<PAGE>
 
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                       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: 0-32259
 
                             ALIGN TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)
 

<TABLE>
<S>                                            <C>
                  Delaware                                       94-3267295
        (State or other jurisdiction                          (I.R.S. Employer
      of incorporation or organization)                      Identification No.)
</TABLE>

 
                               851 Martin Avenue
                         Santa Clara, California 95050
                                 (408) 470-1000
 (Address, including zip code, of principal executive offices and Registrant's
                     telephone number, including area code)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                      None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                        Common Stock, $0.0001 par value
 
   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 [_] No [X]
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of 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 voting stock held by non-affiliates of the
registrant as of March 19, 2001 was $193,188,843. This calculation does not
reflect a determination that persons are affiliates for any other purpose.
 
   On March 19, 2001, 47,335,050 shares of the registrant's common stock were
outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Portions of the registrant's definitive proxy statement relating to its 2001
annual stockholders' meeting to be held on May 15, 2001 are incorporated by
reference into Part III of this annual report on Form 10-K.
 
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--------------------------------------------------------------------------------

<PAGE>
 
                             ALIGN TECHNOLOGY, INC.
 
                                   FORM 10-K
 
                      For The Year Ended December 31, 2000
 
                               TABLE OF CONTENTS
 

                                     PART I
 

<TABLE>
 <C>      <S>                                                               <C>

 Item 1.  Business.......................................................     3

 Item 2.  Properties.....................................................    22

 Item 3.  Legal Proceedings..............................................    22

 Item 4.  Submission of Matters to a Vote of Security Holders............    23
 

                                    PART II
 

 Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters.......................................................    24

 Item 6.  Selected Consolidated Financial Data...........................    25

 Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations.........................................    25

 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....    31

 Item 8.  Consolidated Financial Statements and Supplementary Data.......    32

 Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..........................................    57
 

                                    PART III
 

 Item 10. Directors and Executive Officers of the Registrant.............    57

 Item 11. Executive Compensation.........................................    57

 Item 12. Security Ownership of Certain Beneficial Owners and
           Management....................................................    57

 Item 13. Certain Relationships and Related Transactions.................    57
 

                                    PART IV
 

 Item 14. Exhibits, Financial Statement Schedules, and Reports on            57
           Form 8-K......................................................
 Signatures...............................................................   59
</TABLE>

 
                                       2

<PAGE>
 

                                     PART I
 
   In addition to historical information, this report on Form 10-K contains
forward-looking statements. These statements may contain words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," or other
words indicating future results. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the following sections entitled "Factors That May Affect
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Given these risks and uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
 

ITEM 1. BUSINESS.
 
Overview
 
   We design, manufacture and market the Invisalign(R) System, a proprietary
new method for treating malocclusion, or the misalignment of teeth. The System
corrects malocclusion using a series of clear, removable appliances that gently
move teeth to a desired final position. Because it does not rely on the use of
metal or ceramic brackets and wires, the System significantly reduces the
aesthetic and other limitations associated with braces. The Invisalign System
also offers orthodontists a new means of carrying out their diagnosis and
treatment planning processes. We believe the Invisalign System has the
potential to transform the traditional practice of orthodontics by appealing to
people who would not otherwise seek treatment.
 
   In the U.S. alone, over 200 million individuals have some form of
malocclusion. Each year, less than one percent of these individuals, or
approximately two million Americans, enter orthodontic treatment, spending
approximately $7 billion in the aggregate. We believe the Invisalign System is
a compelling treatment alternative for most of the patients who would seek
traditional orthodontic treatment. In addition, given the significant benefits
of our System, we have the opportunity to expand the U.S. orthodontic market by
addressing the needs of millions of individuals who would not otherwise seek
treatment. Further, we believe the international opportunity is larger than the
U.S. opportunity.
 
   We received FDA clearance to market the Invisalign System in 1998 and
started commercial sales of the System in July 1999. Our 510(k) clearance from
the FDA allows us to market the Invisalign System to treat patients with any
type of malocclusion. We voluntarily restrict the use of the Invisalign System
to adults and adolescents with mature dentition. Individuals with mature
dentition have fully erupted second molars and substantially complete jaw
growth. This group represents approximately 130 million people in the U.S.
Typically, girls by the age of 13 years and boys by the age of 16 years will
have developed mature dentition. Currently, we do not treat children whose
teeth and jaws are still developing, as the effectiveness of the Invisalign
System relies on our ability to accurately predict the movement of teeth over
the course of treatment. Based on our clinical studies to date, we recommend
that orthodontists use the Invisalign System as a complete treatment for mild
and moderate malocclusions and as a component of treatment for unusually severe
malocclusions.
 
   As of February 2001, we had trained approximately 6,400 orthodontists to use
the Invisalign System, representing over 70% of all practicing U.S. and
Canadian orthodontists. As of February 28, 2001, nearly 2,600 of the
orthodontists we have trained had submitted one or more cases to us, and
approximately 14,800 patients have commenced treatment with the Invisalign
System.
 
   Our objective is to establish the Invisalign System as the standard method
for treating orthodontic malocclusion. Our sales and marketing efforts focus on
educating both consumers and orthodontists on the significant benefits of the
System. We continue to train orthodontists and work with them to increase the
use of the Invisalign System within their practices. In September 2000, we
initiated a national advertising campaign to create awareness of the Invisalign
System as a treatment alternative and to stimulate demand for treatment with
the System.
 
