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

                               ----------------

                                   FORM 10-K

(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
   OF 1934

   For the fiscal year ended December 31, 2000

                                       OR

[_]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)

<TABLE>
<S>                                            <C>
                  Delaware                                       77-0470324
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                      Identification Number)
</TABLE>

<TABLE>
<S>                                            <C>
             735 Palomar Avenue
            Sunnyvale, California                                  94085
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (408) 733-9910

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

<TABLE>
<S>                                            <C>
            Title of each class:                 Name of each exchange on which registered:
                    None                                            N/A
</TABLE>

          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 [X] No [_]

   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. [X]

   The aggregate market value of stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 20,
2001, as reported on the Nasdaq National Market, was approximately $22.3
million.

   The number of shares of Common Stock outstanding as of March 25, 2001:
19,158,264 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

   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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<PAGE>

                              CURON MEDICAL, INC.

                                   FORM 10-K

                               TABLE OF CONTENTS

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                                                                          Page
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 <C>      <S>                                                             <C>
 PART I..................................................................   1
 Item 1.  Business......................................................    1
 Item 2.  Properties....................................................   20
 Item 3.  Legal Proceedings.............................................   20
 Item 4.  Submission of Matters to a Vote of Security Holders...........   20
 PART II.................................................................  21
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters......................................................   21
 Item 6.  Selected Financial Data.......................................   22
 Item 7.  Management's Discussion and Analysis of Results of Operations
           and Financial Condition......................................   23
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....   27
 Item 8.  Financial Statements and Supplementary Data...................   29
          Report of Independent Accountants.............................   29
          Balance Sheet at December 31, 2000 and December 31, 1999......   30
          Statement of Operations for each of the Three Years in the
           Period Ended December 31, 2000...............................   31
          Statement of Stockholders' Equity (Deficit) for each of the
           Three Years in the Period Ended December 31, 2000............   32
          Statement of Cash Flows for each of the Three Years in the
           Period Ended December 31, 2000...............................   33
          Notes to Financial Statements.................................   34
          Quarterly Results of Operations (Unaudited)...................   46
 Item 9.  Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.....................................   47
 PART III................................................................  47
 Item 10. Directors and Executive Officers of the Registrant............   47
 Item 11. Executive Compensation........................................   48
 Item 12. Security Ownership of Certain Beneficial Owners and
           Management...................................................   48
 Item 13. Certain Relationships and Related Transactions................   48
 PART IV.................................................................  49
 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
           8-K..........................................................   49
</TABLE>

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                                     PART I

Item 1. Business

   This Report on Form 10-K contains certain forward-looking statements
regarding future events. Actual events or results may differ materially as a
result of the factors described herein and in the documents incorporated herein
by reference, including, in particular, those factors described under
"Additional Risk Factors."

Company Overview

   Curon 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(TM), received United
States Food and Drug Administration clearance in April 2000 for the treatment
of gastroesophageal reflux disease, commonly referred to as GERD, which affects
approximately 14 million U.S. adults on a daily basis. Unlike medication, which
temporarily suppresses GERD symptoms, our Stretta System is designed to apply
radiofrequency energy to treat the causes of GERD. Our Stretta System consists
of a disposable flexible catheter with needle electrodes and a control module,
which is a radiofrequency energy generator. Using the control module, the
physician delivers a precise amount of radiofrequency energy to the lower
esophageal sphincter. The delivery of this thermal energy creates lesions in
the muscle of the lower esophageal sphincter that reabsorb over time causing
tissue contraction. This results in a tightening of the sphincter which reduces
reflux into the esophagus.

   We commercially launched the Stretta System in May 2000 at a major
gastroenterology conference and have only limited revenues to date. As of
December 31, 2000, approximately 800 patients have been treated with the
Stretta procedure. Our second product, the Secca System(TM), is currently under
development for the treatment of fecal incontinence. In April 2001, we expect
to complete the U.S. clinical trial of the Secca System, the results of which
we intend to submit to the FDA during the fourth quarter of 2001.

   We have a direct sales force to market and sell our products in the United
States. We are initially marketing directly to high volume practicing
gastroenterologists, gastroenterology practice groups and endoscopy suite
facilities. Secondarily, we intend to target lower volume gastroenterology
practices and general surgeons. In the United States, there are approximately
4,000 hospital endoscopy suites and approximately 4,000 ambulatory treatment
centers that perform procedures similar to the Stretta procedure. As of
December 31, 2000, we have delivered 41 control units in the United States. We
intend to continue to focus expansion of our marketing program to the medical
community and develop brand awareness of our products.

   Our Stretta System has also received European and Australian clearance. We
opened an office in Belgium in March 2001 and signed distribution agreements
for the sale of our products in Europe. We have a total of four distribution
agreements: one each in Germany, Italy and Greece and one covering sales in the
region of Belgium, the Netherlands, and Luxembourg. We do not expect to expand
our sales coverage beyond the United States and Europe before 2002.

Business Strategy

   Our strategy is to establish the Stretta System, which delivers
radiofrequency energy in a temperature controlled, minimally-invasive manner,
precisely to the lower esophageal sphincter, as the standard of care for GERD.
We believe that the benefits patients enjoy from the use of the Stretta System
are:

   Benefits over medication

  .  Reduction in reflux

  .  Absence of need to take medication and interrupt daily schedule

                                       1
<PAGE>

  .  No observed persistent side effects

  .  Lower cost as compared to the cost of purchasing medication over the
     long term

   Benefits over fundoplication, an alternative surgery that wraps the upper
stomach around the lower esophageal sphincter

  .  Shorter with less anesthesia: one-hour procedure under conscious
     sedation as compared to three-hour procedure under general anesthesia

  .  Less invasive because procedure is performed through the mouth instead
     of through incision in abdomen

  .  Outpatient procedure as opposed to one to four day inpatient
     hospitalization

   We believe the Stretta System also benefits the payor through improved
outcomes and lower costs. In addition, the Stretta System provides
gastroenterologists with the flexibility to perform the procedure in endoscopy
suites rather than requiring them to refer patients to general surgeons.

   We intend to continue to evaluate our Secca System through clinical trials
and, subject to the outcome of those trials, seek U.S. and European clearance
to market the Secca System in those markets. We intend to make the Secca System
the standard of care for fecal incontinence.

   For the Stretta System, we have established a direct 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 are
also developing a network of distributors in selected European countries. In
the United States, we have 9 salespeople and 2 clinical applications
specialists. In Europe, we have four distributors. We may hire additional
salespeople or enter new distributorships to further market our products and
penetrate other areas of the world.

   We have acquired and may continue to acquire complementary technologies. We
have entered into a license agreement with Somnus Medical Technologies, Inc.
for the use of technology related to Somnus' 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 intend to enter into license agreements
with other persons or companies covering technology relating to treating
diseases of the gastrointestinal tract.

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 used by people with
GERD. There are many widely prescribed medications, including Prilosec, with
worldwide sales of approximately $6.3 billion in 2000, Prevacid, Tagamet,
Pepcid and Zantac. 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

                                       2
<PAGE>

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 fundoplication surgery.
This inpatient surgical procedure costs approximately $11,700, involves a
prolonged recovery period, and exposes the patient to a significant risk of
serious side effects. Consequently, physicians are reluctant to refer otherwise
healthy patients for the surgery. An estimated 70,000 patients underwent
fundoplication surgery in the United States in 1999.

Our Solution: The Stretta System

   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 is designed to treat GERD,
rather than simply manage symptoms. Unlike fundoplication surgery, the Stretta
procedure is an outpatient procedure with minimal side effects. The Stretta
procedure, which we believe costs about $2,000, is designed to take less than
an hour utilizing techniques commonly used by gastroenterologists. 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 compared to either
medication or fundoplication surgery.

   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 precisely controlled radiofrequency energy to create thermal lesions
in the muscle of the lower esophageal sphincter. These lesions reabsorb 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

   We are applying our experience with the Stretta System to the development of
the Secca System, which 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 or surgery, neurologic disease,
injury or age. It is a life-altering condition that, like 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 highly invasive surgery and are
rarely utilized.

   The Secca System is designed to provide 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 began a U.S.
clinical trial of the Secca System in July 2000 and, if successful, we intend
to submit the results to the FDA in the fourth quarter of 2001.

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.

                                       3
<PAGE>

 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:

  .  Four electrode needles, which are deployed into the tissue at the
     treatment site for delivery of radiofrequency energy;

  .  Irrigation ports located at the base of each electrode, which deliver
     water to the surface tissue during treatment;

  .  Thermocouples located at each needle tip and base, which provide
     continuous temperature readings to the Curon Control Module, enabling
     precise temperature control;

  .  A balloon in the Stretta Catheter, which is inflated once the Stretta
     Catheter reaches the lower esophageal sphincter to maintain catheter
     positioning; and

  .  An illuminated clear window in the Secca Handpiece that enables the
     physician to view the treatment site.

 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, which allow for independent control of each of the four needle
electrodes on the Stretta Catheter and Secca Handpiece. The 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 safe 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:

  .  shrinking prostatic tissue to treat enlarged prostates;

  .  interrupting nerve pathways in the heart to treat irregular heartbeats;

  .  shrinking tissue in the shoulder joint to prevent repeated shoulder
     dislocation; and

  .  shrinking tissue in the base of the tongue to alleviate obstructive
     sleep apnea.

   We intend to develop additional innovative products that utilize
radiofrequency, as well as expand beyond radiofrequency for treatment of
additional gastrointestinal disorders.

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

                                       4
<PAGE>

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. A subset of this data was presented at the Digestive Disease Week
and published in abstract form in GI Endoscopy. The six-month data shows:

  .  Reduced need for medication. As of six months after treatment with the
     Stretta System, the need for all anti-acid medication was eliminated in
     70% of the 44 patients available for follow-up, and the need for the
     most potent prescription GERD medication was eliminated in 87% of those
     patients that required this medication before treatment.

  .  Fewer GERD symptoms. GERD symptom scores improved 73% as defined by a
     standardized GERD symptom measurement test.

  .  Reduced heartburn. Heartburn symptom scores improved 75% as defined by a
     heartburn symptom measurement test.

  .  Decreased regurgitation. Regurgitation was eliminated in 59% of
     patients.

  .  Improved quality of life scores. Quality of life scores, as measured
     using a validated scoring questionnaire, improved significantly.

  .  Reduced esophageal acid exposure. After treatment with the Stretta
     procedure, patients experienced a 60% reduction in esophageal acid
     exposure.

   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 surgical
fundoplication.

   We believe that the lower esophageal sphincter is more resistant to reflux
after radiofrequency treatment. We believe that this increased resistance is
due to the collagen contraction that occurs after the creation of the lesions,
as well as interruption of nerve pathways that are responsible for
inappropriate relaxations of the lower esophageal sphincter. These neural
pathways are similar to those in the heart muscle, which may cause irregular
heartbeats shown in electrophysiology procedures to respond favorably to
radiofrequency energy treatment. Two scientific papers were presented at the
annual major meeting of the American Gastroenterological Association in May
2000 reporting on the ability of the Stretta procedure to disrupt nerve
pathways in animals and humans.

   In May 2000, we began an eight-center, randomized controlled trial of the
Stretta System in the United States that we completed in January 2001 after
treating 62 patients. In this trial, patients received either the Stretta
procedure or a placebo procedure, and the results will be compared. Patients
who had received the placebo procedure are now eligible to receive the Stretta
procedure and we expect to have complete results compiled during the first
quarter of 2002. We intend to use the data generated for future peer-reviewed
publications and for presentations at national scientific meetings and 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. One year following the procedure, patients showed
significant improvements in fecal incontinence symptoms, incontinence-related
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. Based on these encouraging preliminary results, we are
further evaluating the Secca System in a multi-center U.S. clinical study
involving six sites and 50 patients,

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which began in July 2000. Assuming success of the study, we intend to compile
and submit data from this study to the FDA for 510(k) clearance, or for
premarket application approval if required by the FDA, to market the Secca
System for treatment of fecal incontinence. We intend to target the Secca
System, if and when commercialized, primarily to colorectal surgeons, 1,000 of
whom practice in the United States. Secondarily, we intend to target
gastroenterologists, particularly those who are familiar with the Stretta
System.

