sales vice president, two regional indirect sales managers, and two clinical applications
specialists. In addition, we have an indirect sales channel comprised of 10 Manufacturer Representative firms, with 37 salespeople to sell and market our products, on a part time basis, across the
United States. In Europe and other selected countries, we have distributors covering 17 countries. We may hire additional salespeople or enter new distributor relationships to increase market
penetration of our products.

We
have acquired and may continue to acquire complementary technologies. We have a license agreement with Gyrus Group PLC (formerly Somnus Medical Technologies, Inc) for the use of
technology related to Gyrus' radiofrequency generator. We also have entered into license agreements with the University of Kansas Medical Institute and with Messrs. Shadduck and Baker relating
to applying radiofrequency energy to tissue. We may enter into license agreements with other persons or companies covering technology relating to gastrointestinal tract diseases.

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GERD: The problem and conventional treatment options

GERD is the frequent backward flow, or reflux, of stomach contents into the esophagus, the muscular tube that connects the mouth to the stomach. In the lower part
of the esophagus, there is an area of thickened muscle known as the lower esophageal sphincter which, when functioning properly, acts as a one-way valve, allowing food to pass down from
the esophagus into the stomach, but preventing reflux. In GERD patients, the lower esophageal sphincter does not function properly and allows chronic reflux to occur. Stomach acid, enzymes and bile
irritate the esophagus and cause a wide range of symptoms and complications, most commonly persistent severe heartburn and chest pain. In some GERD sufferers, the pain is acute enough to require an
emergency room visit. People with GERD often have difficulty sleeping due to increased reflux and heartburn when they lie down. Also, damage to the esophagus caused by reflux may result in more
serious complications, such as erosion or ulceration of the esophagus, build-up of scar tissue that can narrow and obstruct the esophagus, and Barrett's epithelium, a condition that
increases the risk of esophageal cancer.

Prescription
medication is the primary treatment option for patients with GERD. The most widely prescribed medications from the proton pump inhibitor drug class, such as Prilosec or
Nexium, have annual U.S. sales of approximately $6 billion. Although these medications temporarily ease heartburn symptoms by reducing stomach acid, they do not prevent reflux or treat the
underlying causes of GERD. Side effects may include diarrhea, headaches, dizziness and nausea. Taken regularly, these medications are expensive, costing an estimated average of $2,300 per year, based
solely on retail prices for medication requirements of the patients in our clinical trial. Many GERD patients do not want to be dependent on medications and have difficulty complying with prescribed
lifestyle modifications that require ongoing fundamental changes in eating, drinking and sleeping behavior.

The
most common corrective treatment for GERD is an anti-reflux surgical procedure generally known as a laparascopic Nissen fundoplication where the fundus of the stomach is
wrapped around the lower esophageal sphincter and sutured in position to provide a mechanical barrier to reflux. This inpatient surgical procedure costs between $11,000 and $15,000, involves a
hospital stay of several days and a prolonged recovery period, and has a significant morbidity risk. We believe that approximately 250,000 patients are referred for this procedure annually, of which
up to 100,000 actually undergo the anti-reflux surgery. The remainder of those referred who do not undergo the procedure are either contra-indicated or choose not to proceed after learning
the details of the surgery.

The Stretta System: Treatment of GERD

Our proprietary Stretta System provides physicians with the tools to perform a minimally invasive, outpatient, and cost-effective procedure for the
treatment of GERD. Unlike medication, the Stretta procedure treats GERD, rather than simply managing the symptoms by inhibiting acid secretion into the stomach. Unlike anti-reflux surgery,
the Stretta procedure is most commonly an outpatient procedure with minimal side effects. The Stretta procedure, which typically costs between $3,000 and $5,000, takes less than an hour, and utilizes
techniques commonly used by general surgeons and gastroenterologists who perform endoscopy. Most treated patients have been able to return to normal activities within one day of treatment and reduce
or eliminate medication use shortly thereafter. We believe that the Stretta procedure's effectiveness and relatively low cost, combined with the absence of significant discomfort and side effects,
makes it a clinically and economically attractive GERD treatment for those patients with unsatisfactory symptom control on drugs, who are considering an anti-reflux surgical procedure.

The
Stretta System consists of the Stretta Catheter, which is a disposable flexible catheter with needle electrodes, and the Curon Control Module, which is a radiofrequency energy
generator. Using these devices, the physician delivers temperature-controlled radiofrequency energy to create thermal lesions in the muscle of the lower esophageal sphincter and upper stomach. These
lesions reabsorb

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over
several weeks and cause tissue contraction, which increases the ability of the lower esophageal sphincter to act as a barrier to reflux.

The Secca System: Treatment of Fecal Incontinence

The Secca System is designed to treat fecal incontinence, a condition that affects up to 16 million U.S. adults. Fecal incontinence is caused by damage to
the anal sphincter from childbirth, surgery, neurological disease, injury or age. It is a life-altering condition that, unlike GERD, lacks minimally invasive corrective treatment
alternatives. The most common treatment options control, but do not correct, the condition, and include the use of protective undergarments, diet modification and
over-the-counter dietary supplements. Current corrective treatment options include major surgery and are rarely utilized.

The
Secca System provides a minimally-invasive, outpatient, and cost-effective procedure for the treatment of fecal incontinence. The Secca procedure utilizes the same
technology and treatment concepts as the Stretta System. Using our Curon Control Module and our handheld disposable device called the Secca Handpiece, physicians deliver radiofrequency energy into the
muscle of the anal sphincter to improve its barrier function. We completed a U.S. clinical trial of the Secca
System in April 2001, and submitted the results to the FDA in December 2001. In March 2002, we received 510(k) clearance from the FDA to market the Secca System for the treatment
of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback.

Product Description

We have developed a suite of products incorporating proprietary design features for use in the Stretta and Secca procedures. These products consist of a
disposable catheter and a disposable handpiece for delivery of controlled radiofrequency energy to tissue, and a radiofrequency generator, known as the Curon Control Module. Both our current products
and products under development utilize proprietary software to interface with our Curon Control Module.

Single-use disposable devices

Both the Stretta Catheter and the Secca Handpiece are disposable products incorporating innovative designs that enable a physician to easily access the treatment
site and accurately deliver radiofrequency energy into the tissue. Features include:



Curon Control Module

The Stretta System and the Secca System both incorporate our radiofrequency energy generator, the Curon Control Module. The Curon Control Module has four
channels, each of which independently control the four needle electrodes on the Stretta Catheter and Secca Handpiece. The

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generator
uses continuous data feedback to achieve precise tissue temperatures at the treatment site. The generator tracks surface tissue temperatures from each electrode, and if temperatures at
either the treatment site or surface tissue exceed pre-set levels, the generator automatically stops delivering energy to that electrode. An integrated pump delivers water to surface
tissue during the procedure. The Stretta System and the Secca System each utilize proprietary software installed onto the Curon Control Module. The software provides a distinct graphical user
interface and the functions and parameters that are required for the particular procedure.

Radiofrequency energy

Our products are based on radiofrequency energy delivery, which has a long history of use in medical applications. Radiofrequency energy has been cleared by the
FDA for many therapies involving tissue heating, tissue remodeling and nerve pathway interruption, including:



Clinical and Regulatory Status

Stretta clinical studies

In April 2000, we received 510(k) clearance from the FDA to market the Stretta System for the treatment of GERD. To evaluate the Stretta System, we
conducted an open label multi-center U.S. clinical trial with leading investigators at 14 institutions, in which 131 patients were treated. We measured how well the procedure eliminated the need for
heartburn medication, improved symptoms, improved quality of life, and reduced the amount of acid detected in the esophagus. Results from the initial 47 patients treated were submitted to the FDA.
Six-month data was available for 44 of the 47 treated patients because three patients did not participate in the voluntary follow-up testing. The follow-up data
indicated that the Stretta procedure led to significant improvement in both objective and subjective measurements. Twelve-month data for 118 of the 131 patients was published in Gastrointestinal Endoscopyin 2002.

Patients
in our trials experienced no persistent side effects or other significant complications during the treatment and follow-up period. Most patients resumed normal
levels of activity on the day after treatment. A few patients reported difficulty swallowing, increased flatulence or mild abdominal discomfort for a period of days. These symptoms were significantly
milder and shorter in duration than those typically experienced after anti-reflux surgery.

We
have conducted an eight-center, double-blind, randomized sham-controlled trial of the Stretta System in the United States, treating 64 patients. Results of this trial were
presented at the Digestive Disease Week Conference in May 2002, and published inGastroenterologyin September 2003. This trial
demonstrated significant improvements in GERD symptom scores and satisfaction that were not present in the sham (control) group. Further, there were significant improvements in acid exposure in the
Stretta treated group at 12 months versus baseline. We expect that this data will influence physician adoption rates, facilitate reimbursement approvals and enhance marketing activity.

Secca clinical studies

In November 1999, we conducted a pilot study at a leading medical institution in Mexico City. Ten patients with fecal incontinence were treated with the
Secca System. Two years following the procedure, most patients showed significant improvements in fecal incontinence symptoms, incontinence-related

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quality
of life and general quality of life, each as measured by validated questionnaires. We have received no reports of persistent complications or persistent side effects. The two-year
data demonstrating durability of the effect of Secca procedure on improving fecal incontinence symptoms was presented at the 2002 Meeting of the American Society of Colon and Rectal Surgeons, and was
published inDiseases of the Colon & Rectumin March 2003.

Based
on these encouraging preliminary results, we further evaluated the Secca System in a multi-center U.S. clinical study involving six sites and 50 patients. The data from this study
was compiled and submitted to the FDA, and in March 2002 we received 510(k) clearance to market the Secca System for the treatment of fecal incontinence in patients who have failed more
conservative therapies such as diet modification and biofeedback. The results of this clinical trial were published inDiseases of the Colon and Rectumin December 2003. The study demonstrated that the Secca procedure resulted in significant improvements in fecal incontinences scores, fecal incontinence related quality of life, and general
quality of life. In June 2002, we started a limited commercial release of the Secca System and in June 2003, we launched the Secca System on a full commercial basis.

Research and Development

Our research and development activities are conducted internally by a research and development staff and are focused on design changes of existing product
alternatives and product accessories. In addition to working on new products, our research and development organization is improving products and developing fixtures that are designed to reduce the
time to manufacture, improve quality and reduce cost of products. Our research and development expenditures were $1.8 million in 2003, $2.7 million in 2002 and $2.8 million in
2001. Stock-based compensation included in these numbers was $27,000 in 2003, $66,000 in 2002 and $205,000 in 2001. Pilot manufacturing costs included in research and development were $235,000 in 2002
for the Secca System. No pilot manufacturing was performed in 2003.

Manufacturing

We manufacture, assemble and test our products in-house. The manufacturing process consists primarily of assembling internally manufactured and
externally purchased components and
sub-assemblies in an environmentally controlled area. After assembly, each Stretta Catheter and Secca Handpiece are inspected and then sent out for sterilization by a
sub-contractor. We manufacture the Curon Control Module primarily by in-house assembly and testing of components ordered from outside manufacturers.

In
February 2003, we voluntarily recalled a limited number of our catheters, which contained nonconforming material. We took corrective action with regard to this occurrence and
no patient injuries were sustained as a result of the use of the recalled items.

We
purchase various materials and components from qualified suppliers that are subject to stringent quality specifications and inspections. We conduct quality audits of our key
suppliers, several of which are experienced in the supply of components to manufacturers of medical devices. Most purchased components and services are available from more than one supplier. For the
few components for which relatively few alternate supply sources exist, we have identified back-up suppliers. The qualification of these back-up suppliers may require
regulatory approval, which may or may not be available on a timely basis or at all.

Currently,
only one supply source exists for the peristaltic pump. Our supplier, in accordance with our specifications, manufactures this pump. We have contracted with this supplier for
ongoing supply, but we would need additional time to locate and qualify a new pump supplier should our current supplier fail to fulfill our needs. If a new pump is incorporated into the Control
Module, then the Control Module may require regulatory clearance under the FDA's 510(k) process, which could take

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several
months or more. Also, a computer chip in the Control Module is no longer manufactured. We have purchased an inventory of these chips sufficient to meet our projected manufacturing needs for at
least the next 12 months and we are currently working on developing a revision to our current generator that will no longer use this chip technology. As with the pump, we cannot incorporate
this new design into the generator without regulatory clearance under the FDA's 510(k) process, which could take several months or more. As a fallback strategy, we can incorporate an updated version
of the chip, which is still being manufactured, from the same supplier. Although this would not require regulatory clearance, this course of action would require a re-layout of the
components on the affected printed circuit board.

Our
manufacturing facility is subject to periodic inspection by regulatory authorities. Our quality assurance systems are subject to FDA regulations. These regulations require that we
conduct our product design, testing, manufacturing, and control activities in conformance with these regulations and that we maintain our documentation of these activities in a prescribed manner. Our
manufacturing facility is licensed by the California Department of Health Services, Food and Drug Branch. In addition, our facility has received ISO 9001/EN46001/ISO13485 certification and the
European Union Certificate pursuant to the European Union Medical Device Directive 93/42/EEC, allowing us to CE mark our products after assembling appropriate documentation. ISO 9001/EN46001/ISO13485
certification standards for quality operations have been developed to ensure that companies know the
standards of quality on a worldwide basis. Failure to maintain the CE mark will preclude us from selling our products in Europe. We cannot assure you that we will be successful in maintaining
certification requirements in Europe or elsewhere.

Patents and Proprietary Technology

We have an aggressive program to obtain or license intellectual property in the United States, Europe and Asia for our medical advances. We are building a
portfolio of apparatus and method patents covering aspects of our current and future technology.

As
of December 31, 2003, we had 32 issued or allowed U.S. patents and 18 pending U.S. patent applications. We intend to continue to file for patents for our technologies to
strengthen our position. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We
also require employees, consultants and advisors who work on our products to agree to disclose and assign to us all inventions conceived during the work day, using our property or which relate to our
business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as
proprietary.

Certain
aspects of our products incorporate technology subject to patents that we have licensed from others. As of December 31, 2003, we had licensed in 22 issued and allowed U.S.
patents and 15 pending U.S. patent applications. We have a license with Gyrus Group PLC (formerly, Somnus Medical Technologies, Inc.) for their generator technology. The
non-exclusive license gives us the right to manufacture, have manufactured, use, offer to sell, sell and import Gyrus' radiofrequency generator technology for use in the treatment of GERD
and other medical disorders of the digestive tract. The license expires on October 6, 2017. During the term of the license, we are obligated to pay a royalty to Gyrus for our sale of generators
that incorporate the licensed technology. We have also licensed patented technology from the University of Kansas Medical Research Institute relating to applying radiofrequency energy to tissue. This
is an exclusive, worldwide and royalty-bearing license allowing us to incorporate the patented technology in our products to treat medical disorders throughout the gastrointestinal tract. The license
expires on September 17, 2013 and may be terminated earlier for breach. We have also licensed other patents that we believe may apply to our current business or that we may incorporate into
future products. We intend to continue to license technologies to strengthen our competitive position.