                                       3

<PAGE>
 
Industry Background
 
 Malocclusion
 
   Malocclusion is one of the most prevalent clinical conditions, affecting
over 200 million individuals, or approximately 75% of the U.S. population.
Approximately two million people annually elect orthodontic treatment in the
U.S., generating industry revenues of approximately $7 billion. While most
individuals seek orthodontic treatment to improve their appearance,
malocclusion may also be responsible for dental problems such as tooth decay,
tooth loss, gum disease, jaw joint pain and headaches. Only a relatively small
proportion of people with malocclusion seek treatment because of the
compromised aesthetics, discomfort and other drawbacks associated with
conventional orthodontic treatments.
 
 Traditional Orthodontic Treatment
 
   Orthodontists apply traditional techniques and principles of treatment
developed in the early 20th century. In the U.S., orthodontists treat
malocclusion primarily with metal archwires and brackets, commonly referred to
as braces. Occasionally, in an attempt to improve treatment aesthetics,
orthodontists use ceramic, tooth-colored brackets or bond brackets on the
inside, or lingual surfaces, of the patient's teeth. Orthodontists also augment
braces with elastics, metal bands, headgear and other ancillary devices.
 
   The average treatment takes approximately two years to complete and requires
several hours of direct orthodontist involvement, or chair time. To initiate
treatment, an orthodontist will diagnose a patient's condition and create an
appropriate treatment plan. In a subsequent visit, the orthodontist will bond
brackets to the patient's teeth with cement and attach an archwire to the
brackets. Thereafter, by tightening or otherwise adjusting the braces
approximately every six weeks, the orthodontist is able to exert sufficient
force on the patient's teeth to achieve desired tooth movement. Because of the
length of time between visits, the orthodontist must tighten the braces to a
degree sufficient to achieve sustained tooth movement during the interval. In a
final visit, the orthodontist removes each bracket and residual cement from the
patient's teeth.
 
   Fees for orthodontic treatment typically range between $3,000 to $5,000 and
are generally not reimbursed by insurance. In addition, orthodontists commonly
charge a premium for lingual or ceramic alternatives. Fees are based on the
difficulty of the particular case and on the orthodontist's estimate of chair
time and are generally negotiated in advance. A treatment that exceeds the
orthodontist's estimate of chair time generally results in decreased fees per
hour of chair time, or reduced profitability for the orthodontist.
 
 Limitations of Traditional Orthodontic Treatment
 
   Although braces are generally effective in correcting a wide range of
malocclusions, they are subject to many limitations and disadvantages.
Conventional orthodontic treatment is associated with:
 
  . Unattractive appearance. Braces call attention to the patient's condition
    and treatment. In addition, braces trap food, which can further
    compromise appearance. Braces can also result in permanent discoloration
    of teeth. Many adults associate braces with adolescence. As a result of
    these and other limitations, less than one half of one percent of
    American adults with malocclusion elect orthodontic treatment annually.
 
  . Oral discomfort. Braces are sharp and bulky and can abrade and irritate
    the interior surfaces of the mouth. The tightening or adjustment of
    braces results in root and gum soreness and discomfort, especially in the
    days after an orthodontic visit.
 
  . Poor oral hygiene. Braces compromise oral hygiene by making it more
    difficult to brush and floss. These problems can result in tooth decay
    and periodontal damage. Additionally, the bonding of brackets to teeth
    can cause permanent markings on the teeth.
 
 
                                       4

<PAGE>
 
  . Inability to project treatment. Historically, orthodontists have not had
    a means to model the movement of teeth over a course of treatment.
    Accordingly, orthodontists must rely on intuition and judgment to plan
    and project treatment. As a result, they cannot be precise about the
    direction or distance of expected tooth movement between patient visits.
    This lack of predictability may result in unwanted tooth movements and
    can limit the orthodontist's ability to estimate the duration of
    treatment. Because most orthodontic treatment is performed on a fixed
    price basis, extended treatment duration reduces profitability for the
    orthodontist.
 
  . Physical demands on orthodontists. The manipulation of wires and brackets
    requires sustained manual dexterity and visual acuity, and may place
    other physical burdens on the orthodontist.
 
  . Root resorption. The sustained high levels of force associated with
    conventional treatment can result in root resorption, a shortening of
    tooth roots. This shortening can have substantial adverse periodontal
    consequences for the patient.
 
  . Emergencies. At times, braces need to be repaired or replaced on an
    emergency basis. Such emergencies cause significant inconvenience to both
    the patient and the orthodontist.
 
   Due to the poor aesthetics, discomfort and other limitations of braces,
relatively few people with malocclusion elect orthodontic treatment.
Accordingly, we believe there is a large unmet need for an orthodontic system
that addresses these patient concerns. We also believe there is an unmet need
among orthodontists for a treatment system that increases the predictability
and efficiency of treatment and enhances practice profitability.
 
The Align Solution
 
   Our Invisalign System is a proprietary new system for treating malocclusion.
The Invisalign System consists of two components: ClinCheck(TM) and Aligners.
 
   ClinCheck. ClinCheck is an interactive Internet application that allows
orthodontists to diagnose and plan treatment for their patients. We use a
dental impression and a treatment prescription submitted by an orthodontist to
develop a customized, three-dimensional treatment plan that simulates
appropriate tooth movement in a series of two-week increments. ClinCheck allows
the orthodontist to view this three-dimensional simulation with a high degree
of magnification and from any angle. Accordingly, ClinCheck enables the
orthodontist to project tooth movement with a level of accuracy not previously
possible.
 
   Upon review of the ClinCheck simulation, the orthodontist may immediately
approve our projected treatment, or may provide us with feedback for
modification. We reflect any requested adjustments in a modified simulation.
Upon the orthodontist's approval of the ClinCheck simulation, we use the data
underlying the simulation to manufacture the patient's Aligners.
 