Research and Development

   Our research and development activities are conducted internally by a
research and development staff consisting of 10 employees at December 31, 2000.
Our research and development efforts are focused on development of additional
products for new gastrointestinal indications, design changes intended to
reduce manufacturing cost as well as evaluation of existing product
alternatives. We intend to develop products that leverage our existing
radiofrequency energy platform, and we also plan to explore options utilizing
technology not associated with this platform. We have a number of new projects
and products under development, including several projects related to
development of a new generator as well as development of additional products
for treatment of gastrointestinal disorders.

   In addition to working on new products, our research and development
organization is developing products and fixtures that are designed to reduce
the time to manufacture, improve quality or reduce cost of products. Our
research and development expenditures were $4.2 million in 2000, $9.0 million
in 1999 and $1.6 million in 1998. Amortization of cheap stock based
compensation included in these numbers was $629,000 in 2000, $4.1 million in
1999 and $71,000 in 1998. Pilot manufacturing costs included in the research
and development expenditures was $244,000 in 1998, $1.0 million in 1999 and
$1.1 million in the first two quarters of 2000.

Manufacturing

   Our manufacturing strategy is to conduct a significant portion of the
manufacturing process in-house to control quality and manufacturing efficiency.
Over time, we intend to move some labor-intensive sub-assembly manufacturing
operations to less costly manufacturing locations both within and outside the
United States and to manufacturers meeting our quality standards in order to
reduce costs and to add additional capacity. At December 31, 2000, two catheter
sub-assemblies were subcontracted to outside manufacturers, one within the
United States and one in Europe.

   We manufacture, assemble and test each Stretta Catheter 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 is internally 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.

   We have no experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales, and we cannot assure
you that we can establish high volume manufacturing or, if established, that we
will be able to manufacture our products in high volumes with commercially
acceptable yields. To achieve our business plan, we expect to hire additional
personnel to assemble our catheters. There is a shortage of such personnel in
our area and we cannot be sure that we will be able to recruit and retain them.
We will also need to achieve some enhancements to our manufacturing operations
to increase our capacity. We cannot be sure about achieving this objective.

   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.

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   Currently, only one supply source exists for the peristaltic pump and the
computer chip used in our Curon Control Module. For these two components, we
believe we have accumulated enough product to allow time to research
alternatives without harming our business. The peristaltic pump integrated into
the Control Module is manufactured by our supplier in accordance with our
specifications. We have contracted with the supplier for ongoing supply, and we
have secured inventory that we believe is sufficient to allow us 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 several months or more. Also, a computer chip in the Control Module
is no longer manufactured. This chip is currently available from multiple
suppliers, but we cannot assure you that it will be available in the future. We
have purchased an inventory of these chips sufficient to meet our projected
manufacturing needs for at least the next 18 months and we are currently
working on developing a new generator that will use newer chip technology. As
with the pump, we cannot incorporate a new chip into the generator without
regulatory clearance under the FDA's 510(k) process, which could take several
months or more.

   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 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
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, 2000, we had 24 issued or allowed U.S. patents and 41
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 are expected to 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, 2000, we had licensed in
13 issued and allowed U.S. patents and 19 pending U.S. patent applications. In
December 1998, we entered into an agreement with Somnus Medical Technologies,
Inc. for the license of the technology related to Somnus' radiofrequency
generator. The non-exclusive license gives us the right to manufacture, have
manufactured, use, offer to sell, sell and import Somnus' 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 Somnus 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

                                       7
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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.

   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. In August 2000, we received a third-party request for our position
regarding infringement of a patent. After discussion with our patent counsel,
we do not believe that we infringe the patent. To date, we have had no further
correspondence with this third party.

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.

   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, Tagamet, Pepcid and Prilosec. 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 fundoplication.
Increased publicity regarding these procedures or advantageous pricing may
adversely affect the market for our products. Both medication treatment and
fundoplication 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 enables patients to undergo a fundoplication-like surgery
in the endoscopy suite as 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. Enteric Medical has developed a
liquid polymer for injection into the lower esophageal sphincter. There may
also be other companies developing innovative therapies of which we are not
aware.

   In the fecal incontinence market, we consider our primary competitors to be
American Medical Systems and Medtronic, both of which are developing
implantable devices for treatment of severe incontinence. Both of these
competitors have significantly greater resources than we do, and we cannot
assure you that we will be able to compete effectively with these companies.

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:

  .  Product development;

  .  Product testing;

  .  Product labeling;

  .  Product storage;

  .  Premarket clearance or approval;


                                       8
<PAGE>

  .  Advertising and promotion;

  .  Product sales and distribution.

 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 IDE must be approved in advance by the FDA for a specified number of
patients unless the product is deemed a nonsignificant 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 expect to complete the U.S.
clinical trial of the Secca System, the results of which we intend to submit to
the FDA during the fourth quarter of 2001.

   In April 2000, we received 510(k) premarket clearance from the FDA for the
Stretta System for the treatment of GERD. We believe that the Secca System will
continue to follow the 510(k) clearance pathway; however, we cannot assure you
that FDA will not deem the Secca System, or one or more of our future products,
to be a class III device subject to the more burdensome PMA approval process.

                                       9
<PAGE>

 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:

  .  Fines, injunctions, and civil penalties;

  .  Recall or seizure of our products;

  .  Operating restrictions, partial suspension or total shutdown of
     production;

  .  Refusing our requests for 510(k) clearance or PMA approval of new
     products;

  .  Withdrawing 510(k) clearance or PMA approvals already granted; and

  .  Criminal prosecution.

   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.

 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.

 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 System
carries a CE Mark, which is required for European product sales, and a
Therapeutic Goods Administration, which is required for product sales in
Australia. Our facility has been audited and certified to be ISO9001/EN46001
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 System 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.

                                       10
<PAGE>

Third Party Reimbursement

   In the United States, health care providers generally rely on third-party
payors, principally private health insurance plans, Medicare and Medicaid, to
reimburse all or part of the cost of procedures in which medical devices are
used. The Health Care Financing Administration, or HCFA, the governmental
agency responsible for Medicare reimbursement policy, has approved the use of
an existing Medicare reimbursement code, which includes the ablation of nerves
in the lower esophageal sphincter, for billing costs associated with the
Stretta procedure by physicians and facilities. In appropriate cases, we
believe that physicians and facilities can use this code for billing costs
associated with the Stretta Catheter and the Stretta procedure. However, we
cannot assure you that the procedure will be reimbursed or that the amounts
reimbursed under this code will be adequate. While these organizations
frequently follow HCFA coding decisions, we cannot assure you that these payors
will reimburse the procedure or accept the Medicare established code.

   The current cost reduction orientation of the third-party payor community
makes it exceedingly difficult for new medical devices and surgical procedures
to obtain reimbursement. Often, it is necessary to convince these payors 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 payors to reduce the cost of treating GERD
patients by possibly eliminating or reducing the costs of medication or
fundoplication surgery. While we believe that the Stretta System possesses
economic advantages that will be attractive to payors, we cannot assure you
that they will make reimbursement decisions based upon these advantages.

   Reimbursement by third-party payors is often positively influenced by the
existence of peer-reviewed publications of long-term safety and efficacy data.
We have collected and published data on six-month results after treatment with
the Stretta System and expect this data to be published in a peer-reviewed
journal in 2001. Additional clinical abstracts and papers have been accepted
for publication in 2001. 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 payors
require that randomized studies be conducted to determine the effect of the
procedure versus placebo or another standard of care. As of December 31, 2000,
we were conducting a randomized, controlled, multi-center study to generate
this data. We cannot assure you that the Stretta System will have compelling
results in this study, that the results will be published in a timely manner or
at all, or that such publication will benefit our reimbursement efforts.

   To facilitate reimbursement for the Stretta System, our director of
reimbursement and dedicated reimbursement group assist physicians and
facilities in obtaining reimbursement for the Stretta System. This group
assists in pre-approving patients for the Stretta procedure, and provides
payors with copies of the Health Care Financing Administration's coding
decision, published literature and clinical data. In addition, this group
educates third-party payors about the economic benefits of the Stretta System
and seeks to influence them to reimburse for the Stretta System and to
incorporate the Stretta System into their standards of care for GERD.

   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 not obtained any international
reimbursement approvals. We cannot assure you that we will obtain any such
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, 2000, we had 73 employees, with 20 employees in
operations, 10 employees in research and development, 22 employees in sales and
marketing, 11 employees in general and administrative, and 10 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.

                                       11
<PAGE>

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 $15.8 million in 2000, $14.1 million in
1999 and $3.0 million in 1998. We have generated limited revenues from the sale
of our products, and it is possible that we will never generate significant
revenues from product sales in the future. Even if we do achieve significant
revenues from our product sales, we expect to incur significant net losses over
the next several years and these losses may increase. It is possible that we
will never achieve profitable operations.

The Stretta System is our only marketed product. If physicians do not adopt our
Stretta System, we will not achieve future sales growth.

   We commercially introduced our Stretta System, which consists of a
radiofrequency generator and a disposable handheld device, in May 2000. We are
highly dependent on Stretta System sales because we anticipate that the Stretta
System will account for substantially all our revenue through at least 2001. To
achieve increasing sales, our product must gain recognition and adoption by
physicians who treat gastrointestinal disorders. The Stretta System represents
a significant departure from conventional GERD treatment methods. We believe
that physicians will not use our Stretta System unless they determine, based on
published peer-reviewed journal articles, long-term clinical data and their
professional experience, that the Stretta System provides an effective and
attractive alternative to conventional means of treatment for GERD. Currently,
there are only limited peer-reviewed clinical reports and short-term clinical
follow-up data on our Stretta System. Physicians are traditionally slow to
adopt new products and treatment practices, partly because of perceived
liability risks and uncertainty of third-party reimbursement. If physicians do
not adopt our Stretta System, 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 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. We have found
that data from twelve-month patient follow-up studies are consistent with those
of our relatively short-term studies although these have not yet been
published. However, if longer-term patient studies or clinical experience
indicate that treatment with the Stretta System does not provide patients with
sustained benefits or that treatment with our product is less effective or less
safe than our current data suggests, our sales could decline and we could be
subject to significant liability. Further, we may find that our data is not
substantiated in studies involving more patients, in which case we may never
achieve significant revenues or profitability.

   Our clinical studies of the Secca System are in the early stages. The Secca
System has undergone a 10-patient pilot study and the FDA approved our
application to conduct a U.S. multi-center clinical study, which we began in
July 2000. In April 2001, we expect to complete the U.S. clinical trial of the
Secca System, the results of which we intend to submit to the FDA during the
fourth quarter of 2001. You should not draw any conclusion about the safety or
efficacy of the Secca System based upon data from the pilot study because this
study involved only a small patient group. If patient studies or clinical
experience do not meet our expectations regarding the benefits of the Secca
System, we may not obtain regulatory clearance or approval to sell the product
and our expected revenues from this product may never materialize.

                                       12
<PAGE>

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 the Stretta System. We rely on physicians to spend
their time and money to attend our pre-sale educational sessions. Positive
results using the Stretta System are highly dependent upon proper physician
technique. If physicians use the Stretta 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.