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The
medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants
into our market increases, the possibility of an infringement claim against us grows. While we attempt to ensure that our products do not infringe other parties' patents and proprietary rights, our
competitors may assert
that our products and the methods they employ may be covered by U.S. patents held by them. In addition, our competitors may assert that future products we may market infringe their patents.

Competition

The medical device industry is subject to intense competition. To be successful, we must establish our products, and the procedures in which our products are
used, as attractive alternatives to currently available treatments. We will also have to compete with a number of companies that have significantly greater resources than we do.

Our
primary competitors in the GERD market are manufacturers and marketers of existing pharmaceutical and surgical treatments for GERD, and manufacturers focused on innovative outpatient
treatments. We compete with manufacturers of medications, such as Zantac, Pepcid, Aciphex, Prilosec, Nexium, and others. These manufacturers and manufacturers of generic medication equivalents have
significantly greater resources than we do. These companies may market products more aggressively, gain influence among opinion leaders, or lower their prices, all of which may affect the adoption of,
and the market for, our products. We also compete with manufacturers of devices and equipment used in laparoscopic anti-reflux surgery. Increased publicity regarding these procedures or
advantageous pricing may adversely affect the market for our products. Both medication treatment and anti-reflux surgery are established GERD therapies with well-defined
reimbursement profiles.

We
also compete with a number of companies that are working on GERD treatments that eliminate or reduce the need for medication but are less invasive than surgery. For example, C.R. Bard
has developed an endoscopic suturing system that places a suture in the upper stomach during an outpatient procedure. The device used in this procedure received FDA marketing clearance in
March 2000. We compete with several companies that are developing bulking agents to be injected into the muscle of the lower esophageal sphincter. For example, Enteric Medical, acquired by
Boston Scientific, has developed a liquid polymer for injection into the lower esophageal sphincter. This product received FDA approval, for patients responsive to and requiring PPI therapy, in
April 2003. Endonetics, recently acquired by Medtronic, is also developing an injectable bulking agent. Another company, NDO, delivers a stapled fold in the upper portion of the stomach in an
attempt to mimic the action of anti-reflux surgery. There may also be other companies developing innovative therapies for minimally invasive treatment of GERD.

In
the fecal incontinence market, we consider our primary competitors to be American Medical Systems, who received FDA clearance in December 2001 to market their Artificial Bowel
Sphincter (ABS) for the treatment of severe fecal incontinence, and Medtronic, which is developing an implantable sacral nerve stimulation device for treatment of incontinence. There are also a small
number of companies pursuing injectable therapies for fecal incontinence.

Government Regulation

Our products are medical devices subject to extensive regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following
activities that we will perform:



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In
April 2000, we received 510(k) premarket clearance from the FDA for the Stretta System for the treatment of GERD, and in March 2002 we received 510(k) premarket
clearance from the FDA for the Secca System for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback.

FDA's premarket clearance and approval requirements

Each medical device that we wish to commercially distribute in the United States will likely require either prior 510(k) clearance or prior PMA approval from the
U.S. Food and Drug Administration under the Federal Food, Drug, and Cosmetic Act. Devices deemed to pose relatively minimal risk are placed in either Class I or II, which requires the
manufacturer to submit a premarket notification requesting permission for commercial distribution; this is known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices
deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously
510(k) cleared device or a preamendment Class III device for which PMA applications have not been called, are placed in Class III, requiring PMA approval.

510(k) Clearance Pathway:To obtain 510(k) clearance for one of our products, we must submit a premarket notification
demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously 510(k) cleared device or a device that was in commercial distribution
before May 28, 1976, for which the FDA has not yet called for submission of PMA applications. The FDA's 510(k) clearance pathway usually takes from four to 12 months, but it can last
longer.

After
a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use,
requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the
FDA disagrees with a manufacturer's decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can
require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.

PMA Approval Pathway:If the FDA denies 510(k) clearance for one of our products, the product must follow the PMA approval
pathway, which requires proof of the safety and effectiveness of the device to the FDA's satisfaction. A PMA application must provide extensive preclinical and clinical trial data and also information
about the device and its components regarding, among other things, device design, manufacturing and labeling. After approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process. The PMA approval pathway is much more costly, lengthy and uncertain than 510(k) clearance. It generally takes from one to three
years or even longer.

Clinical Trials:    A clinical trial is almost always required to support a PMA application and is sometimes required for a
510(k) premarket notification. Such trials generally require submission of an application for an Investigational Device Exemption, or IDE. The IDE application must be supported by appropriate data,
such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The FDA must approve the IDE

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in
advance for a specified number of patients unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. Clinical trials may begin once the
IDE application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. In June 2000, we received IDE approval allowing us to commence a multicenter
clinical trial of the Secca System. We began the trial in July 2000. In April 2001, we completed this trial and the results were submitted to the FDA in December 2001.

In
April 2000, we received 510(k) premarket clearance from the FDA for the Stretta System for the treatment of GERD, and in March 2002 we received 510(k) premarket
clearance from the FDA for the Secca System for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback. We cannot assure
you that the FDA will not deem
one or more of our future products to be a class III device subject to the more burdensome PMA approval process.

Pervasive and continuing FDA regulation

After a device is placed on the market, numerous regulatory requirements apply. These include: the Quality System Regulation, or QSR, which requires manufacturers
to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations; the FDA's general prohibition against
promoting products for unapproved or off-label uses; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur. Class II devices also can have special
controls such as performance standards, postmarket surveillance, patient registries, and FDA guidelines that do not apply to Class I devices. Unanticipated changes in existing regulatory
requirements or adoption of new requirements could hurt our business, financial condition and results of operations.

We
are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we have failed to comply, the Agency
can institute a wide variety of enforcement actions against us, ranging from a public Warning Letter to more severe sanctions such as:



The
FDA also has the authority to require repair, replacement or refund of the cost of any medical device manufactured or distributed by us. Our failure to comply with applicable
requirements could lead to an enforcement action that may have an adverse effect on our financial condition and results of operations.

We
have been an FDA registered medical device facility since January 1999 and we obtained our manufacturing license from the California Department of Health Services, or CDHS, in
September 1999. We are subject to inspection by both the FDA and CDHS for compliance with the quality systems regulations and other applicable regulations.

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Other U.S. regulation

We also must comply with numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and hazardous substance disposal. We may be required to incur significant costs to comply with such laws and regulations in the future and such laws and regulations may
hurt our business, financial condition and results of operations. We are subject to quarterly audits performed by Underwriters Laboratories to ensure that our Control Module production continues to
comply with the original requirements. Failure to comply could result in production delays, and potential product recall.

Foreign regulation

Our products are also regulated as medical devices outside the United States by government agencies and are subject to registration requirements in many of the
foreign countries in which we plan to sell our products. Our Stretta and Secca Systems carry a CE Mark, which is required for European product sales. The Stretta System carries a Therapeutic Goods
Administration license, which is required for product sales in Australia, and a license issued by Health Canada, which allows commercialization in Canada. Our facility has been audited and certified
to be ISO9001/EN46001/ISO13485 compliant, which allows us to sell our products in Europe. Our facility is subject to inspection by TUV/Essen. We plan to seek approval to sell the Stretta and Secca
Systems in additional foreign countries. The time and cost required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements
for licensing a product in a foreign country may differ significantly from FDA requirements.

Third Party Reimbursement

In the United States, health care providers generally rely on third-party payers, principally private health insurance plans, Medicare and Medicaid, to reimburse
all or part of the cost of procedures in which medical devices are used. Medicare reimburses hospital outpatient clinics on a prospectively determined fixed amount for the costs associated with an
outpatient procedure. Individual outpatient procedures are assigned Ambulatory Payment Classification (APC) codes. Effective October 1, 2001, the Center for Medicare and Medicaid Services, CMS
(formerly HCFA), designated a code for the Stretta System, which pays the hospital component of the procedure cost, including the cost of the disposable device. In 2003, CMS reassigned the Stretta
procedure to a new APC, which maintained essentially the same payment rate of $1,850. The American Medical Association recently issued a Category III CPT code for the Stretta procedure to take
effect on January 1, 2004 and it is expected CMS will publish the Category I CPT code, in draft form, in July 2004 to take effect on January 1, 2005. CPT codes are used to
specify the physician component of the procedure cost. In conjunction with the October 2003 RUC review, the mechanism that determines the physician component, this will allow claims to be
processed with specified reimbursement rates.

The
current cost reduction orientation of the third-party payer community makes it exceedingly difficult for new medical devices and surgical procedures to obtain reimbursement. Often,
it is necessary to convince these payers that the new devices or procedures will establish an overall cost savings compared to currently reimbursed devices and procedures. We believe that the Stretta
System may offer an opportunity for payers to reduce the cost of treating GERD patients by possibly eliminating or reducing the costs of medication or anti-reflux surgery. While we believe
that the Stretta System possesses economic advantages that will be attractive to payers, we cannot assure you that they will make reimbursement decisions based upon these advantages.

Reimbursement
by third-party payers is often positively influenced by the existence of peer-reviewed publications of long-term safety and efficacy data. We have
collected data on six-month results after treatment with the Stretta System, and this information was published in a peer-reviewed

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journal
in 2001. We have collected and published data on twelve-month results, and this information was published in a peer-reviewed journal in 2002. Follow-up data in the form
of a Stretta Registry, supporting the durability of the procedure for up to 33 months, was published in a peer-reviewed journal in December 2002. While we cannot assure you
that our products will be reimbursed without publications of longer-term data, we are actively encouraging ongoing research studies to evaluate and publish the long-term safety
and efficacy of the Stretta System. In addition, many third-party payers require that randomized studies be conducted to determine the effect of the procedure versus placebo or another standard of
care. We have completed a double-blind, randomized, sham-controlled, multi-center study to generate this data, and these results were published in September 2003.

To
facilitate reimbursement for the Stretta and Secca Systems, we have established a dedicated reimbursement department. The department assists physicians with
case-by-case pre-determination for coverage and appeals of denied claims, and actively pursues local coverage decisions. Curon Medical has established six positive
coverage decisions with local Medicare carriers, of which two are final draft local medical review policies (LMRPs). In addition, five private payers have issued favorable coverage decisions for the
Stretta procedure.

We
believe that achieving reimbursement for the Stretta procedure is one of the major impediments to growth in sales. We believe that we are making progress toward wider reimbursement of
the procedure. However, while we are actively pursuing reimbursement through case-by-case approvals and by pursuing coverage decisions by local carriers, we cannot guarantee
the speed or the scale to which payers will approve reimbursement of the Stretta procedure. While the Secca procedure has been on the market a shorter amount of time, we anticipate similar challenges
in achieving reimbursement for this product.

Reimbursement
systems in international markets vary significantly by country and, within some countries, by region. Reimbursement approvals must be obtained on a
country-by-country basis or a region-by-region basis. In addition, reimbursement systems in international markets may include both private and
government sponsored insurance. We have so far obtained limited international reimbursement approvals.We cannot assure you that we will obtain any
further approvals in a timely manner, if at all. If we fail to receive international reimbursement approvals at all, or in acceptable amounts, market acceptance of our products would be adversely
affected.

Employees

As of December 31, 2003, we had 68 employees, with 27 employees in operations, seven employees in research and development, 19 employees in sales and
marketing, nine employees in general and administrative, two employees in reimbursement and four employees in clinical and regulatory affairs. We believe that our future success will depend in part on
our continued ability to attract, hire and retain qualified personnel. None of our employees is represented by a labor union, and we believe our employee relations are good.

Available Information

We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the
Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other information concerning the company may be accessed through the
SEC's website at http://www.sec.gov.

You
may also find on our website (http://www.curonmedical.com) electronic copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC.

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Additional Risk Factors

We may never achieve or maintain significant revenues or profitability.

We have only a limited operating history upon which you can evaluate our business. We have incurred losses every year since we began operations. In particular, we
incurred net losses of $15.6 million in 2003, $15.4 million in 2002, and $15.4 million in 2001. As of December 31, 2003, we had an accumulated deficit of approximately
$79.3 million. Our revenues are, and will be, derived from the sale of radiofrequency generators and our disposable devices, such as the Stretta Catheter and Secca Handpiece. We have generated
limited revenues, and it is possible that we will never generate significant revenue from product sales. Even if we do achieve significant revenues from our product sales, we may continue to incur net
losses and these losses may increase. It is possible that we will never achieve profitable operations.

If health care providers are not adequately reimbursed for the procedures, that use our products, or for the products themselves, we may never achieve significant revenues.

Our physician customers continue to encounter difficulties in easily obtaining reimbursement for the Stretta procedure on a case-by-case
basis, and this continues to impact our ability to significantly increase revenues. Our strategies of pursuing state-by-state and also selected national reimbursement coverage,
focusing on promoting repeat catheter sales and incorporating technical improvements to our systems to reduce treatment times are designed to address these issues and we expect that our revenue from
disposables will increase on implementation, but there can be no assurance that this will occur.

Curon
has been actively seeking positive coverage decisions from Medicare and private payers to reimburse physicians, hospitals and other health care providers for procedures using our
products. Recently, the American Medical Association issued a Category III CPT code for the Stretta procedure that took effect on January 1, 2004 and will publish a Category I CPT code,
in draft form, in July 2004 to take effect on January 1, 2005. In conjunction with the RUC review of costs that occurred in October 2003, this will allow claims to be made more
easily and with specified reimbursement rates. There is, however, no assurance that local Medicare or private payers will choose to pay for this procedure. Physicians, hospitals and other health care
providers are unlikely to purchase our products if
they are not adequately reimbursed for the Stretta procedure or the products. In the last nine months Curon has received six positive coverage decisions from State Medicare organizations, one private
payer national coverage decision and a number of private payer state coverage decisions. Some payers may refuse adequate reimbursement even though significant peer-reviewed data has been
published. If users of our products cannot obtain sufficient reimbursement from health care payers for the Stretta procedure or the Stretta System disposables, then it is unlikely that our products
will ever achieve increased market acceptance. The Secca procedure has not yet received any coding decision and there is little data yet regarding the willingness of third-party health care payers to
reimburse the costs of the procedure. We cannot assure you that the procedure will ever be reimbursed. Failure to achieve reimbursement will have a serious negative effect on our revenues.