   Aligners. Aligners are custom-manufactured, clear, removable dental
appliances that, when worn in prescribed series, provide orthodontic treatment.
Each Aligner covers a patient's teeth and is nearly invisible when worn.
Aligners are commonly worn in pairs, over the upper and lower dental arches.
Aligners are generally worn for consecutive two-week periods which correspond
to the approved ClinCheck treatment simulation. After two weeks of use, the
patient discards the Aligners and replaces them with the next pair in the
series. This process is repeated until the final Aligners are used and
treatment is complete. Upon completion of the treatment, the orthodontist may,
in his or her discretion, prescribe that the patient wear the final Aligner as
a retainer.
 
Benefits of the Invisalign System
 
   We believe that the Invisalign System provides benefits to patients and
orthodontists that have the potential to establish the System as the preferred
alternative to conventional braces.
 
                                       5

<PAGE>
 
 Benefits to the Patient
 
  . Excellent aesthetics. Aligners are nearly invisible when worn,
    eliminating the aesthetic concerns associated with conventional braces.
 
  . Comfort. By replacing the six-week adjustment cycle of traditional braces
    with two-week stages, Aligners move teeth more gently. Also, Aligners are
    thin, smooth and low in profile. As a result, Aligners are substantially
    more comfortable and less abrasive than conventional braces.
 
  . Improved oral hygiene. Patients can remove Aligners for tasks that are
    difficult with conventional braces, such as eating, brushing and
    flossing. We believe this feature has the potential to reduce tooth decay
    and periodontal damage during treatment.
 
  . Potentially reduced overall treatment time. Aligners control force by
    distributing it broadly over the exposed surfaces of the teeth. In
    addition, the ClinCheck simulation from which Aligners are produced is
    designed to reduce unintended and unnecessary tooth movements. Together,
    these factors may significantly reduce overall treatment time relative to
    conventional braces.
 
  . Potentially reduced root resorption. We believe that controlling force
    and shortening treatment time has the potential to reduce the incidence
    of root resorption.
 
  . Reduced incidence of emergencies. Typically, a lost or broken Aligner is
    simply replaced with the next Aligner in series, minimizing inconvenience
    to both patient and orthodontist.
 
   We believe that these benefits will prove attractive to people who currently
do not seek treatment because of the limitations of conventional braces.
 
 Benefits to the Orthodontist
 
  . Ability to visualize treatment and likely outcomes. We believe that
    ClinCheck is the only product that enables orthodontists to preview a
    course of treatment and the likely final outcome of treatment in an
    interactive three-dimensional computer model. ClinCheck allows
    orthodontists to analyze multiple treatment alternatives before selecting
    the alternative they feel is most appropriate for the patient.
 
  . Minimal additional training. The biomechanical principles that underlie
    the Invisalign System are consistent with those of traditional
    orthodontics. Orthodontists can complete our initial training and
    certification program within a day.
 
  . Ease of use. When treating patients with the Invisalign System,
    orthodontists do not spend their time manipulating wires and brackets.
    This allows them to spend proportionately more time diagnosing and
    interacting with their patients.
 
  . Significantly expanded patient base. We believe the Invisalign System has
    the potential to transform the practice of orthodontics. Currently, less
    than one percent of the over 200 million people with malocclusion in the
    U.S. enter treatment each year. We believe that our System will allow
    orthodontists to attract patients who would not otherwise seek
    orthodontic treatment.
 
  . Higher fees. Orthodontists typically charge between $3,000 and $5,000 for
    a course of conventional treatment. Due to the substantial patient
    benefits of the Invisalign System, we believe orthodontists offering our
    System have generally been able to command a significant premium. In our
    experience, the premiums charged by orthodontists for the Invisalign
    System have been comparable to other treatment alternatives that attempt
    to improve the aesthetics of conventional braces, such as ceramic and
    lingual braces.
 
  . Decreased orthodontist and staff time. The Invisalign System reduces both
    the frequency and length of patient visits. The Invisalign System
    eliminates the need for time-intensive processes such as bonding
 
                                       6

<PAGE>
 
   appliances to the patient's teeth, adjusting archwires during the course
   of treatment and removing the appliances at the conclusion of treatment.
   As such, use of the Invisalign System significantly reduces orthodontist
   and staff chair time and can increase practice throughput.
 
   We believe the combination of increased patient volume, higher fees per case
and reduced chair time has the potential to substantially improve orthodontic
practice profitability.
 
Limitations of the Invisalign System
 
   In some instances, the Invisalign System may have certain limitations
relative to conventional treatment. Aligners cost more to produce than
conventional braces, and we charge orthodontists more than they generally pay
for the supplies used in conventional treatment. Depending on the individual
pricing policies of each orthodontist, the cost of the Invisalign System to the
patient may be greater than for conventional braces. Orthodontists must also
incorporate our manufacturing cycle times into their overall treatment plan.
Once an orthodontist submits a case to us, there is generally a turn-around
time of a month or more before the corresponding Aligners are delivered.
Aligners may not be appropriate for all cases, such as unusually severe
malocclusion, which may require Aligners to be used in combination with
conventional braces for optimal results. In addition, because Aligners are
removable, treatment using the Invisalign System depends on patients wearing
their Aligners as recommended. Some patients may experience a temporary period
of adjustment to wearing Aligners that may mildly affect speech.
 
   We believe that these limitations are outweighed by the many benefits of the
Invisalign System to both patients and orthodontists.
 
Our Target Market
 
   Commercial sales of our Invisalign System commenced in the U.S. in July
1999. As of February 28, 2001, approximately 14,800 patients have entered
treatment using the Invisalign System.
 