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

   Physicians, hospitals and other health care providers are unlikely to
purchase our products if they are not adequately reimbursed for the Stretta
procedure or the products. To date, only a limited number of private third-
party payors have agreed to reimburse for the cost of the Stretta procedure or
products. Until a sufficient amount of positive peer-reviewed clinical data has
been published, insurance companies and other payors may refuse to provide
reimbursement for the cost of the Stretta procedure or may reimburse at levels
that are not acceptable to providers. Some payors may refuse adequate
reimbursement even upon publication of peer-reviewed data. The advent of
contracted rates per procedure has also made it difficult to receive
reimbursement for disposable products, even if the use of these products
improves clinical outcomes. If users of our products cannot obtain sufficient
reimbursement from health care payors for the Stretta procedure or the Stretta
System disposables, then it is unlikely that our product will ever achieve
significant market acceptance.

Reimbursement from third-party health care payors is uncertain due to factors
beyond our control.

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

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

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

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

   The market for the treatment of GERD is dominated by companies that have
well-established products, reputations and resources. We primarily compete with
large pharmaceutical companies such as AstraZeneca, Takeda Abbott
Pharmaceuticals and Merck, which collectively generate over $6 billion in
annual U.S. revenues from sales of medication for the treatment of GERD
symptoms. We also compete with large medical device companies such as Johnson &
Johnson/Ethicon, which makes instrumentation for fundoplication surgery, and
C.R. Bard, which has received FDA clearance for an endoscopic suturing device
for the treatment of GERD.

                                       13
<PAGE>

Boston Scientific has recently indicated an increased interest in GERD by
signing an agreement with Enteric to market a liquid polymer that is injected
into the lower esophageal sphincter.

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

  .  existing widely-adopted medications and procedures for the treatment of
     GERD;

  .  established reputations within the medical community;

  .  established distribution networks that permit these companies to
     introduce new products and have such products accepted by the medical
     community promptly;

  .  established relationships with health care providers and payors that can
     be used to facilitate reimbursement for new treatments; and

  .  greater resources for product development and sales and marketing.

   At any time, these competitors or other companies may develop new
competitive products that are more effective or less expensive than ours. For
example, AstraZeneca's patent for Prilosec, the leading prescription medication
for the treatment of GERD, expires in 2001, after which time companies may
manufacture less expensive generic versions of the drug. If we cannot compete
effectively in this highly competitive market, we may not be able to achieve
our expected revenue growth.

We have limited sales and marketing experience, and our 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, 2000, we
relied on nine direct sales employees to sell our Stretta System in the United
States. We must manage and expand this sales team over the next 24 months to
achieve our market share and revenue growth goals. Since we have only recently
launched the Stretta 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:

  .  Inability to hire a sufficient number of qualified sales people with the
     skills and understanding to sell the Stretta System effectively;

  .  Failure to adequately train our sales force in the use and benefits of
     our products, making them less effective promoters; and

  .  Failure to accurately price our products as attractive alternatives to
     conventional treatments.

Internationally, we are training third-party distributors who will begin
selling our products, and we cannot assure you that these distributors will
commit the necessary resources to effectively market and sell our products or
that they will be successful in selling our products.

   Internationally, we intend to sell our products through third-party
distribution agreements. We currently have a total of four distribution
agreements: one each in Germany, Italy and Greece and one covering sales in the
region of Belgium, the Netherlands, and Luxembourg. If we fail to adequately
build and manage our domestic and foreign sales force, or to effectively market
and distribute our products internationally, then our revenues and our
profitability will be materially and negatively impacted.

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 January 2001, we voluntarily recalled
certain of our catheters because of manufacturing issues. We may encounter
difficulties and delays in manufacturing our products for the following
additional reasons:

  .  We have limited experience manufacturing our products in compliance with
     the FDA's Quality System Regulation;

                                       14
<PAGE>

  .  To increase our manufacturing output significantly, we will have to
     attract and retain qualified employees, who are in short supply, for the
     assembly and testing operations; and

  .  Some of the components and materials necessary for manufacturing our
     products are currently provided by a single supplier.

   Although we believe that our current manufacturing facility will be adequate
to support our commercial manufacturing activities for the foreseeable future,
we may be required to expand our manufacturing facilities to begin large-scale
manufacturing. If we are unable to provide customers with high-quality products
in a timely manner, we may not be able to achieve market acceptance for our
Stretta System. 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.

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. We have
never been through a QSR inspection, and we cannot assure you that we would
pass. If we failed a QSR inspection, 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 the Stretta System for use in
treating GERD, 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 premarket approval to market the Secca System for fecal
incontinence and for any other new products we wish to market. If the FDA
concludes that the Secca System

                                       15
<PAGE>

does not meet the requirements to obtain 510(k) clearance, then we would have
to seek PMA approval. 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 System is cleared by the FDA for the treatment of GERD. FDA
regulations prohibit us from promoting or advertising the Stretta System, or
any future cleared or approved devices, for uses not within the scope of our
clearances or approvals or 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.

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, premarket
approval, or 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:

  .  product design, development, manufacture and testing;

  .  product labeling;

  .  product storage;

  .  premarket clearance or approval;

  .  advertising and promotion; and

  .  product sales and distribution.

   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.

                                       16
<PAGE>

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

   As of March 2001, we have entered into agreements with distributors in
Europe. We are training these distributors and have not begun selling our
products in international markets. We do not expect sales to occur before April
2001, at the earliest. 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 and Australia, 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,
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 foreign
countries where the U.S. dollar has increased compared to the local currency.
Engaging in international business involves the following additional risks:

  .  export restrictions, tariff and trade regulations, and foreign tax laws;

  .  customs duties, export quotas or other trade restrictions;

  .  economic or political instability;

  .  shipping delays; and

  .  longer payment cycles.

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

Product liability suits against us could 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 involve a
significant risk of product liability claims. The use of any of our products
may expose us to liability claims, which could divert management's attention
from our core business, be expensive to defend, and result in sizable damage
awards against us. We maintain product liability insurance at coverage levels
which we believe to be commercially acceptable; however there can be no
assurance that product liability or other claims will not exceed such insurance
coverage limits or that such insurance will continue to be available on the
same or substantially similar terms, or at all. We reevaluate annually whether
we need to obtain additional product liability insurance. Even if we obtain
additional product liability insurance there can be no assurance that it would
not have a material adverse effect on our business, financial condition, and
results of operations. Any product liability claims brought against us, with or
without merit, could increase our product liability insurance rates or prevent
us from securing any coverage in the future. Even in the absence of a claim,
our insurance rates may rise in the future to a point where we decide not to
carry any insurance.

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, 2000, we had 24 issued or allowed U.S. patents and 41
pending U.S. patent applications. We also had 13 issued or allowed U.S. patents
and 19 pending U.S. patent applications licensed in from third parties. We rely
on patent, copyright, trade secret and trademark laws to protect our products,
including our Stretta Catheter 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

                                       17
<PAGE>

trade secrets by consultants, vendors, former employees or current employees,
despite the existence of nondisclosure and confidentiality agreements and other
contractual restrictions. Furthermore, the laws of foreign countries may not
protect our intellectual property rights to the same extent as the laws of the
United States. If our intellectual property rights do not adequately protect
our commercial products, our competitors could develop new products or enhance
existing products to compete more directly and effectively with us and harm our
product sales and market position.

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

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

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 Somnus 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.

                                       18
<PAGE>

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

Our 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 approximately 62.7% 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 certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.

   Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These 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.

We expect that the price of our common stock will fluctuate substantially.

   The market price for the common stock is affected by a number of factors,
including:

  .  the announcement of new products or product enhancements by us or our
     competitors;

  .  quarterly variations in our or our competitors' results of operations;

  .  changes in earnings estimates or recommendations by securities analysts,
     or our failure to achieve analyst earnings estimates;

  .  developments in our industry; and

  .  general market conditions and other factors, including factors unrelated
     to our operating performance or the operating performance of our
     competitors.

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

A sale of a substantial number of shares of our common stock may cause the
price of our common stock to decline.

   If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding
options, the market price of our common stock could fall. Such sales

                                       19
<PAGE>

also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate.

Item 2. Properties

   We are headquartered in Sunnyvale, California, where we lease one building
with approximately 20,000 square feet of office, research and development, and
manufacturing space under leases expiring September 30, 2003. We believe our
current facilities are adequate to meet our current and foreseeable
requirements through the end of 2001 and that suitable additional or substitute
space will be available as needed.

Item 3. Legal Proceedings

   We are not party to any legal proceedings.

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

   Not applicable.

                                       20
<PAGE>

                                    PART II

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

   Our Common Stock has been quoted on the Nasdaq National Market under the
symbol CURN since our initial public offering on September 22, 2000. Prior to
such time, there was no public market for the Common Stock. The high and low
sales prices per share of the Common Stock for the period September 22, 2000 to
December 31, 2000 were $14.125 and $4.016, respectively, as reported on the
NASDAQ National Market.

   As of March 25, 2001, the number of common stockholders of record was 129.
We currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.

   In September 2000, we completed our initial public offering of 5,000,000
shares and in October 2000 UBS Warburg LLC, the lead underwriter, partially
exercised the underwriter's over-allotment option with regard to 475,000
shares. All shares sold were shares of our common stock, $0.001 par value per
share, at a public offering price of $11.00 per share pursuant to a
registration statement on Form S-1 (File No. 333-37866) filed with the
Securities and Exchange Commission. 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 $60,225,000. There were no selling stockholders
in the IPO.

   We paid underwriting discounts and commissions of approximately $4,216,000
and other expenses of approximately $1,237,000 in connection with the IPO. The
total expenses paid by us in the IPO were approximately $5,453,000 and the net
proceeds to us in the IPO were approximately $54,772,000.

   From September 21, 2000, the effective date of the Registration Statement,
to December 31, 2000, the approximate amount of net proceeds used from the
offering were $1.1 million for research and development, $1.0 million for
continued development, manufacturing and commercialization of existing and
future products, $436,000 in support of clinical trials and reimbursement
efforts and $1.3 million for sales and marketing initiatives to support the
commercialization of the Stretta System. We used approximately $11.5 million of
the net proceeds to repay our debt and accrued interest, including the May 2000
borrowing of $11.1 million. We intend to use the remainder of the net proceeds
for general corporate purposes, which may include the purchase of equipment,
the expansion of facilities and the further expansion of our sales and
marketing efforts. From time to time, we have discussed potential strategic
acquisitions and investments with third parties. To date, we do not have any
agreements or commitments to complete any such transactions. Pending our uses
of the proceeds, we intend to invest the net proceeds of this offering
primarily in short-term, interest-bearing instruments.

   All amounts represent estimates of direct or indirect payments of amounts to
third parties. No amounts were paid directly or indirectly for the above
purposes to our directors or officers, other than in the ordinary course of
business, to persons owning ten percent or more of any class of our equity
securities, or to our affiliates. The use of proceeds described above do not
represent a material change in the use of proceeds described in the offering
prospectus.

                                       21
<PAGE>

Item 6. Selected Financial Data

   The following tables reflect selected summary financial data for each of the
last four fiscal years. Information for our first year of operations includes
the period from May 1, 1997 through December 31, 1997. 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.