Reimbursement from third-party health care payers is uncertain due to factors beyond our control, and changes in third-party health care payers' policies could adversely affect
our sales growth.

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

For
example, some health care payers are moving toward a managed care system in which providers contract to provide comprehensive health care for a fixed cost per person. We cannot
assure you that in a prospective payment system, which is used in many managed care systems, the cost of our

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products
will be incorporated into the overall payment for the procedure or that there will be adequate reimbursement for our products separate from reimbursement for the procedure.

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

If we fail to take adequate action to remedy problems that have adversely affected our sales and marketing efforts, our future performance may be harmed.

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

If physicians do not adopt our products, we will not achieve future sales growth.

To achieve increasing sales, our products must continue to gain recognition and adoption by physicians who treat gastrointestinal disorders. Our products
represent a significant departure from conventional treatment methods. We believe that physicians will not adopt our systems unless they determine, based on published peer-reviewed journal
articles, long-term clinical data and their professional experience, that our systems provide an effective and attractive alternative to conventional means of treatment. Currently, there
are 20 peer-reviewed journal articles on the Stretta procedure, including the results of our Stretta randomized trial, and three peer-reviewed journal articles on the Secca
procedure. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks and uncertainty of third-party reimbursement. Future adverse
events or recalls would also impact future acceptance rates. Additionally, some of our customers and potential customers also find the 45 minutes necessary to perform a Stretta procedure to be a
limiting issue, as their endoscopy unit schedule is typically dominated by short diagnostic procedures. If we cannot achieve increasing physician adoption rates of our products, we may never achieve
significant revenues or profitability.

If the effectiveness and safety of our products are not supported by long-term data, our sales could decline and we could be subject to liability.

If we do not produce clinical data supported by the independent efforts of clinicians, our products may never be accepted. We received clearance from the FDA for
the use of the Stretta System to treat gastroesophageal reflux disease, or GERD, based upon the study of 47 patients. Safety and efficacy data presented to the FDA for the Stretta System was based on
six-month follow-up studies on 44 of these patients. Although the twelve- and thirty-three month follow-up data supports the six-month data,
we may find that data from longer-term patient follow-up studies is inconsistent with those indicated by our relatively short-term data. If longer-term
patient studies or clinical experience indicate that

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treatment
with the Stretta System does not provide patients with sustained benefits or that treatment with our product is less effective or less safe than our current data suggests, our sales could
decline and we could be subject to significant liability. Further, we may find that our data is not substantiated in studies involving more patients, in which case we may never achieve significant
revenues or profitability.

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

Any failure in our physician education efforts could significantly reduce product sales.

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

Because we have only recently shifted our marketing strategy to reposition the Stretta product as an alternative to anti-reflux surgery, targeting surgeons in
addition to gastroenterologists, we cannot predict the effect this shift will have on our future sales.

Because we are a young company, we are determining how best to market our Stretta System. We initially focused our marketing efforts toward gastroenterologists,
but, in late 2002, shifted toward selling to general surgeons. There can be no assurance that this will continue to increase sales.

We face competition from more established GERD treatments and from competitors with greater resources, which will make it difficult for us to achieve significant market
penetration.

Companies that have well-established products, reputations and resources dominate the market for the treatment of GERD. Our primary competitors are
large medical device manufacturers such as Ethicon Endosurgical and United States Surgical, manufacturers of instrumentation for anti-reflux surgery, and C.R. Bard, which manufactures an
endoscopic sewing device for GERD. Other large, established companies have products that may, in the future, provide competition for the Stretta procedure. These include injectable products for the
treatment of GERD, including one developed by Boston Scientific, which has recently been approved by the FDA, and another developed by Medtronic, which is still at an experimental stage. Other
competitive devices may be developed.

These
larger companies enjoy several competitive advantages over us, which may include:



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We
do not feel that we compete directly with large pharmaceutical companies, such as AstraZeneca, Takeda Abbott Pharmaceutical, Wyeth Laboratories and Eisai, because candidate patients
for Stretta have, by definition, failed, or only partially responded to, drug therapy. However, these companies have an established relationship with the gastroenterology community and generate over
$12 billion in annual U.S. revenues from the proton pump inhibitor drug class. We could be adversely affected if one or more pharmaceutical companies elects to market aggressively against our
product, or if a new, more effective, pharmaceutical product is developed. For example, AstraZeneca has developed a new proton pump inhibitor, Nexium, for the treatment of GERD, which doctors may
prescribe in lieu of recommending the Stretta procedure. Further, less expensive generic drugs have been introduced to treat GERD as AstraZeneca's patent for Prilosec, the leading prescription
medication for the treatment of GERD, expired in 2001. Prilosec is also now available over the counter.

We have limited sales and marketing experience, and failure to build and manage our sales force or to market and distribute our products effectively will hurt our revenues and
profits.

We have limited sales and marketing experience. As of December 31, 2003, we relied on eight direct sales employees to sell our Stretta System in the United
States. In the quarter ended June 30, 2003, we added a new sales channel by engaging 10 manufacturers representative firms, which added 37 salespeople to sell and market our products across the
United States. The success of this new sales channel will depend upon a number of factors, many of which are beyond our control, including the willingness of such distributors to prioritize the sale
of our products, and their effectiveness in such sales efforts. We have also hired additional senior sales staff to manage these distributors, which will increase our operating expenses.

Since
we have only recently launched the Secca System, our sales force has little experience marketing the product, and we cannot predict how successful they will be in selling the
product. There are significant risks involved in building and managing our sales force and marketing our products, including our:



Our
failure to adequately address these risks will harm our ability to sell our products.

Internationally, we rely on third-party distributors to sell our products, and we cannot assure you that these distributors will commit the necessary resources to effectively
market and sell our products.

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

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We have limited experience manufacturing our products in commercial quantities, which could adversely impact the rate at which we grow.

Because we have only limited experience in manufacturing our products in commercial quantities, we may encounter unforeseen situations that would result in delays
or shortfalls. For example, in December 2000, we voluntarily withdrew certain of our catheters from the market because of manufacturing issues. In February 2003, we voluntarily recalled
a limited number of our catheters, which contained non-conforming material. This material formed part of the catheter shaft and showed a tendency to degrade over time. The problem was
identified and corrected, and the outside vendor was changed. If the material were to fail during use, there would be a remote possibility of superficial injury to the patient's esophageal or
pharyngeal lining. No injuries have been reported and all unused catheters in the affected lots have been recovered.

We
may encounter difficulties and delays in manufacturing our products for other reasons, including:



In
August 2003, we relocated to new facilities in Fremont, California. Although we believe that these new manufacturing facilities are adequate to support our commercial
manufacturing activities for the foreseeable future, we may be required to expand our manufacturing facilities to begin large-scale manufacturing. We cannot provide any assurance that we will be able
to establish high volume manufacturing or, if established, that we will be able to manufacture our products in high volumes with commercially acceptable yields. If we are unable to provide customers
with high-quality products in a timely manner, we may not be able to achieve market acceptance for our Stretta or Secca Systems. Our inability to successfully manufacture or commercialize
our devices could have a material adverse effect on our product sales.

If we lose our relationship with any individual suppliers of product components, we will face regulatory requirements with regard to replacement suppliers that could delay the
manufacture of our products.

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

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If we or our suppliers fail to comply with the FDA Quality System Regulation, manufacturing operations could be delayed and our business could be harmed.

Our manufacturing processes are required to comply with the Quality System Regulation, or QSR, which covers the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging and shipping of our products. The FDA enforces the QSR through inspections. Our first QSR inspection was in March 2001, and we
recently were inspected in July 2003. There were no significant findings from either inspection. If we fail any future QSR inspections, our operations could be disrupted and our manufacturing
delayed. Failure to take corrective action in response to a QSR inspection could force a shut-down of our manufacturing operations and a recall of our products, which would have a material
adverse effect on our product sales, revenues, and expected revenues and profitability. Furthermore, we cannot assure you that our key component suppliers are, or will continue to be, in compliance
with applicable regulatory requirements, will not encounter any manufacturing difficulties, or will be able to maintain compliance with regulatory requirements. Any such event could have a material
adverse effect on our available inventory and product sales.

Our failure to obtain or maintain necessary FDA clearances or approvals could hurt our ability to commercially distribute and market our products in the United States.

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

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

If we market our products for uses that the FDA has not approved, we could be subject to FDA enforcement action.

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

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Modifications to our marketed devices may require new 510(k) clearances or PMA approvals or require us to cease marketing or recall the modified devices until such clearances
are obtained.

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

Complying with FDA and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

Our products are medical devices that are subject to extensive regulation. FDA regulations are wide-ranging and govern, among other things:



Noncompliance
with applicable regulatory requirements can result in enforcement action, which may include recalling products, ceasing product marketing, paying significant fines, and
penalties, and similar FDA actions which could limit product sales, delay product shipment, and adversely affect our profitability.

We face risks related to our international operations, including the need to obtain necessary foreign regulatory approvals.

To date we have international distribution agreements for Europe, Asia, and South Africa. To successfully market our products internationally, we must address
many issues with which we have little or no experience. We have obtained regulatory clearance to market the Stretta System in the European Union, Australia and Canada and to market the Secca System in
the European Union, but we have not obtained any other international regulatory approvals for other markets or products. We cannot assure you that we will be able to obtain or maintain such approvals.
Furthermore, although contracts already signed with European distributors specify payment in U.S. dollars, future international sales may be made in currencies other than the U.S. dollar. As a result,
currency fluctuations may impact the demand for our products in countries where the U.S. dollar has increased compared to the local currency. Engaging in international business involves the following
additional risks:



19

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

Product liability suits against us may result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance rates.

The development, manufacture and sale of medical products involves a significant risk of product liability claims. The use of any of our products may expose us to
liability claims, which could divert management's attention from our core business, could be expensive to defend, and could result in substantial damage awards against us. For example, we are
currently a party to two product liability lawsuits where there are allegations that our products are defectively designed and that we were negligent in manufacturing our products.

We
maintain product liability insurance at coverage levels we believe to be commercially acceptable, and we re-evaluate annually whether we need to obtain additional product
liability insurance. However there can be no assurance that product liability or other claims will not exceed such insurance coverage limits or that such insurance will continue to be available on the
same or substantially similar terms, or at all. Our former product liability insurance carrier has filed a civil action against us asking for recission of coverage as it relates to one of our product
liability lawsuits. Any product liabilities claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing any coverage in the
future. If the carrier's suit is successful, we could be required to pay any judgment rendered against us in, or any amounts in settlement of, the underlying product liability action, without the aid
of insurance.

We have limited protection for our intellectual property. If our intellectual property does not sufficiently protect our products, third parties will be able to compete against
us more directly and more effectively.

As of December 31, 2003, we had 54 issued or allowed U.S. patents and 33 pending U.S. patent applications; this includes 22 issued U.S. patents and 15
pending U.S. patent applications licensed in from third-parties. In addition, as of December 31, 2003, we had eight patent applications pending in the European Patent Office and three patent
applications pending in the Japanese Patent Office. We own all of these filings. We rely on patent, copyright, trade secret and trademark laws to protect our products, including our Stretta Catheter,
our Secca Handpiece and our Curon Control Module, from being duplicated by competitors. However, these laws afford only limited protection. Our patent applications and the notices of allowance we have
received may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Patents we have obtained and may obtain in the future may be challenged, invalidated or
legally circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or
current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, the laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United States. If our intellectual property rights do not adequately protect our commercial products, our competitors could develop new products
or enhance existing products to compete more directly and effectively with us and harm our product sales and market position.

20

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

Because of our reliance on unique technology to develop and manufacture innovative products, we depend on our ability to operate without infringing or misappropriating the
proprietary rights of others.

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

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

If we lose our rights to intellectual property that we have licensed, we may be forced to develop new technology and we may not be able to develop that technology or may
experience delays in manufacturing as a result.

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

21

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If we are unable to attract and retain qualified personnel, we will be unable to expand our business.

We believe our future success will depend upon our ability to successfully manage our employees, which includes attracting and retaining engineers and other
highly skilled personnel. Our employees are at-will employees and are not subject to employment contracts. The loss of services of one or more key employees could materially adversely
affect our growth. In addition, our stock price is depressed and the results of our operations have been less successful than anticipated. This history of performance may make it difficult to attract
and retain qualified personnel. Failure to attract and retain personnel, particularly management and technical personnel, would materially harm our ability to grow our business rapidly and
effectively.

Following the registration of the securities issued in our February 2004 equity financing, there will be substantial market dilution and the potential for increased
market volatility in our stock.

Following the issuance of securities sold in our February 2004 private placement, our total outstanding shares of common stock increased from approximately
20 million shares to approximately 24 million shares. This number may increase to nearly 25 million shares when, in August 2004, warrants for an additional 900,000 shares
of our common stock will become exercisable. The registration of the securities issued in the private placement will result in substantial market dilution and the potential for increased market
volatility.

Our directors, executive officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

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

Our stockholder rights plan, certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a takeover.

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

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

Item 2. Properties

We are headquartered in Fremont, California, where we lease one building with approximately 35,000 square feet of office, research and development, and
manufacturing space under leases expiring

22

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October 31,
2006. We believe that the facility is suitable and adequate for our current and future needs for the foreseeable future. We are currently utilizing approximately 85% of the
facility's total space.

Item 3. Legal Proceedings

In June 2001, a civil action was filed against us in the United States District Court, Western District of Kentucky, Louisville Division, in which the
plaintiff alleges that he sustained a nerve injury and damage to his gastrointestinal tract during a Stretta procedure caused by the defective design and manufacture of our product. Plaintiff's
allegations against us include strict liability for a product that was in a defective and unreasonably dangerous condition, negligence in the design and manufacturing of the product, breach of implied
warranty of merchantability, and loss of consortium. Plaintiff was a subject in a randomized clinical trial and had been provided with an approved Informed Consent form and counseling by the
physician. Prior to treatment, Plaintiff provided consent to proceed. Plaintiff is seeking a trial by jury and unspecified damages. The trial date is currently set in September 2004. We believe
Plaintiff's claim is without merit.

In
June 2002, a civil action was filed against a number of defendants, including Curon, in the Court of Common Pleas, Philadelphia County, in the State of Pennsylvania, alleging
that the plaintiff sustained injury during a Secca procedure caused by the device being defective and/or in an unreasonably dangerous condition. Plaintiff was a subject in a clinical trial and had
been provided with an approved Informed Consent form and counseling by the physician. Prior to treatment, Plaintiff provided consent to proceed. Additional defendants include the treating physician,
the associated medical institution who, it is alleged, were medically negligent in treatment of Plaintiff, and the members of the Institutional Review Board who approved the protocol for the clinical
trial. Plaintiff has demanded a trial by jury and unspecified damages. The case has since been moved to the United States District Court for the Eastern District of Pennsylvania. We have reached a
tentative settlement in this case, and recognized a charge of $1.25 million to operating expense for the year ending December 31, 2003.