   Our 510(k) clearance from the FDA allows us to market the Invisalign System
to treat patients with any type of malocclusion. We voluntarily restrict the
use of the Invisalign System to adults and adolescents with mature dentition.
Individuals with mature dentition have fully erupted second molars and
substantially complete jaw growth. This group represents approximately 130
million people in the U.S. Typically, girls by the age of 13 years and boys by
the age of 16 years will have developed mature dentition. Currently, we do not
treat children whose teeth and jaws are still developing, as the effectiveness
of the Invisalign System relies on our ability to accurately predict the
movement of teeth over the course of treatment. Based on our clinical studies
to date, we recommend that orthodontists use the Invisalign System as a
complete treatment for mild and moderate malocclusions and as a component of
treatment for unusually severe malocclusions.
 
   Approximately two million patients enter into traditional orthodontic
treatment in the U.S. annually. These patients represent less than one percent
of the population of people with malocclusion. Of these, over 50%, or more than
one million patients, have mature dentition and are therefore natural
candidates for the Invisalign System.
 
   In addition, we believe that we have an immediate and substantial market
expansion opportunity. Our market research indicates that the great majority of
people with malocclusion who desire treatment do not elect traditional
treatment because of its many limitations. We believe that by addressing the
primary limitations of braces, our Invisalign System will encourage this group
to seek treatment. Adults, who are particularly sensitive to the aesthetic
limitations of traditional treatment, represent our most significant market
expansion opportunity.
 
   We are currently focused on the domestic market opportunity but we also
believe that a large international market opportunity exists.
 
                                       7

<PAGE>
 
Business Strategy
 
   Our objective is to establish the Invisalign System as the standard method
for treating orthodontic malocclusion. Key elements of our strategy include the
following:
 
   Educate orthodontists and stimulate demand for Invisalign System
treatment. Our market research indicates that the great majority of people with
malocclusion who desire treatment do not elect traditional treatment because of
its many limitations. By communicating the benefits of the Invisalign System to
both orthodontists and consumers, we intend to significantly increase the
number of patients who seek orthodontic treatment annually. As of February
2001, we had trained approximately 6,400 orthodontists in the U.S. and Canada
on the use and benefits of the Invisalign System. We have successfully tested
consumer advertising in two lead markets and in September 2000 initiated a
national advertising campaign in order to create awareness of the Invisalign
System as a treatment alternative and to establish the Invisalign brand name.
 
   Communicate practice benefits of the Invisalign System to orthodontists. The
Invisalign System provides substantial financial incentives to orthodontists by
enabling them to increase patient volume, charge a premium price and reduce
chair time per treatment. We intend to continue to emphasize these practice
benefits to orthodontists through our sales and training efforts.
 
   Expand and enhance manufacturing capability. Our manufacturing operations
are designed to produce large numbers of custom Aligners at a high level of
quality. To improve cost efficiency, we conduct labor intensive processes in
relatively low wage countries, including Pakistan and Mexico. We intend to
maintain manufacturing capacity in excess of projected demand to reduce the
risk that manufacturing capacity constrains our ability to grow. Our
proprietary software underlies our manufacturing process. By continually
developing this software and other manufacturing processes, we plan to increase
the level of production automation. Increased automation will enhance
production capacity and reduce both unit costs and production times.
 
   Extend and defend technology leadership. The Invisalign System represents a
significant technological advancement in orthodontics. We believe that our
issued patents, multiple pending patents and other intellectual property
provide a substantial lead over potential competitors. One of our issued U.S.
patents is written to broadly cover any algorithmic method of segmenting
orthodontic treatment into a sequence of three or more steps, based on
calculated initial and final representations of a patient's dentition. We
continue to pursue further intellectual property protection through U.S. and
foreign patent applications and non-disclosure agreements. We also seek to
protect our software, documentation and other written materials under trade
secret and copyright laws.
 
   Expand our target patient base. The Invisalign System can provide complete
treatment for those patients with mature dentition and mild or moderate
malocclusion. In addition, we believe that the System can provide partial
treatment of unusually severe malocclusions. In an effort to demonstrate the
System's ability to comprehensively treat such cases, we are undertaking
post-marketing studies and making additional improvements to the product.
 
   Build an international presence. In the near term, we intend to focus our
sales and marketing efforts on the U.S. and Canadian market opportunities.
However, we are developing our strategy for introducing the Invisalign System
in selected international markets. We believe that potential international
demand for the Invisalign System exceeds that of our domestic markets.
 
Manufacturing
 
   We produce highly customized, close tolerance, medical quality products in
volume. To do so, we have developed a number of proprietary processes and
technologies. These technologies include complex software solutions, laser,
destructive and white light scanning techniques and stereolithography, wax
modeling and other rapid prototyping methods.
 
                                       8

<PAGE>
 
   We believe the complexity inherent in producing such highly customized
devices in volume is a barrier to potential competitors. Furthermore, we
believe the sophisticated software we use to guide a custom manufacturing
process on a large scale was not available until we developed it.
 
   Manufacturing is coordinated in Santa Clara, California, where, as of
December 2000, we employed a manufacturing staff of approximately 250 people.
In addition, we employed a software development team comprising approximately
30 software engineers with backgrounds in computational geometry, animation,
computer-aided design and manufacturing industries. We also employ
approximately 610 software operators and other staff in our facilities in
Lahore, Pakistan, who are responsible for the creation of treatment
simulations. In addition, we outsource the fabrication and packaging of
Aligners to a contract manufacturer based in Juarez, Mexico.
 
The Invisalign Treatment Process
 
   The Invisalign System treatment process comprises the following five stages:
 
   Orthodontic diagnosis and transmission of treatment data to us. In an
initial patient visit, the orthodontist determines whether the Invisalign
System is an appropriate treatment. The orthodontist then prepares treatment
data which consists of an impression of the relevant dental arches, x-rays of
the patient's dentition, photographs of the patient, a wax bite depicting the
relationship between the patient's upper and lower dental arches and an
Invisalign System treatment planning form, or prescription. The impression is a
critical component as it depicts the three-dimensional geometry of the
patient's teeth and hence forms the basis for our computer models. An
impression requires the patient to bite into a viscous material. This material
hardens, capturing the shape of the patient's teeth. The prescription is also a
critical component, describing the desired positions and movement of the
patient's teeth. The orthodontist sends the treatment data to our Santa Clara
facility.
 