                             Summary Financial Data
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                  May 1, 1997
                                   Years ended December 31,     (Inception), to
                                   ---------------------------   December 31,
                                     2000      1999     1998         1997
                                   --------  --------  -------  ---------------
<S>                                <C>       <C>       <C>      <C>
Statement of operations data:
Revenues.........................  $  1,156  $    --   $   --       $  --
Cost of goods sold...............     2,066       --       --          --
                                   --------  --------  -------      ------
Gross profit.....................      (910)      --       --          --
Operating expenses:
  Research and development.......     4,162     8,961    1,581          28
  Clinical and regulatory........     1,806     2,012      335         --
  Sales and marketing............     3,461       940      --          --
  General and administrative.....     4,212     2,345      959          13
                                   --------  --------  -------      ------
                                     13,641    14,258    2,875          41
Operating loss...................   (14,551)  (14,258)  (2,875)        (41)
Interest income..................     1,356       258        8         --
Interest expense.................    (4,084)      (89)     (86)        --
Other............................       (96)      --       --          --
                                   --------  --------  -------      ------
Net loss before extraordinary
 item............................   (17,375)  (14,089)  (2,953)        (41)
                                   --------  --------  -------      ------
Extraordinary gain...............     1,596       --       --          --
                                   --------  --------  -------      ------
Net loss.........................  $(15,779) $(14,089) $(2,953)     $  (41)
                                   ========  ========  =======      ======
Net loss per share, basic and
 diluted (1).....................  $  (2.27) $  (6.94) $ (2.01)     $(0.04)
Shares used in computing net loss
 per share, basic and
 diluted (1).....................     6,945     2,030    1,472       1,103
Balance sheet data:
Cash, cash equivalents and
 marketable securities...........  $ 39,206  $  9,498  $ 4,502      $    1
Working capital..................    39,916     8,176    4,223         (96)
Long-term investments............    12,882       --       --          --
Total assets.....................    56,617    11,686    5,842          56
Long-term obligations............       --        227      459         --
Convertible preferred stock and
 warrants........................       --     21,808    7,713         --
Total stockholders' equity
 (deficit).......................    54,930   (12,099)  (2,877)        (41)
</TABLE>
--------
(1) The per share data have been restated to reflect the 0.57 to 1 reverse
    stock split effective September 22, 2000.

                                       22
<PAGE>

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,
2000, 1999, and 1998.

   The information set forth below contains forward-looking statements
(designated by an *), and our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below under "Factors That May Affect Future Results."

Overview

   We were incorporated in May 1997. Business activities before January 1998
were negligible. In 1998, our primary activity was developing the Curon Control
Module and Stretta Catheter for the treatment of GERD. We commercialized our
Curon Control Module and Stretta Catheter in 2000 and have devoted
substantially all of our efforts in 2000 to raising capital and marketing and
selling our products.

   In early 1999, we began a multi-center clinical trial of the Stretta System
in the United States. We also developed our manufacturing capability to support
the production of Stretta Catheters and Curon Control Modules for the clinical
trial. Based on the data acquired in the trial, we submitted a 510(k)
notification to the FDA in January 2000 for clearance to market the Stretta
System for treatment of GERD. We received 510(k) clearance in April 2000. In
May 2000, we launched the Stretta System commercially at Digestive Disease
Week, a large gastroenterology professional conference. Also, in May 2000, we
initiated a randomized controlled trial of the Stretta System, the results of
which we anticipate will be available in the second half of 2001.

   In April 1999, we began developing the Secca System for the treatment of
fecal incontinence. In November 1999, we conducted a 10-patient human clinical
pilot study outside the United States and, in July 2000, we began a U.S. multi-
center clinical trial of the Secca System under an Investigational Device
Exemption. Assuming successful results of this trial, we intend to submit a
510(k) supported by these results to the FDA in the fourth quarter of 2001 or,
if required by the FDA, a PMA supported by these results.*

   We recognize revenue upon shipment of products to customers or, in the case
of our "Buy-over-Time" program, when title passes on final payment by the
customer. 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.* We intend that disposables will form
the basis of a recurring revenue stream and intend to price catheters, at high
volumes, to generate greater margins than generators.* We expect the percentage
of revenue from disposables to increase over time as our installed base of
generators grows.*

   In December 2000, we initiated a voluntary recall of certain lots of Stretta
catheters in which there was a slight risk of insufficient bonding between the
handle and the shaft of the catheter. In total, 278 catheters in the affected
lots had been shipped to customers of which 81 had been used prior to the
recall. There were no adverse patient events linked with the affected lots. The
manufacturing instructions for the assembly of the shaft to the handle were
immediately corrected and production recommenced. The effect of the recall was
to reduce revenue by $115,000 and increase cost of goods sold by $127,000. At
December 31, 2000, there were 128 catheters requiring replacement for recalled
units. Although the recall adversely impacted our ability to supply product in
December, we were able to start replacing recalled catheters almost immediately
and, since the beginning of this year, have regained the ability to supply
catheters from stock.

   Initially, we are focusing our sales efforts in the United States through a
direct sales force. We do not expect to generate international sales before
April 2001.* In the fourth quarter of 2000 we incorporated a wholly-owned
subsidiary company in Belgium and hired a European Manager. We intend to
recruit a limited number of clinical and administrative personnel in Europe in
2001 to identify, recruit and manage national distributors in each country.* In
international markets, we expect to rely primarily on third-party
distributors.* We expect that 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.*

                                       23
<PAGE>

   Our costs of revenues represent the cost of producing generators and
disposable devices. We also license a technology used in the generators that we
sell. In addition to the up-front payment to license the technology, we are
required to pay licensing fees based on the sales price of the units. There are
no additional expected costs to be incurred as part of the licensing agreement.
We believe that there are alternative technologies that could be utilized
should we choose to do so.* Research and development expenses consist primarily
of personnel costs, professional services, patent application costs, materials,
supplies and equipment. Clinical and regulatory expenses consist primarily of
expenses associated with the costs of clinical trials, clinical support
personnel, the collection and analysis of the results of these trials, and the
costs of submission of the results to the FDA. Sales and marketing expenses
consist of personnel costs, advertising, public relations and attendance at
selected medical conferences. General and administrative expenses consist
primarily of amortization of stock-based compensation, the cost of corporate
operations and personnel, legal, accounting and other general operating
expenses of our company. Through December 31, 2000, we recorded limited product
sales while incurring cumulative net losses of $32.9 million. In addition to
increasing expenditures related to market launch of the Stretta System, we
anticipate that our expenses will increase as we continue to develop new
products, conduct clinical trials, commercialize our products and acquire
additional technologies as the opportunities arise.* As a result, we expect our
operating expenses and cumulative net losses to increase.*

   We grant stock options to hire, motivate and retain employees and non-
employee consultants. With respect to these stock options, we may record
deferred stock compensation. For stock options granted to employees, the
difference between the exercise price of the stock options and the fair value
of our stock at the date of grant is recorded as deferred compensation on the
date of grant. For stock options granted to non-employees, the fair value of
the options, estimated using the Black-Scholes valuation model is initially
recorded on the date of grant. As the non-employee options become exercisable,
we revalue the remaining unvested options, with the change in fair value from
period to period represented as change in the deferred compensation charge.

   We are amortizing deferred compensation in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" (FIN 28).
As a result of stock options granted through December 31, 2000, we recorded
$10.1 million in deferred stock compensation, including $3.1 million related to
the modification of stock repurchase rights resulting from a mutual agreement
to terminate our employment relationship with our former president and CEO
extending the repurchase right 18 months to April 2001 (see Note 6 of the notes
to the financial statements). Unamortized stock based compensation of
approximately $2.5 million remained as of December 31, 2000.

                             RESULTS OF OPERATIONS

Twelve months ended December 31, 2000 and 1999

 Revenue

   In the twelve months ended December 31, 2000, we generated $1.2 million in
revenues from the sale of generators and catheters to customers in the United
States. Commercial shipments began in June 2000.

 Cost of goods sold

   In the twelve months ended December 31, 2000, the cost of goods sold was
$2.1 million and was significant in relation to revenues as we began and
enlarged commercial manufacturing operations.

 Research and development expenses

   Research and development expenses were $4.2 million in the twelve months
ended December 31, 2000 compared to $9.0 million in the twelve months ended
December 31, 1999. Amortization of stock-based

                                       24
<PAGE>

compensation accounted for $629,000 million in the twelve months ended December
31, 2000 and $4.1 million in the twelve months ended December 31, 1999. The
decrease in spending in 2000 compared to 1999 was due to the completion of
pilot manufacturing activities in the second quarter of 2000.

 Clinical and regulatory expenses

   Clinical and regulatory expenses were $1.8 million in the twelve months
ended December 31, 2000 compared to $2.0 million in the twelve months ended
December 31, 1999. Amortization of stock-based compensation accounted for
$174,000 in the twelve months ended December 31, 2000 and $96,000 in the twelve
months ended December 31, 1999. The decrease in spending in 2000 over 1999 was
primarily due to the transfer in 2000 of quality and regulatory costs to cost
of sales.

 Sales and marketing expenses

   Sales and marketing expenses were $3.5 million in the twelve months ended
December 31, 2000 compared to $940,000 in the twelve months ended December 31,
1999. Amortization of stock-based compensation accounted for $418,000 in the
twelve months ended December 31, 2000 and $85,000 in the twelve months ended
December 31, 1999. The remaining increase in spending in 2000 over 1999 was
primarily due to an increase in expenditures for field sales personnel, and
activities to promote reimbursement for our products.

 General and administrative expenses

   General and administrative expenses were $4.2 in the twelve months ended
December 31, 2000 compared to $2.3 million in the twelve months ended December
31, 1999. Amortization of stock-based compensation accounted for $1.3 million
in the twelve months ended December 31, 2000 and $554,000 in the twelve months
ended December 31, 1999. The remaining increase in spending in 2000 over 1999
was primarily due to increased personnel costs as our company expanded,
acquisition of technology licenses and a stock-based settlement valued at
$203,000.

 Interest income and expense

   During the twelve months ended December 31, 2000 compared to the twelve
months ended December 31, 1999, interest income increased by $1.1 million
primarily as a result of increased earnings on interest bearing marketable
securities.

   Interest expense for the twelve months ended December 31, 2000 and December
31, 1999 increased by $4.0 million due to $323,000 interest paid on the
convertible notes payable and $3.7 million of amortization of an associated
beneficial conversion feature and warrants (see Note 4 of the notes to
financial statements).

 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, 2000, 1999 and 1998.

Twelve months ended December 31, 1999 and 1998

   In 1998, we were a development stage company with no saleable products.
Compared to a total of $11.0 million spent on product development, clinical
programs and regulatory activities in the twelve months ended December 31,
1999, we spent $1.9 million on the same functions in 1998. We spent $940,000 on
sales and marketing in the twelve months ended December 31, 1999, compared to
$0 in the same period in 1998. In the twelve months ended December 31, 1999 we
spent $2.3 million on general and administrative activities compared to $1.0
million in 1998.

                                       25
<PAGE>

                        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, the issuance of convertible notes totaling
$11.8 million and from bank equipment line financing totaling $780,000. At
December 31, 2000, we had $39.9 million in working capital and our primary
source of liquidity was $52.1 million in cash and cash equivalents, marketable
securities and long term investments.

Twelve months ended December 31, 2000 and 1999

   Cash used in operating activities was $11.5 million in the twelve months
ended December 31, 2000, compared to $8.1 million in the twelve months ended
December 31, 1999. The increase in cash used reflects the increased activities
due to commercialization of our first product including building a domestic
field sales force, establishing a department to help physicians using Stretta
to be reimbursed for performing the procedure and increasing manufacturing and
support personnel.

   Cash used in investing activities amounted to $34.1 million in the twelve
months ended December 31, 2000, due the majority of the net proceeds of the IPO
being invested in marketable securities and $2.5 million in the twelve months
ended December 31, 1999, caused by facilities expansion and purchase of
marketable securities. As of December 31, 2000, we had no material commitments
for capital expenditures.

   Cash provided by financing activities was $54.4 million in the twelve months
ended December 31, 2000, of which $284,000 resulted from the exercise of stock
options, the balance being primarily the net proceeds of the IPO compared to
$14.1 million in the twelve months ended December 31, 1999, primarily provided
by the private issue of convertible preferred stock.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 as
amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133, is effective for fiscal years beginning
after June 15, 2000. To date, we have not engaged in derivative and hedging
activities and the adoption of these statements will not have an impact on our
financial condition and results of operations.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that our current revenue recognition policy is
in compliance with SAB 101.