In
April 2003, a civil action was filed against us in United States District Court for the Northern District of California by Federal Insurance Corporation, our insurance carrier,
for rescission, reformation, and restitution in connection with our liability insurance policy. This policy covers, among other things, product liability claims made against us by people treated with
our product. There is a Summary Judgment scheduled for June 4, 2004 in this matter. Should the Company lose this Judgment, there will be no coverage in the Pennsylvania suit described above and
the provision of the $1.25 million will be the limit of the Company's liability in this case. Should the Company win in the Judgment, the $1.25 million may be reimbursed.

In
February 2003, a civil action was filed against us in the District Court of Dallas County, in the State of Texas, alleging that the plaintiff sustained serious injuries during
a Stretta procedure performed in February 2001, caused by the device being in a defective condition. The court dismissed this case with prejudice.

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

Not applicable.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our Common Stock trades under the symbol CURN. As of December 9, 2002, our Common Stock has been quoted on the NASDAQ SmallCap Market. Until that date, our
Common Stock had been quoted on the NASDAQ National Market since our initial public offering on September 22, 2000. The following table shows the high and low sales prices for the Company's
Common Stock for the periods indicated, as reported on the NASDAQ SmallCap or National Markets.

Common
Stock PriceHigh

LowYear Ended December 31, 2002First Quarter

$
4.64

$
2.55Second Quarter

$
3.95

$
2.90Third Quarter

$
3.22

$
0.56Fourth Quarter

$
0.90

$
0.46Year Ended December 31, 2003First Quarter

$
1.35

$
0.60Second Quarter

$
1.39

$
0.65Third Quarter

$
2.05

$
0.70Fourth Quarter

$
3.90

$
1.79


As
of February 20, 2004, the last reported sales price of our Common Stock on the NASDAQ SmallCap Market was $3.01 per share, and the number of beneficial common stockholders was
approximately 1,600. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

On
September 26, 2000, we completed the sale of 5,000,000 shares of our common stock at a per share price of $11.00 in a firm commitment underwritten public offering. The offering
was effected pursuant to a Registration Statement on Form S-1 (Registration No. 333-378666), which the United States Securities and Exchange Commission declared
effective on September 21, 2000. On October 24, 2000, we completed the sale of an additional 475,000 shares of our common stock at a per share price of $11.00 pursuant to the exercise of
the over-allotment option by the underwriters. All shares sold were shares of our common stock, $0.001 par value per share. UBS Warburg LLC, CIBC World Markets, and SG Cowen were the
managing underwriters of the IPO. Aggregate gross proceeds to us from the IPO (prior to deduction of underwriting discounts and commissions and expenses of the offering) were $60.2 million.
There were no selling stockholders in the IPO. We paid underwriting discounts and commissions of approximately $4.2 million and other expenses of approximately $1.2 million in connection
with the IPO. The total expenses paid by us in the IPO were approximately $5.5 million and the net proceeds to us in the IPO were approximately $54.8 million.

On
February 6, 2004, the Company raised approximately $13.5 million in gross proceeds from the private placement of common stock to several institutional investors.
Aggregate placement agent commissions were $748,000. Net proceeds to the Company after estimated costs and expenses were approximately $12.7 million. The transaction involved the sale of
4,025,000 newly issued shares of Curon Medical Common stock at a price of $3.36 per share. Investors will receive five-year warrants to purchase an aggregate of 905,625 common shares at a
price of $4.71 per share, representing a 40 percent premium to the placement price. Banc of America Securities served as sole placement agent for the transaction. The sale of the securities was
deemed exempt from registration under the Securities Act in reliance upon Regulation D promulgated under the Securities Act.

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The
Board of Directors approved a stock repurchase program in July 2002 pursuant to which up to 1,000,000 shares of our outstanding common stock may be repurchased from time to
time. The duration of the repurchase program is open-ended. Under the program, we may purchase shares of common stock through open market transactions at prices deemed appropriate by
management. The timing and amount of repurchase transactions under this program will depend on market conditions and corporate and regulatory considerations. The purchases will be funded from
available working capital. No repurchases were made in 2003, and as of December 31, 2003, we hold approximately 325,300 shares pursuant to this repurchase program.

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Item 6. Selected Financial Data

The following tables reflect selected summary financial data for each of the last five fiscal years. This data should be read in conjunction with the financial
statements and notes thereto, and with Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition in this Annual Report on Form 10-K. The
information provided below is in thousands, except for per share data.

|                                                                  |                            | Years ended December 31, |        
|----------------------------------------------------------------- | -------------------------- | ------------------------ | -------
|
|Statement of operations data:                                     |                            |                          |        
|Revenues                                                          |                            | $                        | 3,421  
|Cost of goods sold                                                |                            |                          | 4,322  
|                                                                  |                            |                          |        
|Gross loss                                                        |                            |                          | (901   
|                                                                  |                            |                          |        
|Operating expenses:                                               |                            |                          |        
|                                                                  | Research and development   |                          |        
|                                                                  | Clinical and regulatory    |                          |        
|                                                                  | Sales and marketing        |                          |        
|                                                                  | General and administrative |                          |        
|                                                                  | Litigation charge          |                          |        
|                                                                  |                            |                          |        
|                                                                  |                            |                          | 14,900 
|Operating loss                                                    |                            |                          | (15,801
|                                                                  |                            |                          |        
|Interest income                                                   |                            |                          | 234    
|Interest expense                                                  |                            |                          | (5     
|Other income (expense)                                            |                            |                          | 17     
|                                                                  |                            |                          |        
|Net loss before extraordinary item                                |                            |                          | (15,555
|                                                                  |                            |                          |        
|Extraordinary gain                                                |                            |                          |       
|                                                                  |                            |                          |        
|Net loss                                                          |                            | $                        | (15,555
|                                                                  |                            |                          |        
|Net loss per share, basic and diluted                             |                            | $                        | (0.77  
|Shares used in computing net loss per share, basic and diluted(1) |                            |                          | 20,076 
|Balance sheet data:                                               |                            |                          |        
|Cash, cash equivalents and marketable securities                  |                            | $                        | 10,134 
|Working capital                                                   |                            |                          | 9,963  
|Long-term investments                                             |                            |                          |       
|Total assets                                                      |                            |                          | 13,854 
|Long-term obligations                                             |                            |                          |       
|Convertible preferred stock and warrants                          |                            |                          |       
|Total stockholders' equity (deficit)                              |                            |                          | 10,808 

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26

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached financial statements and notes thereto for the fiscal years ended December 31,
2003, 2002, and 2001.

Overview

We were incorporated in May 1997. Business activities before January 1998 were negligible. Prior to December 31, 2000 we were in the
development stage and until that time, we had devoted substantially all of our efforts to raising capital and developing, marketing and selling our products.

In
1998, our primary activity was developing the Curon Control Module and Stretta Catheter for the treatment of gastroesophageal reflux disease, or GERD. In October 1999, we
received CE Mark approval of the Stretta System, indicating that the Stretta System meets MDD standards allowing us to market it within the European Union. We received 510(k) clearance from the FDA in
April 2000 and commercially launched in the United States in May 2000.

In
April 1999, we began developing our second set of products, the Secca System, for the treatment of fecal incontinence. In November 1999, we conducted a
10-patient human clinical pilot study outside the United States and, in July 2000, we began a U.S. multi-center clinical trial of the Secca System under an Investigational Device
Exemption. In September 2001, we received CE Mark approval of the Secca System, indicating that the Secca System meets European medical device standards, allowing us to market it within the
European Union. Our multi-center clinical trial was completed, and the results were used to support a 510(k) submission to the FDA in December 2001. We received 510(k) clearance from the FDA in
March 2002 to market the system for the treatment of fecal incontinence in patients who have failed more conservative therapies such as diet modification and biofeedback. We made our first
sales of the Secca System in June 2002.

We
are focusing our sales efforts in the United States through a direct sales force, supplemented by selected manufacturing representatives. In international markets, we rely primarily
on third-party distributors. In November 2000, we incorporated a subsidiary company in Belgium and hired a European manager to support European distributors' sales, marketing and clinical
efforts. As of December 31, 2003, this subsidiary had two employees. To date, we have international distribution
agreements for the Stretta System in 17 European and Middle Eastern countries and in South Africa. The Secca System will also be sold through distributors in Europe, and the first commercial European
Secca procedure was performed in March 2003. Our gross margins on sales through international third-party distributors will be lower than our gross margins on U.S. sales as a result of
distributor discounts.

To
date, we have generated limited revenues. Our revenues are, and will be, derived from the sale of radiofrequency generators and our disposable devices, such as the Stretta Catheter
and Secca Handpiece. We expect that disposable sales will continue to form the basis of a recurring revenue stream. However, domestic disposable sales continue to grow more slowly than expected
primarily due to difficulties encountered by our physician customers in easily obtaining reimbursement for the Stretta procedure on a case-by-case basis. Some of our customers
also find the 45 minutes necessary to perform a Stretta procedure to be too time-consuming, as their endoscopy unit schedule is typically dominated by short diagnostic procedures. Although disposable
sales from outside the United States are increasing, they are not yet sufficient to offset the current domestic situation. Our strategies of pursuing state and national reimbursement coverage,
focusing on entrenching the therapy to promote repeat catheter sales and incorporating technical improvements to our systems to reduce treatment times are designed to address these issues and we
expect that our revenue from disposables will increase on implementation.

Through
December 31, 2003, we recorded limited product sales while incurring cumulative net losses of $79.3 million. In addition to increasing expenditures related to
continuing selling activities of

27

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the
Stretta and Secca Systems, we anticipate that our expenses will increase as we continue to develop new products, conduct clinical trials, commercialize our products and acquire additional
technologies as opportunities arise. As a result, we expect our operating expenses and cumulative net losses to increase.

Critical Accounting Polices and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period.

We
believe the following critical accounting policies, among others, affect its more significant judgments and estimates in the preparation of its consolidated financial statements:



28

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RESULTS OF OPERATIONS

Revenue

Revenues were $3.4 million in the twelve months ended December 31, 2003 and 2002, and $3.3 million for the same period in 2001. Sales have
remained essentially flat over all three years. Sales have been lower than anticipated, primarily due to the sales and marketing efforts involved in repositioning the Stretta System as an alternative
to anti-reflux surgery, requiring us, in late 2002, to refocus our sales force to target surgeons as opposed to gastroenterologists. We now see our lower sales to gastroenterologists being
replaced by higher sales to surgeons, a trend that we expect to continue. In all three years, our revenues have been impacted by our ongoing challenges in receiving favorable coverage decisions from
both public and private carriers on a state-by-state basis for the Stretta procedures. Stretta System products accounted for 87% and Secca System products 11% of the revenues
for the year ended December 31, 2003, as compared to 96% and 3%, respectively for Stretta and Secca in 2002. There were no Secca System sales in 2001, so revenue was entirely derived through
sales of the Stretta System. The Stretta Control Module and Catheter accounted for 43% and 54%, respectively, of the Stretta product line sales for the year ended December 31, 2003, compared to
52% and 46%, respectively, for the same period in 2002, and 51% and 46%, respectively, in 2001. International sales accounted for $226,000 for the year ended December 31, 2003, compared to
$423,000 for the same period in 2002, and $134,000 in 2001. International sales were higher in 2002 due to the sale of capital equipment to new distributors during that year. We expect that future
revenues will continue to show a trend towards higher percentages of disposable sales as compared to control modules sales.

29

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Cost of goods sold

Our costs of goods sold represent the cost of producing generators and disposable devices. We also license a technology used in the generators that we sell. We
are required to pay licensing fees based on the sales price of the units. We believe that there are alternative technologies that could be utilized should we choose to do so. Cost of goods sold was
$4.3 million, $4.1 million and $4.6 million in the twelve months ended December 31, 2003, 2002, and 2001, respectively. As sales volume increases, we expect gross profit to
become positive and increase accordingly. Our sales have not yet reached a level that would absorb our manufacturing capacity to the extent that we would experience positive gross profit. For the
twelve months ended December 31, 2002, $235,000 of excess manufacturing capacity was used to support Secca Pilot manufacturing, prior to product commercialization in June 2002. This
manufacturing capacity was therefore charged to research and development, as compared to the same period in 2001 and 2003, and no pilot manufacturing activities were done in 2003. Certain cost
reduction strategies were implemented in 2002 that further reduced manufacturing spending from the levels experienced in 2001.

Research and development expenses

Research and development expenses consist primarily of personnel costs, professional services, patent application and maintenance costs, materials, supplies and
equipment. Research and development expenses were $1.8 million, $2.7 million, and $2.8 million in the twelve months ended December 31, 2003, 2002, and 2001, respectively.
Spending levels in 2002 and 2001 are relatively comparable. The decrease in expenses in 2003 compared to 2002 was due to cost reduction strategies as well as the completion of Secca pilot
manufacturing activities in the second quarter of 2002, when commercialization occurred. Stock-based compensation accounted for $27,000, $66,000, and $205,000 in the twelve months ended
December 31, 2003, 2002, and 2001, respectively. During the quarter ended September 30, 2002, we reduced the number of research and development personnel from ten to seven. Costs
associated with terminating these individuals were $83,000. We expect spending for research and development in 2004 to be comparable to 2003.

Clinical and regulatory expenses

Clinical and regulatory expenses consist primarily of expenses associated with the costs of clinical trials, clinical support personnel, the collection and
analysis of the results of these trials, and the costs of submission of the results to the FDA. Clinical and regulatory expenses were $1.5 million, $1.8 million, and $2.1 million
in the twelve months ended December 31, 2003, 2002, and 2001, respectively. Spending decreased in 2002 as compared to 2001 due to the costs involved in the U.S. Secca trial and the Stretta
randomized control trial, which were both ongoing in 2001, and were completed in that year. Spending during 2003 has been further reduced due to decreased headcount, including our Chief Medical
Officer, who has converted to a consulting relationship, which includes stock compensation. Clinical trial costs include payments to hospitals, and the related travel expense for Curon employees.
Stock-based compensation accounted for $142,000, $51,000, and $121,000 in the twelve months ended December 31, 2003, 2002, and 2001, respectively. The increase in stock-based compensation
during 2003 was due to a consultant option. During the quarter ended September 30, 2002, we reduced the number of clinical personnel from four to three. Costs associated with terminating these
individuals were $13,000. We expect spending for clinical and regulatory in 2004 to be comparable to 2003.