   Preparation of three-dimensional computer models of the patient's initial
malocclusion. Upon receipt, we use the treatment data to construct plaster
models of the patient's dentition. We scan the plaster models to develop a
digital, three-dimensional computer model of the patient's current dentition.
We then transmit this initial computer model together with the orthodontist's
prescription electronically to our facilities in Lahore, Pakistan.
 
   Preparation of computer-simulated treatment and viewing of treatment using
ClinCheck. In Pakistan, we transform this initial model into a customized,
three-dimensional treatment plan that simulates appropriate tooth movement in a
series of two-week increments. This simulation is then transmitted back to our
Santa Clara facility for review. Upon passing review, the simulation is then
delivered to the prescribing orthodontist via ClinCheck on our website at
www.invisalign.com. The orthodontist then reviews the ClinCheck simulation on a
computer and, on occasion, asks us to make adjustments. By reviewing and
amending the treatment simulation, the orthodontist retains control over the
treatment plan and, thus, participates in the customized design of the
Aligners. At this point, the orthodontist may also invite the patient to review
ClinCheck, allowing the patient to see the projected course of treatment. The
orthodontist then approves the proposed treatment and, in doing so, engages us
for the manufacture of corresponding Aligners.
 
   Construction of molds corresponding to each step of treatment. We use the
approved ClinCheck simulation to construct a series of molds of the patient's
teeth. Each mold is a replica of the patient's teeth at each two-week stage of
the simulated course of treatment. These molds are fabricated at our Santa
Clara facility using custom manufacturing techniques that we have adapted for
use in orthodontic applications.
 
   Manufacture of Aligners and shipment to orthodontist. We ship these molds to
Juarez, Mexico, where our contract manufacturer fabricates Aligners by pressure
forming polymeric sheets over each mold. The Aligners are then trimmed,
polished, cleaned, packaged and, following final inspection, shipped directly
to the prescribing orthodontist. In certain cases, orthodontists may use the
Invisalign System in conjunction with clear
 
                                       9

<PAGE>
 
attachments bonded to the patient's teeth. These attachments are used to
increase the force applied to a tooth or teeth in circumstances where the
Aligners alone may have difficulty in effecting the desired movement.
 
   To date, we have shipped Aligners in batches. The first batch, which
typically represents the first several months of treatment, is produced once
the prescribing orthodontist approves ClinCheck. Thereafter, Aligners are sent
at approximately six month intervals until treatment is complete. We are in the
process of changing the pattern of Aligner shipments. In mid-February 2001, for
cases where ClinCheck was approved, we began shipping all the Aligners in a
single batch. In addition, we began accelerating the shipments of Aligners for
cases where ClinCheck was approved prior to mid-February 2001.
 
 Throughput Management
 
   Because we manufacture each case on a build-to-order basis, we cannot build
inventories. As a result, we must conservatively build manufacturing throughput
for anticipated demand. To increase throughput, we must improve the efficiency
and increase the scale of our manufacturing processes.
 
   In order to increase the efficiency of our manufacturing processes, we focus
our efforts on software development and the improvement of rate-limiting
processes, or bottlenecks. Our next generation of software is being developed
to enhance computer analysis of treatment data, reducing time spent for each
case on manual and judgmental tasks, thereby increasing the efficiency of our
technicians in Pakistan. We are also developing an automated system for the
fabrication of Aligners currently conducted in Mexico.
 
   In order to scale our manufacturing capacity, we continue to add labor and
invest in facilities and capital equipment. In particular, we recently expanded
our operations to two facilities in Santa Clara, California, together totaling
approximately 70,000 square feet, which serve as our manufacturing
headquarters. We are also expanding our technician base in Pakistan and
continue to hire in Santa Clara.
 
 Quality Assurance
 
   Our quality assurance team maintains compliance with FDA regulations,
monitors customer satisfaction with our products and services, and helps ensure
a high level of quality of final product. The prescribing orthodontist's review
of the ClinCheck treatment simulation represents an important step in our
overall quality control procedures.
 
   Because we custom manufacture Aligners on a build-to-order basis, we do not
offer refunds on our products. However, Aligners are subject to the Invisalign
product warranty, which covers defects in materials and workmanship. Defective
or broken Aligners must be returned to us for credit evaluation. In the event
that returned Aligners fall within the scope of the Invisalign product
warranty, we will replace the Aligners at our expense. Our warranty is
contingent upon proper use of the Aligners for the purposes for which they are
intended. If a patient chooses not to wear the Aligners, any additional
Invisalign treatment requested as a result is provided at the orthodontist's
expense.
 
   The Invisalign product warranty does not provide any assurances regarding
the outcome of treatment using the Invisalign System. However, if actual
treatment results deviate significantly from the approved ClinCheck treatment
plan, the orthodontist may request a mid-course correction under the Invisalign
product warranty. These deviations have typically been the result of
unpredictable biological factors such as variations in bone density or tooth
topography and abnormal jaw growth. A mid-course correction requires that the
orthodontist submit new molds of the patient's dentition to us. We use the
molds to create a new ClinCheck treatment plan for the orthodontist to approve,
from which a successive series of Aligners will be produced that will allow the
patient to finish treatment. Under the Invisalign product warranty, we will
provide patients with one mid-course correction at our expense to address
significant deviations from the approved ClinCheck treatment plan. Mid-course
corrections have only been requested in a limited number of cases.
 