   In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB 25, which clarifies (a) the definition of
an employee for purposes of applying opinion 25 (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. This interpretation is effective
July 1, 2000, with certain provisions effective earlier. FIN 44 has not had a
significant impact on our financial statements.

                                       26
<PAGE>

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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 the securities that we invest in
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 equivalent 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.

                                       27
<PAGE>

Item 8. Financial Statements and Supplementary Data

<TABLE>
   <S>                                                                      <C>
   Report of Independent Accountants......................................   29
   Balance Sheet at December 31, 2000 and December 31, 1999...............   30
   Statement of Operations for each of the Three Years in the Period Ended
    December 31, 2000.....................................................   31
   Statement of Stockholders' Equity (Deficit) for each of the Three Years
    in the Period Ended December 31, 2000.................................   32
   Statement of Cash Flows for each of the Three Years in the Period Ended
    December 31, 2000.....................................................   33
   Notes to Consolidated Financial Statements.............................   34
   Quarterly Financial Data (unaudited)...................................   46
</TABLE>

                                       28
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

   In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Curon Medical, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, 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.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
February 15, 2001

                                       29
<PAGE>

                              CURON MEDICAL, INC.

                                 BALANCE SHEET
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................ $ 16,759  $  7,988
  Marketable securities....................................   22,447     1,510
  Accounts receivable, net of allowance for doubtful
   accounts of $15,000 and $0, respectively................      259       --
  Inventories, net.........................................      866       321
  Related party notes receivable, net of allowance for
   uncollectible accounts of $64,000 and $73,000,
   respectively............................................      250       --
  Prepaid expenses and other current assets................      969        88
                                                            --------  --------
  Total current assets.....................................   41,550     9,907
Long term investments......................................   12,882       --
Related party note receivable..............................      102       250
Property and equipment, net................................    1,397     1,458
Intangible assets, net.....................................      584       --
Other assets...............................................      102        71
                                                            --------  --------
  Total assets............................................. $ 56,617  $ 11,686
                                                            ========  ========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND WARRANTS
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable......................................... $    319  $    645
  Accrued liabilities......................................    1,315       863
  Current portion of long-term debt........................      --        223
                                                            --------  --------
  Total current liabilities................................    1,634     1,731
Long-term debt, net of current portion.....................      --        227
Other liabilities..........................................       53        19
                                                            --------  --------
  Total liabilities........................................    1,687     1,977
                                                            --------  --------
Commitments and Contingencies (Note 5)
Convertible preferred stock, $.001 par value;
  Authorized: 10,500,000 shares at December 31, 1999
  Issued and outstanding: none and 9,597,000,
   respectively............................................      --     21,688
Preferred stock warrants...................................      --        120
                                                            --------  --------
Total preferred stock and warrants.........................      --     21,808
                                                            --------  --------
Stockholders' equity (deficit):
  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: 19,158,000 and 2,819,000,
     respectively..........................................       19         3
  Additional paid-in capital...............................   90,149     8,644
  Deferred stock compensation..............................   (2,451)   (3,663)
  Accumulated deficit......................................  (32,862)  (17,083)
  Accumulated other comprehensive income...................       75       --
                                                            --------  --------
  Total stockholders' equity (deficit).....................   54,930   (12,099)
                                                            --------  --------
  Total liabilities, convertible preferred stock and
   warrants and stockholders' equity (deficit)............. $ 56,617  $ 11,686
                                                            ========  ========
</TABLE>

                 See accompanying notes to financial statements

                                       30
<PAGE>

                              CURON MEDICAL, INC.

                            STATEMENT OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     For the Year Ended
                                                        December 31,
                                                  ---------------------------
                                                    2000      1999     1998
                                                  --------  --------  -------
<S>                                               <C>       <C>       <C>
Revenues......................................... $  1,156  $    --   $   --
Cost of goods sold...............................    2,066       --       --
                                                  --------  --------  -------
Gross loss.......................................     (910)      --       --
                                                  --------  --------  -------
Operating expenses:
  Research and development.......................    4,162     8,961    1,581
  Clinical and regulatory........................    1,806     2,012      335
  Sales and marketing............................    3,461       940      --
  General and administrative.....................    4,212     2,345      959
                                                  --------  --------  -------
Total operating expenses.........................   13,641    14,258    2,875
                                                  --------  --------  -------
Operating loss...................................  (14,551)  (14,258)  (2,875)
Interest income..................................    1,356       258        8
Interest expense.................................   (4,084)      (89)     (86)
Other expense....................................      (96)      --       --
                                                  --------  --------  -------
Net loss before extraordinary item...............  (17,375)  (14,089)  (2,953)
Extraordinary gain--early extinguishment of
 debt............................................    1,596       --       --
                                                  --------  --------  -------
Net loss......................................... $(15,779) $(14,089) $(2,953)
                                                  ========  ========  =======
Net loss per common share, basic and diluted:
  Net loss before extraordinary item............. $  (2.50) $  (6.94) $ (2.01)
  Extraordinary gain--early extinguishment of
   debt..........................................     0.23       --       --
                                                  --------  --------  -------
Net loss per share, basic and diluted............ $  (2.27) $  (6.94) $ (2.01)
                                                  ========  ========  =======
Shares used in computing net loss per share,
 basic and diluted...............................    6,945     2,030    1,472
                                                  ========  ========  =======
</TABLE>


                 See accompanying notes to financial statements

                                       31
<PAGE>

                              CURON MEDICAL, INC.

                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                              Accumulated
                          Common         Additional   Deferred                   Other          Total
                          Stock           Paid-in      Stock     Accumulated Comprehensive  Stockholders'
                          Shares  Amount  Capital   Compensation   Deficit      Income     (Deficit) Equity
                          ------  ------ ---------- ------------ ----------- ------------- ----------------
<S>                       <C>     <C>    <C>        <C>          <C>         <C>           <C>
Balance at January 1,
 1998...................     --    $--    $   --      $   --      $    (41)      $ --          $    (41)
 Net loss and
  comprehensive loss....     --     --        --          --        (2,953)        --            (2,953)
 Issuance of common
  stock ................   2,856      3         2                                                     5
 Repurchase of common
  stock ................    (108)   --        --          --           --          --               --
 Issuance of common
  stock in exchange for
  services received ....      85    --         15         --           --          --                15
 Deferred stock
  compensation..........     --     --        273        (273)         --          --               --
 Amortization of
  deferred stock
  compensation..........     --     --        --           97          --          --                97
                          ------   ----   -------     -------     --------       -----         --------
Balance at December 31,
 1998...................   2,833      3       290        (176)      (2,994)        --            (2,877)
 Net loss and
  comprehensive loss....     --     --        --          --       (14,089)        --           (14,089)
 Common shares forfeited
  against unpaid
  employee loan.........     (14)   --        --          --           --          --               --
 Deferred stock
  compensation..........     --     --      8,354      (8,354)         --          --               --
 Amortization of
  deferred stock
  compensation..........     --     --        --        4,867          --          --             4,867
                          ------   ----   -------     -------     --------       -----         --------
Balance at December 31,
 1999...................   2,819      3     8,644      (3,663)     (17,083)        --           (12,099)
 Net loss...............     --     --        --          --       (15,779)        --           (15,779)
  Unrealized gain on
   investments..........     --     --        --          --           --           75               75
                                                                                               --------
 Total comprehensive
  loss..................     --     --        --          --           --          --           (15,704)
  Issuance of common
   stock in exchange for
   patent license
   agreements...........      86    --        831         --           --          --               831
 Issuance of 12,000
  stock options in
  exchange for
  services..............     --     --         40         --           --          --                40
 Issuance of common
  stock in exchange for
  consulting services
  received..............      17    --        203         --           --          --               203
 Issuance of common
  stock pursuant to
  initial public
  offering and exercise
  of overallotment
  shares net of issuance
  costs of $5,453 ......   5,475      5    54,767         --           --          --            54,772
 Conversion of Series A,
  B and C preferred
  stock and warrants to
  common stock and
  common stock warrants
  upon consummation of
  initial public
  offering and exercise
  of overallotment
  shares................   9,597     10    23,898         --           --          --            23,908
 Issuance of common
  stock upon exercise of
  stock options.........   1,164      1       283         --           --          --               284
 Deferred stock
  compensation..........     --     --      1,483      (1,483)         --          --               --
 Amortization of
  deferred stock
  compensation..........     --     --        --        2,695          --          --             2,695
                          ------   ----   -------     -------     --------       -----         --------
Balance at December 31,
 2000...................  19,158   $ 19   $90,149     $(2,451)    $(32,862)      $  75         $ 54,930
                          ======   ====   =======     =======     ========       =====         ========
</TABLE>

               See accompanying notes to the financial statements

                                       32
<PAGE>

                              CURON MEDICAL, INC.

                            STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                      For the Year Ended
                                                         December 31,
                                                   ---------------------------
                                                     2000      1999     1998
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Cash Flows From Operating Activities
Net loss.........................................  $(15,779) $(14,089) $(2,953)
Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation and amortization...................       611       325      151
 Amortization of acquired technology.............       320       --       --
 Extraordinary gain on extinguishment of debt,
  net............................................    (1,596)      --       --
 Note payable issued in exchange for services
  received.......................................        45       --       --
 Loss on disposal of fixed assets................        86       --       --
 Write-off of related party receivables..........       --         73      --
 Amortization of stock-based compensation........     2,695     4,867       97
 Amortization of discounts on notes payable......     3,724        22       69
 Common stock issued in exchange for services
  received.......................................       203       --        18
 Preferred stock issued in exchange for
  intellectual property and services received....       --          3      175
 Stock options issued in exchange for services
  received.......................................        40       --       --
 Accretion of discount on securities.............      (321)      --       --
 Changes in current assets and liabilities:
   Accounts receivable, net......................      (259)      --       --
   Inventories...................................      (545)     (321)     --
   Prepaid expenses and other current assets.....      (881)      (82)      (6)
   Other assets..................................       (31)      (16)     (51)
   Accounts payable..............................      (326)      462       87
   Accrued liabilities...........................       452       656      207
   Other long-term liabilities...................        34        19      --
                                                   --------  --------  -------
   Net cash used in operating activities.........   (11,528)   (8,081)  (2,206)
                                                   --------  --------  -------
Cash Flows From Investing Activities
Purchase of property and equipment...............      (636)   (1,016)    (867)
Purchase of marketable securities................   (37,423)   (1,510)     --
Proceeds from maturities of marketable
 securities......................................     4,000       --       --
Purchase of acquired technology..................       (73)      --       --
                                                   --------  --------  -------
   Net cash used in investing activities.........   (34,132)   (2,526)    (867)
                                                   --------  --------  -------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable..........       --        --       780
Proceeds from issuance of convertible notes
 payable.........................................    11,045       800      --
Repayment of convertible notes...................   (11,090)      --       --
Principal payments on notes payable..............      (478)      (49)    (253)
(Payments) proceeds from related party notes
 receivable......................................      (102)       50     (373)
Proceeds from issuance of convertible preferred
 stock, net of issuance costs....................       --     13,292    7,418
Proceeds from issuance of common stock, net of
 issuance costs..................................    54,772       --         2
Proceeds from exercise of stock options..........       284       --       --
                                                   --------  --------  -------
   Net cash provided by financing activities.....    54,431    14,093    7,574
                                                   --------  --------  -------
Net increase in cash and cash equivalents........     8,771     3,486    4,501
Cash and cash equivalents at beginning of
 period..........................................     7,988     4,502        1
                                                   --------  --------  -------
Cash and cash equivalents at end of period.......  $ 16,759  $  7,988  $ 4,502
                                                   ========  ========  =======
Supplemental Disclosure Of Cash Flow Information
Cash paid for interest...........................  $    388  $     67  $    16
Cash paid for taxes..............................  $    --   $      1        3
Supplemental Disclosure of Non-Cash Investing and
 Financing Information
Conversion of notes payable and accrued interest
 to preferred stock..............................  $    --   $    803  $   --
Deferred stock based compensation................  $  1,483  $  8,354  $   273
Issuance of warrants with debt...................  $  2,100  $    --   $   120
Issuance of common stock in exchange for
 intangible assets...............................  $    831  $    --   $   --
Conversion of preferred stock and warrants to
 common stock and common stock warrants..........  $ 23,908  $    --   $   --
</TABLE>

               See accompanying notes to the financial statements

                                       33
<PAGE>

                              CURON MEDICAL, INC.