Sales and marketing expenses

Sales and marketing expenses consist of personnel related costs, advertising, public relations and attendance at selected medical conferences. Sales and marketing
expenses were $6.8 million, $7.1 million, and $7.0 million in the twelve months ended December 31, 2003, 2002, and 2001,

30

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respectively.
Implementation of cost reduction strategies realized lower spending for the twelve months ended December 31, 2003 as compared to the same period in 2002. Spending increased in the
twelve months ended December 2002 as compared to the same period in 2001 due to increases in expenditures for activities to promote reimbursement for our products, and similar spending also
occurred for the same period in 2003. Amortization of stock-based compensation accounted for $14,000, $47,000, and $250,000 in the twelve months ended December 31, 2002, 2001, and 2000,
respectively. During the quarter ended September 30, 2002, we reduced the number of sales and marketing personnel from 28 to 26. Costs associated with terminating these individuals were
$147,000. We expect spending for sales and marketing in 2004 to be comparable to 2003.

General and administrative expenses

General and administrative expenses consist primarily of the cost of corporate operations and personnel, legal, accounting and other general operating expenses of
our company. General and administrative expenses were $3.5 million, $4.0 million, and $4.4 million in the twelve months ended December 31, 2003, 2002, and 2001,
respectively. After eliminating the stock-based compensation and termination costs noted below, spending in 2003 is slightly higher in comparison to 2002 and 2001, due to the relocation costs for our
new CEO in the amount of $225,000. Amortization of stock-based compensation accounted for $9,000, $186,000, and $670,000 in the twelve months ended December 31, 2002, 2001, and 2000,
respectively. During the quarter ended September 30, 2002, we reduced the number of general and administrative personnel from nine to seven. Costs associated with terminating these individuals
were $555,000, which included loan forgiveness in the amount of $272,000, which occurred in July 2002. We expect spending for general and administrative in 2004 to be comparable to 2003.

Litigation charge

We have recognized a non-recurring charge of $1.25 million related to the tentative settlement of litigation against the company, in which the
Plaintiff alleges injury during a Secca procedure caused by the device being defective and/or in an unreasonably dangerous condition. The Plaintiff was a subject in a clinical trial and had been
provided with an approved Informed Consent form and counseling by a physician. Related to this litigation, our product liability insurer filed a civil action against us for rescission, reformation and
restitution in connection with the coverage of this
particular lawsuit. A Summary Judgment on the latter case is scheduled in June 2004, and if we prevail, we may recover some or all of the $1.25 million charge.

Interest income and expense

Interest income was $234,000, $751,000, and $2.2 million in the twelve months ended December 31, 2003, 2002, and 2001, respectively. Interest income
has decreased in 2003 as compared to 2002 and 2001, due to a declining balance of marketable securities. Average cash and investment balances in 2003 were $16.8 million, compared to the 2002
average of $30.8 million and $45.1 million in 2001. Earnings have also been affected by declining interest rates through 2001, 2002 and 2003.

Interest
expense was $5,000, $8,000, and $4,000 in the twelve months ended December 31, 2003, 2002, and 2001, respectively. In all three years, interest expense is related to
notes payable related to insurance policies.

Income taxes

As a result of our net losses, we did not incur any income tax obligations in each of the twelve-month periods ended December 31, 2003, 2002 and 2001.

31

---

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations and capital investments from gross proceeds from our initial public offering completed in September 2000
totaling $55.0 million, from the partial exercise of the underwriter's over-allotment provision totaling $5.2 million, from the private sale of equity securities totaling
$22.0 million, from the issuance of convertible notes totaling $11.8 million and from bank equipment line financing totaling $780,000. At December 31, 2003, we had
$10.0 million in working capital and our primary source of liquidity was $10.1 million in cash and cash equivalents and marketable securities. We intend to finance our operations
primarily through our cash and cash equivalents, marketable securities, future financing and future revenues.

In
February 6, 2004, the Company raised approximately $13.5 million in gross proceeds from the private placement of common stock to a group of institutional investors. Net
proceeds to the Company after
estimated costs and expenses were approximately $12.7 million. The transaction involved the sale of 4,025,000 newly issued shares of Curon Medical Common stock at a price of $3.36 per share.
Investors received warrants with a term of five years to purchase an aggregate of 905,625 common shares at an exercise price of $4.71 per share. Banc of America Securities served as sole placement
agent for the transaction. We believe we have enough cash to fund operations for at least 18 to 24 months, and that additional alternative financing is available, if needed, however, there can
be no assurance that such efforts will succeed or that sufficient funds will be made available.

Cash
used in operating activities was $12.5 million in the twelve months ended December 31, 2003, compared to $14.4 million for the same period in 2002. Operating
cash use decreased in 2003 primarily due to cost reduction strategies, partially offset by a decrease in interest income.

Cash
provided by investing activities was $8.7 million in the twelve months ended December 31, 2003, which consists of net maturities of marketable securities of
$9.3 million used to fund operations. Cash provided by investing activities was to $15.6 million for the same period in 2002, which consisted of $15.8 million in net maturities of
marketable securities. Our investment balances have decreased over the past twelve months, and therefore the related volume of investment purchases and maturities is lower for the year ended
December 31, 2003, as compared to the same period in 2002.

Cash
provided by financing activities was $72,000 for the twelve months ended December 31, 2003, primarily related to sales of common stock and proceeds from notes payable to
finance insurance policies, offset by payments on those notes payable. Cash used by financing activities was $76,000 for the twelve months ended December 31, 2002, primarily due to payments on
the notes payable used to finance insurance policies. During 2002, sales of stock through employee stock plans were offset by purchases of treasury stock. The Company has no significant outstanding
long-term obligations except operating lease commitments.

The
Company leases office space under noncancelable operating leases expiring in October 2006. Future minimum payments due under operating leases are as follows:

2004

$
3092005


3772006


318Total future minimum lease payments

$
1,004


Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No 150. "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities

32

---

in
the statement of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not have a
significant impact on our financial statements.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without
significantly increasing risk. Some of our investment securities may have market risk. That means that a change in prevailing interest rates may cause the fair value of the principal amount of an
investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments has generally been less
than eighteen months. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments.

Our
exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our available funds for
investment. We do not plan to use derivative financial instruments in our investment portfolio. We plan to ensure the safety and preservation of our invested principal funds by limiting default risks,
market risk and reinvestment risk. We plan to mitigate default risk by investing in high-credit quality securities.

All
of our revenue is realized in U.S. dollars. Therefore, we do not believe that we currently have any significant direct foreign currency exchange rate risk.

33

---



Item 8. Financial Statements and Supplementary Data

|Report of Independent Auditors                                                                                    |  | 35
|----------------------------------------------------------------------------------------------------------------- |  | --
|Consolidated Balance Sheets at December 31, 2003 and December 31, 2002                                            |  | 36
|Consolidated Statements of Operations for each of the Three Years in the Period Ended December 31, 2003           |  | 37
|Consolidated Statements of Stockholders' Equity for each of the Three Years in the Period Ended December 31, 2003 |  | 38
|Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 2003           |  | 39
|Notes to Consolidated Financial Statements                                                                        |  | 40
|Quarterly Financial Data (unaudited)                                                                              |  | 54

34

---



REPORT OF INDEPENDENT AUDITORS

To
the Board of Directors and Stockholders of Curon Medical, Inc.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Curon Medical, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance
with auditing standards generally accepted in the United States of America which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PRICEWATERHOUSECOOPERS LLP

San
Jose, California

February 20,
2004

35

---



CURON MEDICAL, INC.  Consolidated Balance Sheets        (in thousands, except shares and per share data)

|                                       |                                                                                          | December 31,                                                    |    
|-------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ---
|
|Assets                                 |                                                                                          |                                                                 |    
|Current assets:                        |                                                                                          |                                                                 |    
|                                       | Cash and cash equivalents                                                                |                                                                 | $  
|                                       | Marketable securities                                                                    |                                                                 |    
|                                       | Accounts receivable, net of allowance for doubtful accounts of $15 and $34, respectively |                                                                 |    
|                                       | Inventories, net                                                                         |                                                                 |    
|                                       | Prepaid expenses and other current assets                                                |                                                                 |    
|                                       |                                                                                          |                                                                 |    
|                                       | Total current assets                                                                     |                                                                 |    
|Long-term investments                  |                                                                                          |                                                                 |   
|Property and equipment, net            |                                                                                          |                                                                 | 836
|Other assets                           |                                                                                          |                                                                 | 124
|                                       |                                                                                          |                                                                 |    
|                                       | Total assets                                                                             |                                                                 | $  
|                                       |                                                                                          |                                                                 |    
|Liabilities and Stockholders' Equity   |                                                                                          |                                                                 |    
|Current liabilities:                   |                                                                                          |                                                                 |    
|                                       | Accounts payable                                                                         |                                                                 | $  
|                                       | Accrued liabilities                                                                      |                                                                 |    
|                                       | Litigation reserve                                                                       |                                                                 |    
|                                       | Notes payable                                                                            |                                                                 |    
|                                       |                                                                                          |                                                                 |    
|                                       | Total current liabilities                                                                |                                                                 |    
|Other liabilities                      |                                                                                          |                                                                 | 115
|                                       |                                                                                          |                                                                 |    
|                                       | Total liabilities                                                                        |                                                                 |    
|                                       |                                                                                          |                                                                 |    
|Contingencies and commitments (Note 5) |                                                                                          |                                                                 |    
|Stockholders' equity:                  |                                                                                          |                                                                 |    
|                                       | Preferred stock, $.001 par value: 5,000,000 shares authorized                            |                                                                 |    
|                                       |                                                                                          | Issued and outstanding: none                                    |    
|                                       | Common stock, $.001 par value: 50,000,000 shares authorized                              |                                                                 |    
|                                       |                                                                                          | Issued and outstanding: 20,209,000 and 19,993,000, respectively |    
|                                       | Additional paid-in capital                                                               |                                                                 |    
|                                       | Deferred stock compensation                                                              |                                                                 |    
|                                       | Accumulated deficit                                                                      |                                                                 |    
|                                       | Treasury stock, at cost                                                                  |                                                                 |    
|                                       |                                                                                          | 326,000 shares at December 31, 2003 and 2002                    |    
|                                       | Accumulated other comprehensive income                                                   |                                                                 |    
|                                       |                                                                                          |                                                                 |    
|                                       | Total stockholders' equity                                                               |                                                                 |    
|                                       |                                                                                          |                                                                 |    
|                                       | Total liabilities and stockholders' equity                                               |                                                                 | $  
|                                       |                                                                                          |                                                                 |    

See
accompanying notes to consolidated financial statements

36

---



CURON MEDICAL, INC.        Consolidated Statements of Operations        (in thousands, except per share amounts)

|                                                               |                            | For the Year Ended December 31, |        
|-------------------------------------------------------------- | -------------------------- | ------------------------------- | -------
|
|Revenues                                                       |                            | $                               | 3,421  
|Cost of goods sold                                             |                            |                                 | 4,322  
|                                                               |                            |                                 |        
|Gross loss                                                     |                            |                                 | (901   
|                                                               |                            |                                 |        
|Operating expenses:                                            |                            |                                 |        
|                                                               | Research and development   |                                 |        
|                                                               | Clinical and regulatory    |                                 |        
|                                                               | Sales and marketing        |                                 |        
|                                                               | General and administrative |                                 |        
|                                                               | Litigation charge          |                                 |        
|                                                               |                            |                                 |        
|Total operating expenses                                       |                            |                                 | 14,900 
|                                                               |                            |                                 |        
|Operating loss                                                 |                            |                                 | (15,801
|Interest income                                                |                            |                                 | 234    
|Interest expense                                               |                            |                                 | (5     
|Other income (expense), net                                    |                            |                                 | 17     
|                                                               |                            |                                 |        
|Net loss                                                       |                            | $                               | (15,555
|                                                               |                            |                                 |        
|Net loss per share, basic and diluted                          |                            | $                               | (0.77  
|                                                               |                            |                                 |        
|Shares used in computing net loss per share, basic and diluted |                            |                                 | 20,076 
|                                                               |                            |                                 |        

See
accompanying notes to consolidated financial statements

37

---



CURON MEDICAL, INC.    Consolidated Statements of Stockholders' Equity    For the Years Ended December 31, 2003, 2002, and 2001    (in thousands)

|                             |                                                               | Common
Stock
Shares                     |     | Amount |    | Additional
Paid-in
Capital |   | Deferred
Stock
Compensation |      | Accumulated
Deficit |        | Treasury
Stock |   | Accumulated
Other
Comprehensive
Income |         | Total
Stockholders'
Equity |     
|---------------------------- | ------------------------------------------------------------- | --------------------------------------- | --- | ------ | -- | -------------------------- | - | --------------------------- | ---- | ------------------- | ------ | -------------- | - | -------------------------------------- | ------- | -------------------------- | ----
|Balance at January 1, 2001   |                                                               | 19,158                                  |     | $      | 19 |                            | $ | 90,149                      |      | $                   | (2,451 | )              | $ | (32,862                                | )       | $                          |    
|                             | Net loss                                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        | (15,429 | )                          |     
|                             |                                                               | Change in unrealized gain on investment |     |       |    |                            |  |                             |      |                    |        |                |  |                                        |         |                           |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|                             | Total comprehensive loss                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock in upon exercise of warrants         |                                         | 124 |        |    |                           |   |                             |     |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock upon exercise of stock options       |                                         | 220 |        |    |                           |   |                             | 45   |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock through Employee Stock Purchase Plan |                                         | 139 |        |    |                           |   |                             | 333  |                     |        |               |   |                                        |        |                            |     
|                             | Deferred stock compensation                                   |                                         |    |        |    |                           |   |                             | (159 | )                   |        | 159            |   |                                        |        |                            |     
|                             | Amortization of stock compensation                            |                                         |    |        |    |                           |   |                             |     |                     |        | 1,336          |   |                                        |        |                            |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|Balance at December 31, 2001 |                                                               | 19,641                                  |     |        | 19 |                            |   | 90,368                      |      |                     | (956   | )              |   | (48,291                                | )       |                            |    
|                             | Net loss                                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        | (15,441 | )                          |     
|                             |                                                               | Change in unrealized gain on investment |     |       |    |                            |  |                             |      |                    |        |                |  |                                        |         |                           |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|                             | Total comprehensive loss                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock upon exercise of stock options       |                                         | 212 |        |    |                           |   |                             | 49   |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock through Employee Stock Purchase Plan |                                         | 140 |        |    | 1                          |   |                             | 185  |                     |        |               |   |                                        |        |                            |     
|                             | Deferred stock compensation                                   |                                         |    |        |    |                           |   |                             | (474 | )                   |        | 474            |   |                                        |        |                            |     
|                             | Amortization of stock compensation                            |                                         |    |        |    |                           |   |                             |     |                     |        | 357            |   |                                        |        |                            |     
|                             | Repurchase of common stock                                    |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        |        |                            |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|Balance at December 31, 2002 |                                                               | 19,993                                  |     |        | 20 |                            |   | 90,128                      |      |                     | (125   | )              |   | (63,732                                | )       |                            | (234
|                             | Net loss                                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        | (15,555 | )                          |     
|                             |                                                               | Change in unrealized gain on investment |     |       |    |                            |  |                             |      |                    |        |                |  |                                        |         |                           |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|                             | Total comprehensive loss                                      |                                         |    |        |    |                           |   |                             |     |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock upon exercise of stock options       |                                         | 64  |        |    |                           |   |                             | 30   |                     |        |               |   |                                        |        |                            |     
|                             | Issuance of common stock through Employee Stock Purchase Plan |                                         | 152 |        |    |                           |   |                             | 84   |                     |        |               |   |                                        |        |                            |     
|                             | Deferred stock compensation                                   |                                         |    |        |    |                           |   |                             | (70  | )                   |        | 70             |   |                                        |        |                            |     
|                             | Amortization of stock compensation                            |                                         |    |        |    |                           |   |                             | 142  |                     |        | 51             |   |                                        |        |                            |     
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     
|Balance at December 31, 2003 |                                                               | 20,209                                  |     | $      | 20 |                            | $ | 90,314                      |      | $                   | (4     | )              | $ | (79,287                                | )       | $                          | (234
|                             |                                                               |                                         |     |        |    |                            |   |                             |      |                     |        |                |   |                                        |         |                            |     