   In the event that an orthodontist wishes to effect additional adjustments to
a patient's treatment when the actual treatment results are in accordance with
the approved ClinCheck treatment plan, the orthodontist may
 
                                       10

<PAGE>
 
request a mid-course correction or additional Aligners. However, in these
cases, the mid-course correction and additional Aligners are provided at the
orthodontist's expense. In addition, should an orthodontist request a
replacement for a lost Aligner, we charge the orthodontist for the cost of the
replacement Aligner.
 
Sales and Marketing
 
   We market the Invisalign System by communicating the System's benefits
directly to consumers with a nationwide advertising campaign. Based on our
experience with advertising and commercial sales in our test markets, we
believe that making consumers aware of the Invisalign System as a new treatment
alternative generates significant demand for the System. In order to serve
anticipated demand in North America, we are training a broad base of
orthodontists.
 
 Consumer Marketing
 
   We tested our consumer marketing strategy in two markets, Austin, Texas and
San Diego, California. Based on the positive results of these initial marketing
efforts, in September 2000, we launched a nationwide consumer marketing
campaign to create awareness and stimulate demand for the Invisalign System.
Our national consumer marketing efforts primarily focused on television
advertising and will be supported by print, public relations and direct mail
campaigns.
 
   Our experience indicates that prospective patients exposed to our
advertising seek information from four primary sources:
 
  .a general practice dentist;
 
  .an orthodontist;
 
  .Our toll-free support line (1-800-INVISIBLE); and
 
  .our website (www.invisalign.com).
 
   Our marketing efforts have generated substantial consumer interest directed
toward our telephone support line and our website. From the inception of our
national advertising campaign in September 2000 through December 31, 2000, our
support line received approximately 300,000 calls and we received a comparable
number of visitors to our website. Our telephone support line and our website
not only provide consumers with information on the Invisalign System, but,
importantly, also allow us to channel consumer interest to orthodontists of our
choice. Traditionally we have outsourced the telephone support function to a
large national call center operator. Currently, we are transitioning this
function in-house. We will maintain the outsourced function for back-up and
peak periods.
 
 Professional Marketing
 
   As of December 31, 2000, our sales team consisted of 30 salespeople
experienced in orthodontic product sales. Approximately 40 technical support
staff, together with the marketing department and our in-house orthodontic
staff, support the sales team. Our sales and support staff has been engaged in
marketing the Invisalign System to orthodontists since July 1999. Professional
marketing consists of training orthodontists and assisting them in building
their practices. In addition, we are creating awareness of the Invisalign
System among general practice dentists to help them refer patients to
orthodontists.
 
   As of February 2001, we had trained approximately 6,400 orthodontists,
representing over 70% of the practicing orthodontists in the U.S. and Canada.
As of February 28, 2001, nearly 2,600 orthodontists had submitted one or more
cases to us. Our sales and orthodontic teams conduct training primarily in a
workshop format. The key topics covered in training include case selection
criteria, instructions on filling out the Invisalign prescription form,
guidance on pricing and instructions on interacting with our ClinCheck software
and the many other features of our website.
 
                                       11

<PAGE>
 
   The Invisalign System relies on the same orthodontic principles that apply
to traditional treatment, and we present our training material in a manner
consistent with orthodontists' training and experience. As a result, we are
able to complete these training workshops within one day. Our success in
training a large number of orthodontists confirms our belief that training
represents a minimal barrier to adoption for most orthodontists.
 
   After training, sales representatives follow up with orthodontists to ensure
that their staff is prepared to handle Invisalign System cases. Such follow up
may include assisting orthodontists in taking dental impressions, establishing
an Internet connection and familiarizing them with our website. Sales
representatives may also provide practice-building assistance, including
helping orthodontists market to local general practice dentists and to
prospective patients through direct mail or other media. Indeed, many practices
have commenced promotional activity in their local region with our assistance.
 
   To facilitate adoption of the Invisalign System, we sell machines to some of
our customers to assist them in preparing the impressions required for
submission of Invisalign cases. These machines are manufactured by ESPE
America, Inc.
 
   We have developed a system of tiering orthodontists that encourages our
sales force to devote more time to those orthodontists most proficient in the
use of the Invisalign System.
 
   We use objective criteria, primarily the number of cases initiated with the
Invisalign System, to tier orthodontists. Inquiries from prospective patients
through our customer call center and our website are directed to higher tier
orthodontists. We believe the tiering process will rapidly increase the
penetration of our product within selected orthodontists' offices.
 
   General dentists play an important role in informing their patients about
orthodontics and are a key source of referrals to orthodontists. There are over
120,000 active general practice dentists in the U.S. and Canada. We have
commenced educating these general dentists and staff to encourage them to
recommend the Invisalign System to their patients. We communicate with the
dental community using a combination of direct mail, telemarketing, journal
advertising and trade shows.
 
Research and Development
 
   As of December 31, 2000, our research and development team consisted of 17
individuals with medical device development, orthodontic and other relevant
backgrounds. Prior to commercial launch in July 1999, our research and
development strategy had three primary objectives: developing the Invisalign
System, establishing the ability of the System to treat malocclusion and
developing software and processes to enable the manufacture of Aligners in
volume. Since our commercial launch, our research and development effort has
focused on extending the range of clinical applicability of the Invisalign
System, enhancing the software used in the manufacturing process and enhancing
our line of products.
 
   We are conducting a number of post-marketing studies to establish the
effectiveness of the System in comprehensively treating unusually severe cases
of malocclusion. We are developing a next-generation of software primarily to
increase our manufacturing capacity and efficiency. Our product development
team is testing enhanced materials and a number of complementary products that
we expect will provide additional revenue opportunities.
 