                         NOTES TO FINANCIAL STATEMENTS

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. However, there can be no
assurance that such efforts will succeed or that sufficient funds will be made
available. During 2000, the Company began commercial manufacturing operations
and is no longer reporting as a development stage company.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

   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. 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 to the public: radio-
frequency generators and single use disposable devices. 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.

Stock Split

   In September 2000, the Company's Board of Directors effected a 0.57 for 1
reverse stock split. All share and per share amounts in the accompanying
financial statements have been restated to reflect the effect of this reverse
stock split.

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.

                                       34
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


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 2001
are classified as long-term investments and those maturing during 2001 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 (deficit) 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, 2000:

<TABLE>
<CAPTION>
                                         Gross Unrealized Gross Unrealized
                                Cost      Holding Gains    Holding Losses  Fair Value
                             ----------- ---------------- ---------------- -----------
   <S>                       <C>         <C>              <C>              <C>
   Maturities under one
    year
   Government obligations..  $ 7,366,000     $ 18,000         $    --      $ 7,384,000
   Corporate obligations...   15,071,000       11,000          (19,000)     15,063,000
                             -----------     --------         --------     -----------
   Total Current...........   22,437,000       29,000          (19,000)     22,447,000
                             -----------     --------         --------     -----------
   Maturities between one
    and two years
   Government obligations..    4,984,000       39,000              --        5,023,000
   Corporate obligations...    7,833,000       34,000           (8,000)      7,859,000
                             -----------     --------         --------     -----------
   Total long-term.........   12,817,000       73,000           (8,000)     12,882,000
                             -----------     --------         --------     -----------
   Total at December 31,
    2000...................  $35,254,000     $102,000         $(27,000)    $35,329,000
                             ===========     ========         ========     ===========
</TABLE>

   At December 31, 1999, short-term investments consisted of corporate
obligations recorded at cost, which represented their fair values.

Inventories

   Inventories are stated at the lower of standard cost, which approximates the
first-in, first-out method, 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 consist of technology licenses, which are being amortized
on a straight-line basis over their estimated useful lives of two years.

Impairment of Long-Lived Assets

   Long-lived assets and intangible assets are reviewed for impairment when
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability is measured by the comparison of the asset's
carrying amount to future net undiscounted cash flows the assets are expected
to

                                       35
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the projected discounted future net cash flows arising from the asset.
There have been no impairment charges recorded.

Revenue Recognition

   Revenue from product sales is recognized on product shipment against a valid
purchase order 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 until all catheters under the contract have been purchased, at which
time title to the control module passes and revenue is recognized. Revenue on
the catheters is recognized upon shipment at an amount representing their fair
value based on verifiable objective evidence of such.

Research and Development

   Research and development costs are expensed as incurred.

Advertising Costs

   Advertising costs are expensed as incurred. Advertising costs were $287,000
in 2000, and were not material in 1999 and 1998.

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"). Under APB No. 25,
unearned stock compensation is based on the difference, if any, on the date of
grant, between the fair value of the Company's common stock and the exercise
price.

   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.

                                       36
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


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.

Comprehensive Income

   The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
for general purpose financial statements. The components of comprehensive
income include net loss and the fair value adjustment on available-for-sale
securities.

Fair Value of Financial Instruments

   The carrying value of the Company's financial instruments, including cash
and cash equivalents, related party receivables, 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.

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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
No. 133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133" is effective for fiscal years beginning
after June 15, 2000. The Company, to date, has not engaged in derivative and
hedging activities and the adoption of these statements is not expected to have
a significant impact on the Company's financial condition and results of
operations.

   In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes that its current
revenue recognition policy is in compliance with SAB 101.

   In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB 25," which clarifies (a) the definition
of an employee for purposes of applying opinion 25 (b) the criteria for
determining

                                       37
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

whether a plan qualifies as a non-compensatory plan (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This interpretation was effective July 1,
2000, with certain provisions effective earlier. FIN 44 did not have a
significant impact on its financial statements.

NOTE 3--BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
                                           December 31, 2000 December 31, 1999
                                           ----------------- -----------------
   <S>                                     <C>               <C>
   Inventories:
   Raw material...........................    $  555,000        $  209,000
   Work-in-process........................       115,000               --
   Finished goods.........................       196,000           112,000
                                              ----------        ----------
                                                $866,000        $  321,000
                                              ==========        ==========


<CAPTION>
                                           December 31, 2000 December 31, 1999
                                           ----------------- -----------------
   <S>                                     <C>               <C>
   Property and Equipment:
   Computer and office equipment..........    $  455,000        $  336,000
   Equipment..............................     1,278,000         1,072,000
   Furniture and fixtures.................       101,000            85,000
   Leasehold improvements.................       303,000           283,000
   Software...............................       215,000           158,000
   Construction in progress...............        43,000               --
                                              ----------        ----------
                                               2,395,000         1,934,000
   Less: Accumulated depreciation and
    amortization..........................      (998,000)         (476,000)
                                              ----------        ----------
                                              $1,397,000        $1,458,000
                                              ==========        ==========
</TABLE>

<TABLE>
<CAPTION>
                                             December 31, 2000 December 31, 1999
                                             ----------------- -----------------
   <S>                                       <C>               <C>
   Accrued liabilities:
   Compensation and benefits................    $  481,000         $435,000
   Clinical trials..........................       307,000          194,000
   Professional fees........................       264,000           92,000
   Other accrued expenses...................       263,000          142,000
                                                ----------         --------
                                                $1,315,000         $863,000
                                                ==========         ========
</TABLE>

NOTE 4--LONG-TERM DEBT:

Notes Payable

   The Company entered into an equipment line of credit in 1998. On February
18, 1999, the Company converted its equipment line of credit into a term debt
agreement that was collateralized by the equipment purchased under the original
line of credit and under substantially the same terms as the original
agreement. No gain or loss resulted on this conversion. At December 31, 1999,
the Company had $430,000 outstanding on this debt. Interest on the debt was at
a rate of prime plus 2% per annum (10.5% at December 31, 1999). The Company was
required to comply with certain financial covenants. Monthly payments began on
March 18, 1999 and were to continue through February 2002. The debt was paid in
full at the end of September 2000.

                                       38
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   The Company had a term loan with an outstanding balance at December 31, 1999
of $49,000. The note was collateralized by the Company's assets. Monthly
payments of principal and interest were to continue through December 18, 2001,
with interest at the prime rate plus 2% per annum. The note was paid in full at
the end of September 2000.

Convertible Notes Payable

   On July 29, 1999, the Company issued 6% convertible promissory notes
totaling $800,000 in exchange for cash. The notes were due on August 31, 1999.
On August 31, 1999, the notes and accrued interest of $3,000 were converted
into 535,698 shares of Series C Preferred Stock based on a conversion price of
$1.50 per share.

   In May 2000, the Company received $11.045 million in cash and $45,000 in
services in exchange for convertible notes due and payable in May 2005 with
detachable warrants to purchase 568,917 shares of common stock. The notes,
which were convertible into 2,107,000 shares of preferred stock and bore
interest at 8% per annum, had a beneficial conversion feature associated with
them. The value of the warrants and value of the notes (including the value of
the beneficial conversion feature) were adjusted using their relative fair
values to the face amount of the notes. The warrants were exercisable
immediately and will expire in September 2005. Accordingly, the warrants were
recorded at $2.10 million and the beneficial conversion feature was recorded at
$8.99 million, both as additional paid-in capital and a discount on the notes.
The discount associated with both the warrants and the beneficial conversion
feature were amortized to interest expense; the warrant over the contractual
life of the notes and the beneficial conversion feature over one year, the
earliest conversion date. The total amount recorded as interest expense was
$4,019,000 through September 2000.

   In September 2000, the notes were repaid and a loss on the early
extinguishment of debt of $1,400,000 associated with the remaining unamortized
balance of the warrant discount was recorded. Additionally, the original amount
recorded as beneficial conversion feature was reversed, resulting in a gain on
the early extinguishment of debt of $2,996,000. The net extraordinary gain
associated with the early extinguishment of the debt was $1,596,000.

NOTE 5--COMMITMENTS AND CONTINGENCIES:

Leases

   The Company leases office space under noncancelable operating leases
expiring in September 2003. Rent expense for the years December 31, 2000, 1999,
and 1998 was $546,000, $406,000 and $144,000 respectively.

   At December 31, 2000, future minimum facility lease payments are as follows:

<TABLE>
     <S>                                                              <C>
     2001............................................................ $  525,000
     2002............................................................    543,000
     2003............................................................    414,000
                                                                      ----------
                                                                      $1,482,000
                                                                      ==========
</TABLE>

Commitment

   In October 1999, the Company entered into a mutual agreement to terminate an
employment relationship with the former president and CEO. At the time of the
agreement, the former president and CEO of the Company had approximately
706,000 common shares that were subject to repurchase by the Company. The
agreement modified the repurchase rights to reduce the lapsing period. The
706,000 shares subject to repurchase were valued at $4.39 per share, with no
future services expected to be performed. The Company also agreed to pay
$310,000 over a period of 18 months. As a result, the Company recorded a total
of $3.4 million in charges in 1999 related to this agreement.

                                       39
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


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.

Development and Technology License Agreements

   In December 1998, the Company entered into a technology license agreement
with Somnus Medical Technologies, Inc. granting the Company a license to
manufacture, use or sell products based on licensed technology in exchange for
100,000 shares of the Company's Series A Preferred Stock valued at $175,000 and
a one-time license fee. At the time of the licensing agreement, the Company
believed that any knowledge gained would be useful in developing its new
product, however, there were no alternative future uses (in other research and
development projects or otherwise) as its product was still undergoing
significant testing and development. Therefore, all amounts paid, including the
value of the preferred shares, were included as a component of research and
development expense in 1998. Additionally, the Company is obligated to make
royalty payments tied to the Company's average selling price on licensed
products.

   The technology agreement allows the Company to use the technology in a
licensed field, as defined in the technology agreement, and gives the Company
an irrevocable license to manufacture, have manufactured, use, offer to sell,
sell and import Radio Frequency generators based on the licensed technology in
the licensed field. The agreement expires on October 6, 2017.

   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 in 2000.

NOTE 6--CONVERTIBLE PREFERRED STOCK:

   At December 31, 2000, all previously issue convertible preferred stock had
been converted into common stock in connection with the initial public offering
in September 2000. At December 31, 1999, and immediately prior to conversion,
the amounts of Series A, Series B and Series C convertible preferred stock
outstanding were as follows:

<TABLE>
<CAPTION>
                                       Shares Issued,                                    Amount Net of
                              Shares    Outstanding,                                       Issuance
                            Designated and Converted     Date of Issuance    Issue Price     Costs
                            ---------- -------------- ---------------------- ----------- -------------
   <S>                      <C>        <C>            <C>                    <C>         <C>
   Series A................ 1,197,000    1,066,000    March to December 1998    $1.75     $ 1,850,000
   Series B................ 2,964,000    2,926,000    December 1998             $1.98       5,743,000
   Series C................ 5,985,000    5,605,000    August 1999               $2.63      14,095,000
                                         ---------                                        -----------
                                         9,597,000                                        $21,688,000
                                         =========                                        ===========
</TABLE>

   At December 31, 2000, there were 5,000,000 authorized shares of preferred
stock, none of which were issued or outstanding.