See accompanying notes to the consolidated financial statements

38

---



CURON MEDICAL, INC.        Consolidated Statements of Cash Flows        (in thousands)

|                                                                            |                                                                    | For the Year Ended December 31,                     |        
|--------------------------------------------------------------------------- | ------------------------------------------------------------------ | --------------------------------------------------- | -------
|
|Cash Flows From Operating Activities                                        |                                                                    |                                                     |        
|Net loss                                                                    |                                                                    | $                                                   | (15,555
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                    |                                                     |        
|                                                                            | Depreciation and amortization                                      |                                                     |        
|                                                                            | Litigation charge                                                  |                                                     |        
|                                                                            | Loss on forgiveness of related party notes receivable              |                                                     |        
|                                                                            | Amortization of acquired technology                                |                                                     |        
|                                                                            | Loss on disposal of fixed assets                                   |                                                     |        
|                                                                            | Amortization of stock-based compensation                           |                                                     |        
|                                                                            | Amortization of premium (accretion of discount) on securities, net |                                                     |        
|                                                                            | Changes in current assets and liabilities:                         |                                                     |        
|                                                                            |                                                                    | Accounts receivable, net                            |        
|                                                                            |                                                                    | Inventories                                         |        
|                                                                            |                                                                    | Prepaid expenses and other current assets           |        
|                                                                            |                                                                    | Other assets                                        |        
|                                                                            |                                                                    | Accounts payable                                    |        
|                                                                            |                                                                    | Accrued liabilities                                 |        
|                                                                            |                                                                    | Other long-term liabilities                         |        
|                                                                            |                                                                    |                                                     |        
|                                                                            |                                                                    | Net cash used in operating activities               |        
|                                                                            |                                                                    |                                                     |        
|Cash Flows From Investing Activities                                        |                                                                    |                                                     |        
|Purchase of property and equipment                                          |                                                                    |                                                     | (614   
|Sale of property and equipment                                              |                                                                    |                                                     | 10     
|Purchase of marketable securities                                           |                                                                    |                                                     | (5,374 
|Proceeds from maturities of marketable securities                           |                                                                    |                                                     | 14,700 
|                                                                            |                                                                    |                                                     |        
|                                                                            |                                                                    | Net cash provided by investing activities           |        
|                                                                            |                                                                    |                                                     |        
|Cash Flows From Financing Activities                                        |                                                                    |                                                     |        
|Proceeds from issuance of notes payable                                     |                                                                    |                                                     | 309    
|Principal payments on notes payable                                         |                                                                    |                                                     | (351   
|Proceeds from related party notes receivable                                |                                                                    |                                                     |       
|Payments of related party notes receivable                                  |                                                                    |                                                     |       
|Proceeds from issuance of common stock, net of issuance costs               |                                                                    |                                                     | 114    
|Purchase of treasury stock                                                  |                                                                    |                                                     |       
|                                                                            |                                                                    |                                                     |        
|                                                                            |                                                                    | Net cash provided by (used in) financing activities |        
|                                                                            |                                                                    |                                                     |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                    |                                                     | (3,705 
|Cash and cash equivalents at beginning of period                            |                                                                    |                                                     | 8,570  
|                                                                            |                                                                    |                                                     |        
|Cash and cash equivalents at end of period                                  |                                                                    | $                                                   | 4,865  
|                                                                            |                                                                    |                                                     |        
|Supplemental Disclosure Of Cash Flow Information                            |                                                                    |                                                     |        
|Cash paid for interest                                                      |                                                                    | $                                                   | 5      

See
accompanying notes to the consolidated financial statements

39

---



CURON MEDICAL, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Tabular amounts in thousands, except share and per share data)

NOTE 1FORMATION AND BUSINESS OF THE COMPANY:

Curon Medical, Inc. (the Company) was incorporated in the State of Delaware on May 1, 1997. The Company develops, manufactures and markets
proprietary products for the treatment of gastrointestinal disorders.

In
the course of its development activities, the Company has sustained operating losses and negative cash flows from operations and expects such losses to continue in the foreseeable
future. The Company intends to finance its operations primarily through its cash and cash equivalents, marketable securities, future financing and future revenues. The Company believes it has enough
cash to fund operations for at least 18 to 24 months. The Company also believes additional alternative financing is available, if needed, however, there can be no assurance that such efforts
will succeed or that sufficient funds will be made available.

On
February 6, 2004, the Company raised approximately $13.5 million in gross proceeds from the private placement of common stock to several institutional investors. Net
proceeds to the Company after estimated costs and expenses were approximately $12.7 million. The transaction involved the sale of 4,025,000 newly issued shares of the Company's Common stock at
a price of $3.36 per share. Investors received warrants with a term of five years to purchase an aggregate of 905,625 common shares at an exercise price of $4.71 per share. Banc of America Securities
served as sole placement agent for the transaction.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in preparation of the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain Risks and Uncertainties

The Company's products and services are currently concentrated in a single segment of the gastrointestinal treatment field, which is characterized by increasing
technological advances and changes in customer requirements. The success of the Company depends on management's ability to anticipate or to respond quickly and adequately to technological developments
in its industry, changes in customer requirements or industry standards. Failure to obtain or maintain necessary FDA clearances or approvals could hurt the Company's ability to commercially distribute
and market its products in the United States. Any significant delays in the development or introduction of products or services could have a material adverse effect on the Company's business and
operating results. The Company has two products that it is currently marketing: radio-frequency generators and single use disposable devices. A single supplier currently provides some components and
materials necessary for manufacturing of

40

---

products.
Any technical or quality problems in the manufacturing of these components, changes to the product specifications, changes in rights to currently licensed intellectual property, or lack of
essential equipment by suppliers, could have a significant impact on the Company's financial condition and results of operations.

Sales
to both domestic and international customers are generally made on open credit terms. Management performs on-going credit evaluation of its customers and maintains an allowance for
bad debts when needed.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with remaining maturities of three months or less at the date of purchase to be cash equivalents.
The Company's cash and cash equivalents include deposit funds, money market funds and commercial paper.

Marketable Securities

Investments consist primarily of marketable corporate bonds, commercial paper and government agency securities with a remaining maturity at the date of purchase
of greater than three months. Investments with maturities beyond 2004 are classified as long-term investments and those maturing during 2004 are shown as current marketable securities.
These investments are classified as available-for-sale securities and are stated at market value, with any temporary differences between an investment's amortized cost and its
market value recorded as a separate component of stockholders' equity until such gains or losses are realized. Gains or losses on the sales of securities are determined on a specific identification
basis. The following is a summary of investments at December 31, 2003 and 2002, respectively:

|                                     |  | Cost |        | Gross
Unrealized
Holding Gains |   | Gross
Unrealized
Holding Losses |   | Fair
Value
|------------------------------------ |  | ---- | ------ | ------------------------------ | - | ------------------------------- | - | ----------
|Maturities under one year            |  |      |        |                                |   |                                 |   |           
|Corporate obligations                |  | $    | 5,270  |                                | $ | (1                              | ) | $         
|                                     |  |      |        |                                |   |                                 |   |           
|Total at December 31, 2003           |  | $    | 5,270  |                                | $ | (1                              | ) | $         
|                                     |  |      |        |                                |   |                                 |   |           
|Maturities under one year            |  |      |        |                                |   |                                 |   |           
|Government obligations               |  | $    | 6,604  |                                | $ | 29                              |   | $         
|Corporate obligations                |  |      | 7,748  |                                |   | 16                              |   |           
|                                     |  |      |        |                                |   |                                 |   |           
|Total                                |  |      | 14,352 |                                |   | 45                              |   |           
|                                     |  |      |        |                                |   |                                 |   |           
|Maturities between one and two years |  |      |        |                                |   |                                 |   |           
|Corporate obligations                |  |      | 527    |                                |   | 1                               |   |           
|                                     |  |      |        |                                |   |                                 |   |           
|Total                                |  |      | 527    |                                |   | 1                               |   |           
|                                     |  |      |        |                                |   |                                 |   |           
|Total at December 31, 2002           |  | $    | 14,879 |                                | $ | 46                              |   | $         
|                                     |  |      |        |                                |   |                                 |   |           

41

---

Inventories

Inventories are stated at the lower of standard cost (which approximates average cost) or market.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Fixed assets are depreciated over a life of three to five years. Leasehold improvements are amortized using the straight-line method over the
estimated useful life of the improvement, or the lease term, if shorter. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.

Intangible Assets

Intangible assets consisted of technology licenses, which were amortized on a straight-line basis over their estimated useful lives of two years.
These intangible assets were fully amortized as of the year ended December 31, 2002.

Impairment of Long-Lived Assets

Long-lived are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, or its
estimated useful life has changed significantly. When an asset's expected future undiscounted cash flows are less than its carrying value, an impairment loss is recognized and the asset is written
down to its estimated fair value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to
dispose. There have been no impairment charges recorded.

Revenue Recognition

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

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

Shipping
and handling costs charged to customers are recognized as revenue and the associated costs incurred by the Company are expensed under cost of goods sold.

42

---

Product Warranty

The Company generally warrants its products against defects for a period of one year and records a liability for such product warranty obligations at the time of
sale based upon historical experience. The Company also sells separately priced extended warranties to provide additional warranty coverage and recognizes the related revenue on a
straight-line basis over the extended warranty period which is generally one to four years. Costs associated with services performed under the extended warranty obligation are expensed as
incurred.

Changes
in product warranty obligations, including separately priced extended warranty obligations, for the year ended December 31, 2003 is as follows:

2003

2002Balance as of the beginning of the year

$
44

$
33Add:Accruals for warranties issued


35


25Cost incurred under separately priced extended warranty obligations


3


5Less:Settlements made


(15
)

(14
)Revenue recognized under separately priced extended warranty obligations


(9
)

(5
)Balance as of the end of the year

$
58

$
44


Research and Development

Research and development costs are expensed as incurred. Legal expenses related to patent development costs are expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred and were $327,000 in 2003, $348,000 in 2002, and $428,000 in 2001.

Income Taxes

The Company accounts for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.

Accounting for Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." Under APB No. 25, unearned stock compensation is
based on the difference, if any, on the date of grant, between the fair

43

---

value
of the Company's common stock and the exercise price. Had the Company determined its stock-based compensation based on the fair value at the grant dates for the awards under a method prescribed
by SFAS No. 123, the Company's net loss would have been increased to the FAS 123 adjusted amounts indicated below, as amended by SFAS No. 148:

|                                                                                                                |                   | Year Ended December 31, |        
|--------------------------------------------------------------------------------------------------------------- | ----------------- | ----------------------- | -------
|
|Net loss, as reported                                                                                           |                   | $                       | (15,555
|Add: Stock-based employee compensation expense in reported net income                                           |                   |                         | 51     
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |                   |                         | (878   
|                                                                                                                |                   |                         |        
|Net lossFAS 123 adjusted                                                                                       |                   | $                       | (16,382
|                                                                                                                |                   |                         |        
|Net loss per shareas reported                                                                                  |                   |                         |        
|                                                                                                                | Basic and diluted |                         | $      
|                                                                                                                |                   |                         |        
|Net loss per shareFAS 123 adjusted                                                                             |                   |                         |        
|                                                                                                                | Basic and diluted |                         | $      
|                                                                                                                |                   |                         |        

The
Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The equity instruments are
valued using the Black-Scholes Model. All unvested shares are marked to market until such options vest.

All
deferred stock compensation is amortized and expensed in accordance with FASB Interpretation No. 28, an accelerated vesting model.

Net Loss per Share

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding during the period excluding those shares that are subject
to repurchase. Diluted net loss per share would give effect to the dilutive effect of common stock equivalents consisting of stock options, warrants, and common stock subject to repurchase (calculated
using the treasury stock method). Potentially dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company's net loss.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash and cash equivalents, trade accounts receivable, and accounts payable approximate fair
value. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of obligations approximates fair value.

44

---

Segments

The Company operates in one segment, using one measurement of profitability to manage its business. All long-lived assets are maintained in the United
States.

Reclassification

Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.

Recent accounting pronouncements

In May 2003, the FASB issued SFAS No 150. "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in the statement of financial position.
SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not have a significant impact on the Company's financial
statements.