Intellectual Property
 
   We believe our intellectual property position represents a substantial
business advantage. As of February 28, 2001, we have two issued U.S. patents
and 46 pending U.S. patent applications. We have two foreign-issued patents and
111 pending foreign patent applications. One of our issued U.S. patents is
written to cover any algorithmic method of segmenting orthodontic treatment
into a sequence of three or more steps, based on calculated initial and final
representations of a patient's dentition.
 
 
                                       12

<PAGE>
 
   We continue to pursue further intellectual property protection through U.S.
and foreign patent applications and non-disclosure agreements. We also seek to
protect our software, documentation and other written materials under trade
secret and copyright laws. We cannot be certain that patents will be issued as
a result of any patent application or that patents that have been issued to us
or may issue in the future will be found to be valid and enforceable and
sufficient to protect our technology or products.
 
Competition
 
   We are not aware of any company that has developed or is marketing a system
comparable to our Invisalign System. However, we compete for the attention of
orthodontists with manufacturers of other orthodontic products. These suppliers
include manufacturers of traditional orthodontic appliances such as 3M Company,
Sybron Dental Specialities and Dentsply International, Inc.
 
   We believe that, in addition to price, the principal competitive factors in
the market for orthodontic appliances include the following factors:
 
  .aesthetic appeal of the treatment method;
 
  .comfort associated with the treatment method;
 
  .effectiveness of treatment;
 
  .ease of use; and
 
  .orthodontist chair time.
 
   We believe that the Invisalign System compares favorably with respect to
each of these factors.
 
Government Regulation
 
   FDA Regulation of Medical Devices. The Invisalign System is regulated as a
medical device. Accordingly, our product development, labeling, manufacturing
processes and promotional activities are subject to extensive review and
rigorous regulation by government agencies in countries in which we sell our
products.
 
   In the U.S., the FDA regulates the design, manufacture, distribution,
preclinical and clinical study, clearance and approval of medical devices.
Medical devices are classified in one of three classes on the basis of the
controls necessary to reasonably assure their safety and effectiveness. Class I
or II devices require the manufacturer to submit a pre-market notification
requesting permission for commercial distribution, which is known as 510(k)
clearance. Class III devices, which are deemed by the FDA to pose greater risk
than Class I and II devices, require FDA approval of a pre-market approval
application which includes, among other things, extensive preclinical and
clinical trial data and information about the device's and its components'
design, manufacturing and labeling.
 
   The Invisalign System is a Class I device, the least stringent class, which
only requires general controls, including labeling, pre-market notification and
adherence to the FDA's Quality System regulations. In addition, because the
Invisalign System is a Class I device, we are required to register contract
manufacturers located outside the U.S. with the FDA. Accordingly, we have
registered our Mexico-based contract manufacturer, Elamex. Elamex is certified
under ISO, an internationally recognized quality standard, and also performs
subcontractor manufacturing for other U.S.-based medical device companies. Our
quality system and procedures are set up to comply with all FDA regulations.
Elamex has dedicated an area in its facilities and personnel for our exclusive
use. We have supplied Elamex with procedures for how to manufacture and ship
our products and have trained Elamex's personnel, thus assuring compliance with
FDA regulations as long as the procedures are followed. We conduct frequent
visits to the Mexico facility to monitor Elamex's performance and its
compliance with our procedures.
 
                                       13

<PAGE>
 
   In November 1998, our Invisalign System received 510(k) Pre-Market
Notification by the FDA, allowing us to market the Invisalign System in the
U.S. In addition, we have recently applied for FDA registration for our Santa
Clara facility. The manufacture and distribution of the Invisalign System are
subject to continuing regulation by the FDA. We are subject to routine
inspections by the FDA to determine compliance with facility registration,
product listing requirements, medical device reporting regulations and Quality
System requirements. The Quality System regulation is similar to good
manufacturing practices and relates to product testing and quality assurance,
as well as the maintenance of records and documentation.
 
   If the FDA finds that we have failed to comply, it can institute a wide
variety of enforcement actions against us, ranging from a public Warning Letter
to more severe sanctions, including but not limited to financial penalties,
withdrawal of 510(k) pre-market notification clearances already granted, and
criminal prosecution.
 
   When introduced in Europe, the Invisalign System will be regulated as a
custom device. As such, we will not be subject to regulations promulgated by
the European Community, although we have the option to CE mark our product. We
are working toward the certification of our manufacturing process under ISO
9001, which will facilitate the commercialization of the Invisalign System
outside the U.S.
 
   Other Federal and State Laws. As a participant in the health care industry
we are subject to extensive and frequently changing regulation under many other
laws administered by governmental entities at the federal, state and local
levels, some of which are, and others of which may be, applicable to our
business. Furthermore, our health care service provider customers are also
subject to a wide variety of laws and regulations that could affect the nature
and scope of their relationships with us.
 
   Laws regulating medical device manufacturers and health care providers cover
a broad array of subjects. For example, the confidentiality of patient medical
information and the circumstances under which such information may be released
for inclusion in our databases, or released by us to third parties, are subject
to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical information and are evolving rapidly. In addition, provisions of the
Social Security Act prohibit, among other things, paying or offering to pay any
remuneration in exchange for the referral of patients to a person participating
in, or for the order, purchase or recommendation of items or services that are
subject to reimbursement by Medicare, Medicaid and similar other federal or
state health care programs. Most states have also enacted illegal remuneration
laws that are similar to the federal laws. These laws are applicable to our
financial relationships with, and any marketing or other promotional activities
involving, our orthodontist customers. Finally, various states regulate the
operations of an advertising and referral service for dentists, and may require
registration of such services with a state agency as well as compliance with
various requirements and restrictions on how they conduct business and
structure their relationships with participating dentists. Violations of any of
these laws or regulations could subject us to a variety of civil and criminal
sanctions.
 