NOTE 7--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 date. At December 31,
2000, 1999, and 1998 there were 224,000, 771,000 and 923,000 shares subject to
repurchase, respectively.


                                       40
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Common Stock Warrants

   During 1998, the Company issued warrants to purchase 67,000 shares of common
stock, at prices ranging from $0.88 to $1.75 per share in connection with
financing arrangements. The warrants were outstanding at December 31, 2000 and
expire in 2005. The value of the warrants, determined using a Black-Scholes
valuation model, was not material.

   In connection with a line of credit agreement in 1999 (Note 4), the Company
issued a warrant to purchase 86,000 shares 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 May 2000, the company issued warrants to purchase 568,917 shares of
common stock in connection with convertible notes payable (Note 4). 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 (Note 4).

NOTE 8--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 under the 1997
Plan.

   The 2000 Stock Plan (the "2000 Plan") was adopted by the Board of Directors
during the year and became effective on September 21, 2000. The terms of this
plan are generally the same as under the 1997 Plan. A total of 2,000,000 shares
of common stock have been reserved for issuance under the 2000 Plan, and the
remaining 264,408 shares available for issuance under the 1997 Plan have been
added to the 2000 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

   During the years ended December 31, 2000, 1999, and 1998, 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
has 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.


                                       41
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   For stock options granted to employees (407,000 in 2000, 1,444,000 in 1999,
and 390,000 in 1998), 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 (104,000 in 2000,
115,000 in 1999, and 148,000 in 1998), the fair value of the options, estimated
using the Black-Scholes valuation model, is initially recorded as deferred
stock compensation on the date of grant. As the non-employee fulfils the terms
of the option grants, all relating to continued services to the Company, the
Company revalues the remaining unvested options, with the change in fair value
from period to period represented as an adjustment of compensation expense and
deferred stock compensation.

   All deferred compensation charges are amortized over the service period,
generally four years, using an accelerated model (FIN 28). Amortization of
deferred stock compensation is as follows:

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                 -----------------------------
                                                    2000       1999     1998
                                                 ---------- ---------- -------
   <S>                                           <C>        <C>        <C>
   Amortization of stock-based compensation
     Cost of product sold....................... $  131,000 $      --  $   --
     Research and development...................    629,000  4,132,000  71,000
     Clinical and regulatory....................    174,000     96,000   7,000
     Sales and marketing........................    418,000     85,000     --
     General and administrative.................  1,343,000    554,000  19,000
                                                 ---------- ---------- -------
                                                 $2,695,000 $4,867,000 $97,000
                                                 ========== ========== =======
</TABLE>

   Included in the 1999 research and development stock-based compensation is
$3.1 million related to the modification of repurchase rights for 706,000
shares of common stock (Note 5).

   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.

<TABLE>
<CAPTION>
                                      2000                       1999                     1998
                            -------------------------- ------------------------- ----------------------
                              Shares       Weighted     Shares       Weighted    Shares     Weighted
                              under        average       under       average      under     average
                             options    exercise price  options   exercise price options exercise price
                            ----------  -------------- ---------  -------------- ------- --------------
   <S>                      <C>         <C>            <C>        <C>            <C>     <C>
   Beginning balance.......  1,982,000      $0.21        538,000      $0.18          --      $ --
     Granted...............    511,000       6.24      1,559,000       0.23      538,000      0.18
     Exercised............. (1,164,000)      2.45            --         --           --        --
     Cancelled.............    (46,000)      2.05       (115,000)      0.19          --        --
                            ----------      -----      ---------      -----      -------     -----
   Ending balance..........  1,283,000       2.83      1,982,000       0.21      538,000      0.18
                            ----------      -----      ---------      -----      -------     -----
   Exercisable at
    year-end...............    317,000      $0.20      1,074,000      $0.23       39,000     $0.18
                            ==========      =====      =========      =====      =======     =====
</TABLE>

                                       42
<PAGE>

                              CURON MEDICAL, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   The options outstanding and currently exercisable by exercise price at
December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                          Options Outstanding and
                          Options Outstanding                                   Exercisable
   -------------------------------------------------------------------------------------------------
                                   Weighted Average
   Actual Range of     Number    Remaining Contractual Weighted Average   Number    Weighted Average
   Exercise Prices   Outstanding     Life (Years)       Exercise Price  Exercisable  Exercise Price
   --------------    ----------- --------------------- ---------------- ----------- ----------------
   <S>               <C>         <C>                   <C>              <C>         <C>
   $ 0.18--$ 0.26       837,000           8.1               $0.20         313,000        $0.20
     0.61                86,000           9.0                0.61           4,000         0.61
     4.39               149,000           9.3                4.39             --           --
     7.00                42,000           9.9                7.00             --           --
   $11.84--$12.50       169,000           9.5               11.89             --           --
                      ---------           ---               -----         -------        -----
                      1,283,000           8.6               $2.83         317,000        $0.20
                      =========           ===               =====         =======        =====
</TABLE>

Fair Value Disclosures

   The fair value of options granted was $7.44, $2.75, and $0.61, for fiscal
years 2000, 1999, and 1998 respectively, estimated on the date of the grant
using the Black-Scholes option pricing model using the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                                          2000    1999    1998
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   Risk-free interest rate..............................   6.30%   5.60%   5.30%
   Expected life........................................ 4 years 4 years 4 years
   Expected volatility..................................     85%     75%     75%
   Expected dividend yield..............................    0.0%    0.0%    0.0%
</TABLE>

   As discussed in Note 2, the Company accounts for its stock-based
compensation using the method prescribed by APB No. 25. 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:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                      ---------------------------------------
                                          2000          1999         1998
                                      ------------  ------------  -----------
   <S>                                <C>           <C>           <C>
   Net loss.......................... $(15,779,000) $(14,089,000) $(2,953,000)
                                      ------------  ------------  -----------
   Net loss--FAS 123 adjusted........ $(16,502,000) $(14,108,000) $(2,956,000)
                                      ------------  ------------  -----------
   Net loss per share--as reported
     Basic and diluted............... $      (2.27) $      (6.94) $     (2.01)
                                      ------------  ------------  -----------
   Net loss per share--FAS 123
    adjusted
     Basic and diluted............... $      (2.38) $      (6.95) $     (2.01)
                                      ------------  ------------  -----------
</TABLE>

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, 2000 or 1999.

                                      43
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


Employee Stock Purchase Plan

   Effective September 21, 2000, the Company adopted the 2000 Employee Stock
Purchase Plan ("ESPP"). An initial 400,000 shares of common stock have been
reserved for issuance under the ESPP. 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.

   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, except that the first offering period
commenced on September 21, 2000 and will end on May 1, 2002. Each offering
period is comprised of four 6-month purchase periods, except for the first
purchase period, which will be from September 21, 2000 to May 1, 2001. 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 specified date. No shares have been purchased under
the ESPP as of December 31, 2000.

NOTE 9--NET LOSS PER SHARE:

   Net loss per share is calculated as follows:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                      ---------------------------------------
                                          2000          1999         1998
                                      ------------  ------------  -----------
   <S>                                <C>           <C>           <C>
   Basic and diluted:
     Net loss........................ $(15,779,000) $(14,089,000) $(2,953,000)
                                      ------------  ------------  -----------
   Weighted average shares used in
    basic and diluted net loss per
    share............................    6,945,000     2,030,000    1,472,000
                                      ------------  ------------  -----------
   Net loss per share................ $      (2.27) $      (6.94) $     (2.01)
                                      ------------  ------------  -----------
</TABLE>

   The Company has issued shares to 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.

   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:

<TABLE>
<CAPTION>
                                                       At December 31,
                                                ------------------------------
                                                  2000       1999      1998
                                                --------- ---------- ---------
   <S>                                          <C>       <C>        <C>
   Unvested common shares (shares subject to
    repurchase)...............................    244,000    771,000   923,000
   Shares issuable upon exercise of stock
    options...................................  1,283,000  1,982,000   538,000
   Convertible preferred stock................        --   9,597,000 3,992,000
   Shares issuable upon exercise of warrants..    722,000    153,000   153,000
                                                --------- ---------- ---------
     Total....................................  2,249,000 12,503,000 5,606,000
                                                ========= ========== =========
</TABLE>

                                       44
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 10--INCOME TAXES:

   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, 2000.

   Deferred tax assets (liabilities) consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              December 31,
                                                             -----------------
                                                              2000      1999
                                                             -------   -------
   <S>                                                       <C>       <C>
   Deferred Tax Assets
     Net operating loss carryforwards....................... $ 7,684   $ 2,932
     Capitalized start-up costs.............................   1,193     1,542
     Research and development and other tax credits.........     554       280
     Depreciation and amortization..........................     237       162
     Other..................................................     205       180
                                                             -------   -------
                                                               9,873     5,096
                                                             -------   -------
   Valuation Allowance......................................  (9,873)   (5,096)
                                                             -------   -------
   Net Deferred Tax Assets.................................. $   --    $   --
                                                             =======   =======

   Reconciliation of the statutory federal income tax to the Company's
effective tax:

<CAPTION>
                                                              December 31,
                                                             -----------------
                                                              2000      1999
                                                             -------   -------
   <S>                                                       <C>       <C>
                                                             $         $
   Tax at federal statutory rate............................     (34)%     (34)%
   State, net of federal benefit............................      (3)%      (3)%
   Change in valuation allowance............................      30 %      37 %
   Stock based compensation.................................       6 %     --
   Amortization of warrants issued with debt................       1 %     --
                                                             -------   -------
                                                                   0 %       0 %
                                                             =======   =======
</TABLE>

   As of December 31, 2000, the Company has a net operating loss carryforward
of approximately $20.5 million for both federal and 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 $356 thousand and $251 thousand for federal and state income tax
purposes, respectively. If not utilized, the federal carryforwards 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.

                                       45
<PAGE>

                              CURON MEDICAL, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


NOTE 11--RELATED PARTY TRANSACTIONS:

   During the period from May 1, 1997 (date of inception) to December 9, 1998,
the Company paid for various operating expenses for two privately held
companies in which the founder of the Company is a shareholder. Amounts due to
the Company at December 31, 2000, 1999, and 1998 net of allowance for doubtful
accounts are reported as related party receivables and equal to $0, $0, and
$262,000, respectively.

   In 1999, the Company entered into a three-year agreement with John Morgan,
President and CEO of the Company, to loan him $8,500 per month as a
reimbursement of housing costs. The total amount loaned under this arrangement
at December 31, 2000 was $102,000 and is classified as a long-term related
party note receivable on the balance sheet. The loan bears interest based on
federal interest rates adjusted monthly, 6.2% at December 31, 2000, and is due
in full at the end of the three-year term.

NOTE 12--QUARTERLY FINANCIAL DATA:

(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

   The following table presents certain unaudited quarterly financial
information for the eight quarters ended December 31, 2000. In our opinion,
this information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Form 10-K and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the unaudited quarterly results of operations set forth herein.