NOTE 3BALANCE SHEET COMPONENTS:

|                |  | December 31, 2003 |       | December 31, 2002 |  
|--------------- |  | ----------------- | ----- | ----------------- | -
|Inventories:    |  |                   |       |                   |  
|Raw material    |  | $                 | 712   |                   | $
|Work-in-process |  |                   | 89    |                   |  
|Finished goods  |  |                   | 262   |                   |  
|                |  |                   |       |                   |  
|                |  | $                 | 1,063 |                   | $
|                |  |                   |       |                   |  

|                                                |  | December 31, 2003 |        | December 31, 2002 |  
|----------------------------------------------- |  | ----------------- | ------ | ----------------- | -
|Property & Equipment:                           |  |                   |        |                   |  
|Computer and office equipment                   |  | $                 | 518    |                   | $
|Equipment                                       |  |                   | 1,654  |                   |  
|Furniture and fixtures                          |  |                   | 176    |                   |  
|Leasehold improvements                          |  |                   | 301    |                   |  
|Software                                        |  |                   | 248    |                   |  
|                                                |  |                   |        |                   |  
|                                                |  |                   | 2,897  |                   |  
|Less: Accumulated depreciation and amortization |  |                   | (2,061 | )                 |  
|                                                |  |                   |        |                   |  
|                                                |  | $                 | 836    |                   | $
|                                                |  |                   |        |                   |  

45

---

|                          |  | December 31, 2003 |       | December 31, 2002
|------------------------- |  | ----------------- | ----- | -----------------
|Accrued Liabilities:      |  |                   |       |                  
|Compensation and benefits |  | $                 | 728   |                  
|Clinical trials           |  |                   | 130   |                  
|Professional fees         |  |                   | 203   |                  
|Other accrued expenses    |  |                   | 103   |                  
|                          |  |                   |       |                  
|                          |  | $                 | 1,164 |                  
|                          |  |                   |       |                  

NOTE 4NOTES PAYABLE:

During 2003, a note payable in the amount of $309,000, bearing interest at 3.99% was used to finance the corporate liability and casualty insurance policy
renewal. This note was paid in full in December 2003. The Company had short-term notes payable at December 31, 2002 in the amount of $42,000, at an interest rate of 5.75%.
The note was paid in full in March 2003, and related to the financing of corporate insurance policies in the amount of $140,000.

NOTE 5COMMITMENTS AND CONTINGENCIES:

Leases

The Company leases office space under a noncancelable operating lease expiring in October 2006. In September 2003, the previous lease agreements
expired, and the Company moved to new facilities. Rent expense for the years December 31, 2003, 2002, and 2001 was $576,000, $528,000 and $532,000 respectively.

At
December 31, 2002, future minimum facility lease payments are as follows:

2004

$
3092005


3772006


318Total future minimum lease payments

$
1,004


Contingencies

The Company is involved in routine legal and administrative proceedings that arise from the normal conduct of business. Management believes that the ultimate
disposition of these matters will not have a material adverse effect on the financial results or condition of the Company.

In
June 2001, a civil action was filed against the Company in the United States District Court, Western District of Kentucky, Louisville Division, alleging that the Plaintiff
sustained a vagal nerve injury and damage to his gastrointestinal tract during a Stretta procedure caused by the defective design and manufacture of the Company's product. Plaintiff's allegations
against the Company include strict liability for a product that was in a defective and unreasonably dangerous condition, negligence in the design and manufacturing of the product, breach of implied
warranty of merchantability, and loss of consortium. Plaintiff was a subject in a randomized clinical trial and had been provided with an approved Informed Consent form and counseling by the
physician. Prior to treatment, the subject

46

---

provided
consent to proceed. Plaintiff is seeking a trial by jury and unspecified damages. Trial date is currently set in September 2004. The Company believes Plaintiff's claim is without
merit.

This
matter is in the early stage and the Company believes that the resolution of this matter will not have a material effect, if any, on its business, financial position, and results of
operations and cash flows.

In
June 2002, a civil action was filed against a number of defendants, including the Company, in the Court of Common Pleas, Philadelphia County, in the State of Pennsylvania,
alleging that the Plaintiff sustained injury during a Secca procedure caused by the device being defective and/or in an unreasonably dangerous condition. Plaintiff was a subject in a clinical trial
and had been provided with an approved Informed Consent form and counseling by the physician. Prior to treatment, the subject provided consent to proceed. Additional defendants include the treating
physician, the associated medical institution who, it is alleged, were medically negligent in treatment of Plaintiff, and the members of the Institutional Review Board who approved the protocol for
the clinical trial. Plaintiff has demanded a trial by jury and unspecified damages. Although the case was moved to the United States District Court for the Eastern District of Pennsylvania, it has
since been moved back to State Court on appeal. The Company has reached a tentative settlement in this case, and a charge of $1.25 million to operating expense for the year ending
December 31, 2003 was recognized as a result.

In
April 2003, a civil action was filed against the Company in United States District Court for the Northern District of California by Federal Insurance Corporation, the Company's
insurance carrier, for rescission, reformation, and restitution in connection with the Company's liability insurance policy. This policy covers, among other things, product liability claims made
against the Company by people treated with the Company's product. There is a Summary Judgment scheduled for June 4, 2004 in this matter. Should the Company lose this Judgment, there will be no
coverage in the Pennsylvania suit described above and the provision of the $1.25 million will be the limit of the Company's liability in this case.

In
February 2003, a civil action was filed against the Company in the District Court of Dallas County, in the State of Texas, alleging that the plaintiff sustained serious
injuries during a Stretta procedure performed in February 2001, caused by the device being in a defective condition. The court dismissed this case with prejudice.

Development and Technology License Agreements

The Company licenses certain radiofrequency technology through an agreement that gives the Company an irrevocable license to manufacture, have manufactured, use,
offer to sell, sell and import radiofrequency generators based on the licensed technology in the licensed field. The agreement expires on October 6, 2017. Royalties are accrued at the time of
sale, based on the revenues recognized when the related licensed technology is part of the sold item.

In
February and April 2000, the Company entered into two separate licensing agreements for the use of proprietary radiofrequency technologies used in certain of the Company's
products. The Company issued 86,000 shares of its common stock, valued at $831,000 on the date of the agreements, in exchange for the right to use the technologies. In addition, $73,000 was paid in
conjunction with the
licensed technology. As part of the February agreement, the Company is also required to pay a royalty on all revenues collected when the related licensed technology is part of the sold item. Such
payments were not significant for all years presented.

47

---



NOTE 6COMMON STOCK:

The Company's Certificate of Incorporation, as amended, authorizes the Company to issue 50,000,000 shares of $.001 par value common stock. Certain of the shares
issued are subject to a right of repurchase by the Company, which lapses over a three or four-year period from the issuance dates. At December 31, 2003, 2002 and 2001 there were
1,000, 34,000 and 280,000 shares subject to repurchase, respectively.

Common Stock Warrants

In connection with a line of credit agreement in 1999, the Company issued a warrant to purchase 86,000 shares of stock for $0.88 per share. The warrant expires in
2005. The aggregate value of the warrant of $120,000, determined using a Black-Scholes valuation model, was recorded as a discount to the related notes payable, and was expensed as interest expense
over the life of the debt. In March 2001, these, along with certain other warrants to purchase 153,000 shares, were exercised to purchase 124,000 shares of common stock.

In
May 2000, the company issued warrants to purchase 568,917 shares of common stock in connection with convertible notes payable. These warrants are exercisable immediately and
expire in 2005. The value of the warrants, $2.1 million, was determined using the Black-Scholes option-pricing model and was amortized to interest expense in 2000. These warrants are
outstanding at December 31, 2003.

Stockholder Rights Plan

In October 2001, the Company adopted a Preferred Stock Rights Agreement. Under this agreement, the Company will issue a dividend of one Preferred Share
Purchase Right (a "Right") for each share of common stock held by stockholders of record as of the close of business on November 20, 2001. Each Right entitles the registered stockholder to
purchase from the Company one one-thousandth of a share of the Company's Series A Participating Preferred Stock
("Preferred Stock") at an exercise price of $30.00. The agreement is designed to assure stockholders fair value in the event of a future unsolicited business combination or similar transaction.

The
Rights do not have any voting rights, and will expire upon the earlier of redemption or November 20, 2011. If the Rights are exercised, each stockholder receives one
one-thousandth of a share of Preferred Stock, which entitles the holder to one additional vote and dividends and liquidation rights equal to that paid on common stock.

NOTE 7STOCK OPTION PLANS AND OTHER EMPLOYEE BENEFITS:

Stock Option Plans

During 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan"). The 1997 Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the 1997 Plan may be either incentive stock options or nonstatutory stock options. Incentive stock options (ISO) may be granted only to Company employees (including
officers and directors who are also employees). Nonstatutory stock options (NSO) may be granted to Company employees, officers, directors, and consultants. The Company reserved 2,679,000 of common
stock for issuance under the 1997 Plan. The first options were issued in 1998. No further options will be granted

48

---

under
the 1997 Plan. The remaining shares reserved for issuance under this plan are being used for grant under the 2000 Stock Plan.

During
2000, the 2000 Stock Plan (the "2000 Plan") was adopted by the Board of Directors and became effective on September 21, 2000. The terms of this plan are generally the same
as under the 1997 Plan. At December 31, 2003, there were 4,939,636 shares authorized for issuance under this plan.

Under
both plans, options are granted for a period of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant, provided, however,
that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise
price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the fair market value of the shares on the date of grant. Options generally vest 25% one year from the vest start
date and ratably over the next 36 months and expire 10 years from the date of grant.

Deferred Stock Compensation

Prior to its IPO in September 2000, the Company issued stock options under the 1997 Plan at exercise prices, deemed by the Board of Directors at the date
of grant to be equal to the fair value of the common stock. In anticipation of the Company's initial public offering, the Company subsequently determined that, for financial statement purposes, the
estimated value of its common stock was in excess of the exercise prices. Accordingly, the Company has recorded deferred stock compensation for stock options issued to both employees and
non-employees. For stock options granted to employees (1,661,000 in 2003, 1,098,000 in 2002 and 1,139,000 in 2001), the difference, if any, between the exercise price of the stock options
and the fair value of the Company's stock at the date of grant is recorded as deferred compensation on the date of grant.

For
stock options granted to non-employees, generally for future services (10,000 in 2003, none in 2002, and 41,000 in 2001), the fair value of the options, was determined
using the Black-Scholes valuation model. The Company records stock compensation as the non-employee fulfills the terms of the option grants, with changes in fair value of the unvested
options from period to period recorded as an adjustment to compensation expense.

Stock
compensation is as follows:

|                           |  | Years Ended December 31,
|-------------------------- |  | ------------------------
|
|Cost of goods sold         |  | $                       
|Research and development   |  |                         
|Clinical and regulatory    |  |                         
|Sales and marketing        |  |                         
|General and administrative |  |                         
|                           |  |                         
|                           |  | $                       
|                           |  |                         

49

---

Activity
under stock option plans is as follows:

|                        |           | 2003      |           | 2002 |      | 2001
|----------------------- | --------- | --------- | --------- | ---- | ---- | ----
|
|Beginning balance       |           | 2,416,000 |           | $    | 2.52 |     
|                        | Granted   |           | 1,671,000 |      | $    | 1.07
|                        | Exercised |           | (64,000   | )    | $    | 0.47
|                        | Cancelled |           | (394,000  | )    | $    | 2.26
|                        |           |           |           |      |      |     
|Ending balance          |           | 3,629,000 |           | $    | 1.92 |     
|                        |           |           |           |      |      |     
|Exercisable at year-end |           | 1,301,000 |           | $    | 2.96 |     
|                        |           |           |           |      |      |     

The
options outstanding and currently exercisable by exercise price at December 31, 2003 are as follows:

|Options Outstanding and Exercisable |  | Exercisable
|----------------------------------- |  | -----------
|
|$  0.18   $0.19                    |  | 218,000    
|0.61    0.80                       |  | 2,029,000  
|1.13                                |  | 192,000    
|2.70    3.87                       |  | 742,000    
|4.39    4.50                       |  | 308,000    
|7.00                                |  | 20,000     
|$11.84  $12.50                     |  | 120,000    
|                                    |  |            
|                                    |  | 3,629,000  
|                                    |  |            

50

---

Fair Value Disclosures

The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model, using the following assumptions:

|                              |                                          | Stock Option Plans |   |         |   |   |         |   |  
|----------------------------- | ---------------------------------------- | ------------------ | - | ------- | - | - | ------- | - | -
|
|
|
|Assumptions:                  |                                          |                    |   |         |   |   |         |   |  
|                              | Risk-free interest rate                  |                    |   | 2.55    | % |   | 3.35    | % |  
|                              | Expected life                            |                    |   | 4 years |   |   | 4 years |   |  
|                              | Expected volatility                      |                    |   | 100     | % |   | 100     | % |  
|                              | Expected dividend yield                  |                    |   | 0.0     | % |   | 0.0     | % |  
|Weighted average fair values: |                                          |                    |   |         |   |   |         |   |  
|                              | Exercise price less than market price    |                    | $ |        |   | $ |        |   | $
|                              | Exercise price equal to market price     |                    | $ | 0.75    |   | $ | 0.71    |   | $
|                              | Exercise price greater than market price |                    | $ |        |   | $ |        |   | $

401(k) Savings Plan

In October 1999, the Company began a 401(k) savings plan (the "401(k) Plan"). The 401(k) Plan is a defined contribution plan intended to qualify under
Section 401(a) and 401(k) of the Internal Revenue Code. All full-time employees of the Company are eligible to participate in the 401(k) Plan pursuant to the terms of the Plan.
Contributions by the Company are discretionary and no contributions have been made by the Company for the years ended December 31, 2003, 2002, or 2001.

Employee Stock Purchase Plan

Effective September 21, 2000, the Company adopted the 2000 Employee Stock Purchase Plan (ESPP). A total of 400,000 shares of common stock were initially
reserved for issuance under this plan. In addition, subject to the Board of Directors' discretion, on January 1, 2001 and on each anniversary thereafter, the aggregate number of shares reserved
for issuances under the ESPP will be increased automatically by the lesser of: 500,000 shares, 1.5% of the outstanding shares of the Company's Common Stock, or a lesser amount determined by the Board
of Directors. During 2003, 2002 and 2001, the shares reserved for issuance under the ESPP were increased by 300,000, 295,000 and 285,000 shares, respectively.

Under
the ESPP, eligible employees may have up to 15% of their earnings withheld, subject to certain limitations, to be used to purchase shares of the Company's common stock. Unless the
Board of Directors shall determine otherwise, each offering period provides for consecutive 24-month periods commencing on each May 1 and November 1. Each offering period is
comprised of four 6-month purchase periods. The price at which common stock may be purchased under the ESPP is equal to 85% of the lower of the fair market value of common stock on the
commencement date of each offering period or the fair market value on the last day of the purchase period. During 2003, the shares purchased under the ESPP were 78,000 and 74,000 on May 1 and
November 1, respectively.

51

---

NOTE 8NET LOSS PER SHARE:

Basic and diluted net loss per share is calculated as follows:

|                   |                                                                      | Year Ended December 31, |      
|------------------ | -------------------------------------------------------------------- | ----------------------- | -----
|
|Numerator:         |                                                                      |                         |      
|                   | Net loss                                                             |                         | $    
|                   |                                                                      |                         |      
|Demoninator:       |                                                                      |                         |      
|                   | Weighted average shares outstanding                                  |                         |      
|                   | Weighted average unvested common shares subject to repurchase        |                         |      
|                   |                                                                      |                         |      
|                   | Weighted average shares used in basic and diluted net loss per share |                         |      
|                   |                                                                      |                         |      
|Net loss per share |                                                                      | $                       | (0.77
|                   |                                                                      |                         |      

The
Company has issued shares to employees and non-employees that are subject to repurchase should an employee terminate employment with the Company. The shares vest monthly
and the vesting periods range from 36 months to 48 months. Shares subject to repurchase are excluded from the average shares used in the calculation of basic and diluted net loss per
share.

During
1999, the Company granted to certain employees and non-employees, options which were immediately exercisable into common stock, subject to repurchase by the Company
based on the same remaining vesting schedule as the related option. Shares are subject to repurchase at the original option exercise price.

Equity
instruments that could dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share as their effect is antidilutive are as
follows:

|                                                      |  | At December 31,
|----------------------------------------------------- |  | ---------------
|
|Unvested common shares (shares subject to repurchase) |  | 1,000          
|Shares issuable upon exercise of stock options        |  | 3,629,000      
|Shares issuable upon exercise of warrants             |  | 569,000        
|                                                      |  |                
|Total                                                 |  | 4,199,000      
|                                                      |  |                

NOTE 9GEOGRAPHIC SEGMENT INFORMATION

The Company has determined that it has a single reportable segment consisting of the development, manufacture, and marketing of proprietary products for the
treatment of gastrointestinal disorders. Management uses one measurement of profitability and does not disaggregate its business for internal reporting. Operations outside the United States primarily
consist of a sales office in Belgium that is responsible for promoting sales activities to foreign customers who are invoiced by the Company's headquarters in the United States, and a subsidiary in
Australia that was used to coordinate Australian clinical trials in the past, and currently is inactive. The foreign subsidiaries do not carry any

52

---

significant
long-lived assets, and income and assets of the Company's foreign subsidiaries were not significant.

Revenue
from external customers by geographic area for each of the three years in the period ended December 31, 2003, were as follows (tabular amounts are not in thousands):

2003

2002

2001United States

$
3,195

$
2,980

$
3,183% of total


93.4
%

87.6
%

96.0
%Europe

$
226

$
423

$
134% of total


6.6
%

12.4
%

4.0
%


NOTE 10INCOME TAXES:

Deferred tax assets consist of the following:

December 31,2003

2002Deferred tax assetsDepreciation and amortization

$
501

$
537Reserves


674


158Credits


1,022


1,015Capitalized start-up costs


316


596Net operating loss carryforwards


24,196


18,85526,709


21,161Valuation allowance


(26,709
)

(21,161
)Net deferred tax assets

$


$



Based
on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has
provided a full valuation allowance against its net deferred tax assets at December 31, 2003 and 2002.

As
of December 31, 2003, the Company has a net operating loss carryforward of approximately $63,800,000 for federal purposes and $42,600,000 for state tax purposes. If not
utilized, these carryforwards will begin to expire beginning in 2013 for federal purposes and 2006 for state purposes.

The
Company has research and development credit carryforwards of approximately $656,000 and $499,000 for federal and state income tax purposes, respectively. If not utilized, the federal
carryforward will expire in various amounts beginning in 2013. The California credit can be carried forward indefinitely.

The
Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event
the Company has had a change in ownership, utilization of the carryforwards could be restricted.

53

---

NOTE 12QUARTERLY FINANCIAL DATA:

(UNAUDITED)

The
following table presents certain unaudited quarterly financial information for the eight quarters ended December 31, 2003. In our opinion, this information has been prepared
on the same basis as the audited financial statements and includes all adjustments (consisting only of normal recurring adjustments, except for the litigation charge in the fourth quarter of 2003)
necessary to present fairly the unaudited quarterly results of operations set forth herein.

|                   |  |           |  | First
Quarter |               | Second
Quarter |   | Third
Quarter |    | Fourth
Quarter |               | Fiscal
Year |  
|------------------ |  | --------- |  | ------------- | ------------- | -------------- | - | ------------- | -- | -------------- | ------------- | ----------- | -
|Net Sales          |  | 2003
2002 |  | $             | 709
939       |                | $ | 868
877       |    | $              | 783
746       |             | $
|Gross Loss         |  | 2003
2002 |  |               | (274
(44      | ))             |   | (178
(162     | )) |                | (389
(299     | ))          |  
|Net Loss           |  | 2003
2002 |  |               | (3,265
(3,825 | ))             |   | (3,575
(4,235 | )) |                | (3,866
(4,152 | ))          |  
|Earnings per Share |  | 2003
2002 |  | $             | (0.16
(0.20   | ))             | $ | (0.18
(0.22   | )) | $              | (0.19
(0.21   | ))          | $

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9a. Controls and Procedures

With the participation of management, our President and Chief Executive Officer and our Vice President of Finance and Chief Financial Officer evaluated our
disclosure controls and procedures within 90 days of the filing date of this annual report. Based upon this evaluation, our President and Chief Executive Officer and our Vice President of
Finance and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in our reports that
we file with the Securities and Exchange Commission.

There
were no significant changes our internal controls or, to the knowledge of our management, in other factors that could significantly affect these controls subsequent to the
evaluation date.

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PART III

Certain information required by Part III is omitted from this Report on Form 10-K in that the registrant will file a definitive
proxy statement within 120 days after the end of our fiscal year pursuant to Regulation 14A with respect to the 2003 Annual Meeting of Stockholders (the Proxy Statement) and certain
information included therein is incorporated herein by reference.

Item 10. Directors and Executive Officers of the Registrant

Certain of the information required by this item relating to directors is incorporated by reference to the information under the caption Proposal
No. 1Election of Directors in the Proxy Statement and under the caption Executive Officers.

Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors, officers and beneficial owners of more than 10% of our Common Stock to file with the SEC
and the National Association of Securities Dealers reports of ownership on Form 3 and reports of changes in ownership on Form 4 or Form 5. Such persons are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.

Based
solely on our review of the copies of such report received by us, or written representations from reporting persons that no Forms 3, 4, or 5 were required of such persons, we
believe that during our fiscal year ended December 31, 2003, Fred L. Brown, Michael Berman, Alan L. Kaganov, Robert Kuhling, and David I. Fann failed to timely file one Form 4.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the information under the caption Executive Compensation in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the information under the caption Record Date and Stock Ownership in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the information under the caption Certain Transactions in the Proxy Statement.

Item 14. Principal Auditor Fees and Services

The information required by this item is incorporated by reference to the section entitled "Proposal Number 2Selection of Auditors," beginning with
the section entitled "Audit and Other Fees," but only up to and not including the section entitled "Recommendation and Vote Required of the Company's Proxy Statement for the 2004 Annual Meeting of
Stockholders."

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



The
following Consolidated Financial Statements of Curon Medical, Inc. and Report of PricewaterhouseCoopers LLP have been provided as Item 8, above:

Report
of PricewaterhouseCoopers LLP, Independent Auditors.

Consolidated
Balance Sheets at December 31, 2003 and 2002.

Consolidated
Statements of Operations, for the years ended December 31, 2003, 2002, and 2001.

Consolidated
Statements of Stockholders' Equity, for the years ended December 31, 2003, 2002, and 2001.

Consolidated
Statements of Cash Flows, for the years ended December 31, 2003, 2002, and 2001.

Notes
to Financial Statements.

Quarterly
Financial Data (unaudited).



The
financial statement schedule entitled Valuation and Qualifying Accounts is included at page 61 of this Form 10-K.

All
other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto.



Refer
to (c) below.



During
the quarter ended December 31, 2003, we furnished a Current Report on Form 8-K dated October 16, 2003, reporting under Items 7 and 9 the issuance
of a press release (Exhibit 99.1 to such filing) and a transcript of the earnings call on that date (Exhibit 99.2 to such filing) announcing the results for the quarter ended
September 30, 2003,

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|Exhibit
Number |      | Description                                                                                                                                                                                                                                                                           
|-------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.3            | (1)  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                                    
|3.4            | (1)  | Bylaws of the registrant.                                                                                                                                                                                                                                                             
|4.1            | (1)  | Specimen common stock certificate of the registrant.                                                                                                                                                                                                                                  
|4.3            | (5)  | Preferred Stock Rights Agreement, dated as of October 30, 2001 between Curon Medical, Inc. and Mellon Investor Service, LLC including the Certificate of Designation, the form of Rights Certificate and the Summary of
Rights attached thereto as Exhibits A, B, and C, respectively.
|4.4            | (9)  | Form of Warrant to Purchase Shares of Common Stock.                                                                                                                                                                                                                                   
|10.1           | (1)  | Form of Indemnification Agreement for directors and executive officers.                                                                                                                                                                                                               
|10.2           | (1)  | 1997 Stock Option Plan.                                                                                                                                                                                                                                                               
|10.3           | (1)  | 2000 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                    
|10.5           | (1)  | Amended and Restated Stockholder Rights Agreement dated August 30, 1999 by and among the registrant and certain stockholders.                                                                                                                                                         
|10.6           | (1)  | Lease dated August 27, 1997 for office space located at 733 Palomar Avenue, Sunnyvale, California 94086.                                                                                                                                                                              
|10.7           | (1)  | Lease dated May 6, 1998 for office space located at 735 Palomar Avenue, Sunnyvale, California 94086.                                                                                                                                                                                  
|10.8           | (1)  | 2000 Stock Option Plan.                                                                                                                                                                                                                                                               
|10.9           | (1)  | Sublease dated April 2, 1999 for office space located at 735 Palomar Avenue, Sunnyvale, California 94086.                                                                                                                                                                             
|10.10          | (1)  | Amendment to Lease, effective April 28, 1999, for office space located at 735 Palomar Avenue, Sunnyvale, California 94086.                                                                                                                                                            
|10.14          | *(1) | Technology license agreement between the registrant and Gyrus PCL (formerly Somnus Medical Technologies, Inc.) effective December 10, 1998.                                                                                                                                           
|10.15          | (1)  | Technology license agreement between the registrant and University of Kansas Medical Research Institute effective February 2000.                                                                                                                                                      
|10.20          | (6)  | Severance Agreement with John W. Morgan dated July 19, 2002.                                                                                                                                                                                                                          
|10.21          | (7)  | Employment Agreement with Larry C. Heaton II, President and Chief Executive Officer.                                                                                                                                                                                                  
|10.23          | (8)  | Lease Agreement with Hopkins Properties, LLC for 46117 & 46107 Landing Parkway, Fremont, CA 94538, dated June 26, 2003.                                                                                                                                                               
|10.24          | (9)  | Securities Purchase Agreement, dated as of February 4, 2004.                                                                                                                                                                                                                          
|23.1           |      | Consent of Independent Accountants.                                                                                                                                                                                                                                                   
|24.1           |      | Power of Attorney (see page 59).                                                                                                                                                                                                                                                      
|31.1           |      | Chief Executive Officer's Certification Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     
|31.2           |      | Chief Financial Officer's Certification Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     
|32.1           |      | Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      
|32.2           |      | Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      

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57

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58

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fremont, State of California, on the 27th of February, 2004.

| |  | CURON MEDICAL, INC.
| |  | -------------------
| |  | By:                

POWER OF ATTORNEY

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Larry C. Heaton II and Alistair F. McLaren, his
attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his or their substitute or substitutes, may do or cause to be done by virtue thereof.

Pursuant
to the requirements of the Securities Act of 1934, this report signed below by the following person on behalf of the registrant and in the capacities and on the date indicated:

|Signature                                       |  | Title                                                                                                  |  | Date             
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | -----------------
|/s/LARRY C. HEATON IILarry C. Heaton II         |  | President, Chief Executive Officer and Director (Principal Executive Officer)                          |  | February 27, 2004
|/s/ALISTAIR F. MCLARENAlistair F. McLaren       |  | Chief Financial Officer and Vice President of Finance and Administration (Principal Financial Officer) |  | February 27, 2004
|/s/MICHAEL BERMANMichael Berman                 |  | Director                                                                                               |  | February 27, 2004
|/s/DAVID I. FANNDavid I. Fann                   |  | Director                                                                                               |  | February 27, 2004
|/s/ALAN L. KAGANOVAlan L. Kaganov               |  | Director                                                                                               |  | February 27, 2004
|/s/ROBERT F. KUHLING, JR.Robert F. Kuhling, Jr. |  | Director                                                                                               |  | February 27, 2004

59

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Report of Independent Auditors on Financial Statement Schedule

To the Board of Directors and Stockholders of Curon Medical, Inc.

Our
audits of the consolidated financial statements referred to in our report dated February 20, 2004, appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a) 2 on this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/
PricewaterhouseCoopers LLP

San
Jose, California

February 20,
2004

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Schedule II    VALUATION AND QUALIFYING ACCOUNTS    Years ended December 31, 2003, 2002, and 2001    (Dollars in Thousands)

|                                           |                   | Balance
at beginning
of year |   | Additions
charged to
Earnings |  | Deductions |       | Balance
at end
of year
|------------------------------------------ | ----------------- | ---------------------------- | - | ----------------------------- |  | ---------- | ----- | ----------------------
|Allowance for Doubtful Accounts:           |                   |                              |   |                               |  |            |       |                       
|                                           | December 31, 2003 |                              | $ | 34                            |  | $          |      |                       
|                                           | December 31, 2002 |                              |   | 20                            |  |            | 20    |                       
|                                           | December 31, 2001 |                              |   | 15                            |  |            | 5     |                       
|Reserve on Related Party Notes Receivable: |                   |                              |   |                               |  |            |       |                       
|                                           | December 31, 2003 |                              |   |                              |  |            |      |                       
|                                           | December 31, 2002 |                              |   |                              |  |            |      |                       
|                                           | December 31, 2001 |                              |   | 64                            |  |            |      |                       
|Deferred Tax Valuation Allowance:          |                   |                              |   |                               |  |            |       |                       
|                                           | December 31, 2003 |                              |   | 21,161                        |  |            | 5,548 |                       
|                                           | December 31, 2002 |                              |   | 15,595                        |  |            | 5,566 |                       
|                                           | December 31, 2001 |                              | $ | 9,873                         |  | $          | 5,722 |                       

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