<TABLE>
<CAPTION>
                                 First   Second    Third   Fourth       Fiscal
                                Quarter  Quarter  Quarter  Quarter       Year
                                -------  -------  -------  -------     --------
   <S>                          <C>      <C>      <C>      <C>         <C>
   Net Sales
       2000.................... $    43  $   127  $   686  $   300(1)  $  1,156
       1999....................     --       --       --       --           --
   Gross Loss
       2000....................      23     (134)    (174)    (625)(1)     (910)
       1999....................     --       --       --       --           --
   Net Income before
     Extraordinary Item
       2000....................  (3,309)  (4,769)  (6,191)  (3,106)     (17,375)
       1999....................  (1,755)  (2,550)  (2,819)  (6,965)     (14,089)
   Net Loss
       2000....................  (3,309)  (4,769)  (4,595)  (3,106)     (15,779)
       1999....................  (1,755)  (2,550)  (2,819)  (6,965)     (14,089)
   Earnings per Share:
     Before Extraordinary Item
       2000....................   (1.49)   (1.75)   (1.38)   (0.17)       (2.27)
       1999....................   (0.88)   (1.21)   (1.41)   (3.48)       (6.94)
     Net Loss
       2000....................   (1.49)   (1.75)   (1.02)   (0.17)       (2.27)
       1999....................   (0.88)   (1.21)   (1.41)   (3.48)       (6.94)
</TABLE>
--------
(1) includes the impact of our catheter recall in the fourth quarter of 2000
    which reduced net sales by $115,000 and increased our gross loss and net
    loss by $242,000. See further discussion in Management's Discussion and
    Analysis of Financial Condition and Results of Operations.


                                       46
<PAGE>

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

   None.

                                    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 2001 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.

   The executive officers of the Registrant, who are elected by the board of
directors, are as follows:

<TABLE>
<CAPTION>
             Name           Age                     Position
             ----           ---                     --------
   <C>                      <C> <S>
   John W. Morgan..........  41 President, Chief Executive Officer and Director

   Alistair F. McLaren.....  60 Chief Financial Officer and Vice President of
                                 Finance and Administration

   David S. Utley, M.D.....  36 Chief Medical Officer

   Carol A. Chludzinski....  46 Vice President of Sales and Marketing

   John W. Gaiser..........  43 Vice President of Engineering, Research and
                                 Development

   Viorica Filimon.........  43 Vice President of Quality Affairs
</TABLE>

   John W. Morgan. Mr. Morgan has served as our President and Chief Executive
Officer and as a member of our board of directors since November 1999. From
October 1997 to October 1999, Mr. Morgan worked as Chief Executive Officer at
Epitope Inc., a manufacturer of medical devices and diagnostic products
utilizing oral fluid technologies. From October 1996 to October 1997, Mr.
Morgan was President of Regent Medical Products Group for London International
Group, PLC, a manufacturer of latex medical products. From April 1983 to
October 1996, Mr. Morgan worked at Baxter International, a large medical supply
and distribution company, in various management positions including President
of the MidAmerican Regional Company. He holds a B.S. degree in Public
Administration and Economics from the University of Arizona.

   Alistair F. McLaren. Mr. McLaren has served as our Chief Financial Officer
and Vice President of Finance and Administration since January 1998. From April
1994 to May 1998, Mr. McLaren was Co-President of NeoCon Associates, Inc., an
interim management services company. During his tenure with NeoCon Associates,
Inc., Mr. McLaren served at various times as General Manager of Advanced
Closure Systems, Inc., a medical device company, Chief Financial Officer and
Director of Operations of RITA Medical Systems, Inc., a manufacturer of
radiofrequency devices, and President and Chief Operating Officer of Southern
Pump and Tank, a construction company and SPATCO Environmental, Inc. Mr.
McLaren is a member of the Institute of Chartered Accountants of Scotland.

   David S. Utley, M.D. Dr. Utley is a co-founder of the company. He has served
as our Chief Medical Officer since July 1998. From October 1997 to July 1998,
Dr. Utley was Medical Director of Somnus Medical Technologies, Inc., a
manufacturer of medical devices for treatment of ear, nose and throat
disorders. From June 1997 through June 1998, he was a fellow in plastic and
reconstructive surgery at Stanford University

                                       47
<PAGE>

Medical Center. From June 1992 through June 1997, Dr. Utley was a resident of
surgery at Stanford University Medical Center. Dr. Utley currently holds
faculty positions at Stanford University Medical Center and the VA Palo Alto
Health Care System. He received his M.D. from Harvard Medical School and holds
a B.A. in Science/Arts from Pennsylvania State University.

   Carol A. Chludzinski. Ms. Chludzinski has served as our Vice President of
Sales & Marketing since February 1999. From August 1995 to January 1999, Ms.
Chludzinski was employed by VidaMed, Inc., a manufacturer of devices for
treatment of urologic disorders, where she first served as Vice President of
North American Sales and Worldwide Marketing and later as Senior Vice
President, where she was responsible for reimbursement activities. From January
1995 to July 1995, Ms. Chludzinski was Director of Sales for Cybex, Inc., a
manufacturer of products sold to hospitals and clinics. Ms. Chludzinski holds a
B.A. in Liberal Arts from Chestnut Hill College.

   John W. Gaiser. Mr. Gaiser has served as our Vice President of Engineering,
Research and Development since May 1998. From August 1991 to January 1998, Mr.
Gaiser was Vice President of Research and Development for Medtronic
Cardiorhythm Inc., a developer of devices for treatment of cardiac disorders.
From May 1986 to July 1991, he was project group leader for Advanced
Cardiovascular System Inc., a cardiovascular device company. From February 1981
until May 1986, Mr. Gaiser held senior engineering positions at Baxter
International. Mr. Gaiser holds a B.S. in Mechanical Engineering from Purdue
University.

   Viorica Filimon. Ms. Filimon has served as our Vice President of Quality
Affairs since March 2000 and served as our Director of Quality Affairs from May
1999 to March 2000. From April 1998 to May 1999, Ms. Filimon was Director of
Quality Assurance for EndoTex Interventional Systems Inc., an endovascular
company. From September 1995 to January 1998, Ms. Filimon served as Quality
Engineering Manager for Boston Scientific-Target Therapeutics Inc., a developer
and manufacturer of cardiovascular devices. From January 1995 to September
1995, she served as a senior engineer for Toshiba America MRI, a medical
imaging company. Ms. Filimon holds an M.S. in Electrical Engineering from
Bucharest Polytechnic Institute and is certified by the American Society of
Quality as a Certified Reliability Engineer, a Certified Quality Engineer, and
a Certified Quality Auditor.

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.

                                       48
<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (A) 1. Financial Statements

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

   Report of PricewaterhouseCoopers LLP, Independent Accountants

   Balance Sheet at December 31, 2000 and 1999.

   Statement of Operations, for the years ended December 31, 2000, 1999, and
1998.

   Statement of Stockholders' Equity (deficit), for the years ended December
31, 2000, 1999, and 1998.

   Statement of Cash Flows, for the years ended December 31, 2000, 1999, and
1998.

   Notes to Financial Statements

   Quarterly Financial Data (unaudited)

      2. Financial Statement Schedules

   The financial statement schedule entitled "Valuation and Qualifying
Accounts" is included at page 53 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.

      3. Exhibits

  Refer to (c) below.

  (B) Reports on Form 8-K

   Curon was not required to and did not file any reports on Form 8-K during
the three months ended December 31, 2000.

                                       49
<PAGE>

  (C) Exhibits

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number                                Description
  -------                               -----------
 <C>       <S>
  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.
           Form of Indemnification Agreement for directors and executive
 10.1(1)    officers.
 10.2(1)   1997 Stock Option Plan.
 10.3(1)   2000 Employee Stock Purchase Plan.
 10.4(1)   Series C Preferred Stock Purchase Agreement dated August 30, 1999 by
            and among the Registrant and the Purchasers named therein.
 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.
 10.11(1)  Amended and Restated Loan and Security Agreement effective August
            12, 1998.
 10.14*(1) Technology license agreement between the Registrant and 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.
 10.16(1)  Employment Agreement with John W. Morgan, President and Chief
            Executive Officer.
 23.1      Consent of Independent Accountants.
 24.1      Power of Attorney (see page 50).
</TABLE>
--------
 * Confidential treatment has been requested for certain portions of this
   Exhibit.

(1) Filed as an Exhibit to Curon's Registration Statement on Form S-1 (File No.
    333-37866) and incorporated herein by reference.

                                       50
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                          CURON MEDICAL, INC.

                                                   /s/ John W. Morgan
                                          By: _________________________________
                                                       John W. Morgan
                                               President and Chief Executive
                                                           Officer

                               POWER OF ATTORNEY

   KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John W. Morgan 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:

<TABLE>
<CAPTION>
             Signature                         Title                  Date
             ---------                         -----                  ----

 <C>                                <S>                          <C>
      /s/ John W. Morgan            President, Chief Executive   March 30, 2001
 _________________________________   Officer and Director
          John W. Morgan             (Principal Executive
                                     Officer)

    /s/ Alistair F. McLaren         Chief Financial Officer      March 30, 2001
 _________________________________   and Vice President of
        Alistair F. McLaren          Finance and
                                     Administration (Principal
                                     Financial Officer)

      /s/ Michael Berman            Director                     March 30, 2001
 _________________________________
          Michael Berman

        /s/ Fred Brown              Director                     March 30, 2001
 _________________________________
            Fred Brown

       /s/ David I. Fann            Director                     March 30, 2001
 _________________________________
           David I. Fann

      /s/ Alan L. Kaganov           Director                     March 30, 2001
 _________________________________
          Alan L. Kaganov

  /s/ Robert F. Kuhling, Jr.        Director                     March 30, 2001
 _________________________________
      Robert F. Kuhling, Jr.
</TABLE>

                                       51
<PAGE>

                      Report of Independent Accountants on
                         Financial Statement Schedules

To the Board of Directors of Curon Medical, Inc.

   Our audits of the financial statements referred to in our report dated
February 15, 2001, 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 financial statements.

PricewaterhouseCoopers LLP

San Jose, California
February 15, 2001

                                       52
<PAGE>

                                  Schedule II

                       Valuation and Qualifying Accounts

                 Years ended December 31, 2000, 1999, and 1998

                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                   Balance at Additions
                                   beginning  charged to            Balance at
                                    of year    Earnings  Deductions end of year
                                   ---------- ---------- ---------- -----------
<S>                                <C>        <C>        <C>        <C>
Allowance for Doubtful Accounts:
  December 31, 2000..............    $  --      $   15      $--       $   15
  December 31, 1999..............       --         --        --          --
  December 31, 1998..............       --         --        --          --
Reserve on Related Party Notes
 Receivable:
  December 31, 2000..............        73        --          9          64
  December 31, 1999..............       --          73       --           73
  December 31, 1998..............       --         --        --          --
Deferred Tax Valuation Allowance:
  December 31, 2000..............     5,096      4,777       --        9,873
  December 31, 1999..............     1,284      3,812       --        5,096
  December 31, 1998..............       --       1,284       --        1,284
</TABLE>

                                       53
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number                             Description
  -------                            -----------
 <C>       <S>                                                              <C>
  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.
           Form of Indemnification Agreement for directors and executive
 10.1(1)    officers.
 10.2(1)   1997 Stock Option Plan.
 10.3(1)   2000 Employee Stock Purchase Plan.
 10.4(1)   Series C Preferred Stock Purchase Agreement dated August 30,
            1999 by and among the Registrant and the Purchasers named
            therein.
 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.
 10.11(1)  Amended and Restated Loan and Security Agreement effective
            August 12, 1998.
 10.14*(1) Technology license agreement between the Registrant and 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.
 10.16(1)  Employment Agreement with John W. Morgan, President and Chief
            Executive Officer.
 23.1      Consent of Independent Accountants.
 24.1      Power of Attorney (see page 51).
</TABLE>
--------
 * Confidential treatment has been requested for certain portions of this
   Exhibit.

(1) Filed as an Exhibit to Curon's Registration Statement on Form S-1 (File No.
    333-37866) and incorporated herein by reference.

                                       54