Employees
 
   As of December 31, 2000, we had approximately 1,065 employees, of whom
approximately 455 were employed in the U.S., with the balance employed in
Pakistan. Of our U.S. employees, approximately 250 are employed in
manufacturing, 30 are software engineers, 30 are sales representatives, 40 are
customer support staff, 17 are employed in research and development and 88 are
employed in various management, administrative and support positions.
 
   We employ a staff of approximately 610 employees in our two facilities in
Pakistan, most of whom are computer operators and approximately 50 of whom are
dental and orthodontic supervisors. We believe that our relations with our
employees are good.
 
                                       14

<PAGE>
 
Factors That May Affect Operating Results
 
Since we have a history of losses and negative operating cash flows, and we
expect our operating expenses to continue to increase, we may not achieve or
maintain profitability in the future.
 
   We have incurred significant operating losses, negative operating cash flows
and have not achieved profitability. From inception through July 2000, we spent
significant funds in organizational and start-up activities, recruiting key
managers and employees, developing the Invisalign System and developing our
manufacturing and customer support resources. We also spent significant funds
on clinical trials and training programs to train orthodontists in the use of
the Invisalign System. We expect to have net losses and negative operating cash
flows for at least the next 18 months.
 
   We intend to increase our operating expenses as we continue to:
 
  . scale our manufacturing operations;
 
  . develop new software and increase the automation of our manufacturing
    processes;
 
  . execute our national direct to consumer marketing campaign;
 
  . increase the size of our sales force and orthodontist training staff;
 
  . undertake quality assurance and improvement initiatives; and
 
  . increase our general and administrative functions to support our growing
    operations.
 
   As a result, we will need to increase our revenue significantly, while
controlling our expenses, to achieve profitability. It is possible that we will
not achieve profitability, and even if we do achieve profitability, we may not
sustain or increase profitability in the future.
 
We have a limited operating history and expect our future financial results to
fluctuate significantly, which may cause our stock price to decline.
 
   We were incorporated in April 1997 and have only recently begun selling our
Invisalign System in commercial quantities. Thus, we have a limited operating
history which makes an evaluation of our future prospects and your investment
in our stock difficult. In addition, we expect our future quarterly and annual
operating results to fluctuate as we increase our commercial sales. These
fluctuations could cause our stock price to decline. Some of the factors that
could cause our operating results to fluctuate include:
 
  . changes in the timing of product orders;
 
  . unanticipated delays in production caused by insufficient capacity or in
    the introduction of new production processes;
 
  . inaccurate forecasting of revenue, production and other operating costs;
    and
 
  . the development and marketing of directly competitive products by
    potential competitors.
 
   To respond to these and other factors, we may need to make business
decisions that could adversely affect our operating results. Most of our
expenses, such as employee compensation and lease payment obligations, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if our
revenue for a particular period fall below our expectations, we may be unable
to adjust spending quickly enough to offset any unexpected shortfall in revenue
growth or any decrease in revenue levels.
 
   Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for any one quarter as an indication of our future performance.
 
                                       15

<PAGE>
 
We have limited product offerings, and if demand for our Invisalign System
declines or fails to develop as we expect, our revenue will decline.
 
   We expect that revenue from the sale of our Invisalign System will continue
to account for a substantial portion of our total revenue. Continued and
widespread market acceptance of our System is critical to our future success.
The Invisalign System may not achieve market acceptance at the rate at which we
expect, or at all, which could reduce our revenue.
 
If orthodontists do not adopt our Invisalign System in sufficient numbers or as
rapidly as we anticipate, our operating results will be harmed.
 
   As of February 28, 2001, nearly 2,600 orthodontists have submitted one or
more cases to us. Our success depends upon increasing acceptance by
orthodontists and dentists of the Invisalign System. The Invisalign System
requires orthodontists and their staff to undergo special training and learn to
interact with patients in new ways and to interact with us as a supplier. In
addition, because our Invisalign System has only been in clinical testing since
July 1997 and commercially available since July 1999, orthodontists may be
reluctant to adopt it until more historical clinical results are available.
Also, increasing adoption by orthodontists will depend on factors such as the
capability, safety, efficacy, ease of use, price, quality and reliability of
our products and our provision of effective sales support, training and
service. In the future, unanticipated poor clinical performance of the
Invisalign System could result in significant adverse publicity and
consequently in reduced acceptance by orthodontists. If our Invisalign System
does not achieve growing acceptance in the orthodontic and dental communities,
our operating results will be harmed.
 
If consumers do not adopt our Invisalign System in sufficient numbers or as
rapidly as we anticipate, our operating results will be harmed.
 
   Our Invisalign System represents a significant change from traditional
orthodontic treatment, and patients may be reluctant to accept it or may not
find it preferable to conventional treatment. In addition, patients may not
comply with recommended treatment guidelines which could compromise the
effectiveness of their treatment. While we have generally received positive
feedback from both orthodontists and patients regarding our Invisalign System
as both an alternative to braces and as a clinical method for treatment of
malocclusion, our success will depend upon the rapid acceptance of our System
by the substantially larger number of potential patients to which we are now
actively marketing. We have had a limited number of complaints from patients
and prospective patients generally related to shipping delays and minor
manufacturing irregularities. Market acceptance will depend in part upon the
recommendations of dentists and orthodontists, as well as other factors
including effectiveness, safety, reliability, improved treatment aesthetics and
greater comfort and hygiene compared to conventional orthodontic products.
Furthermore, consumers may not respond to our direct marketing campaigns or we
may be unsuccessful in reaching our target audience. If consumers prove
unwilling to adopt our Invisalign System as rapidly or in the numbers that we
anticipate, our operating results will be harmed.
 
Our success depends in part on our proprietary technology and if we are unable
to successfully enforce our intellectual property rights, our competitive
position may be harmed.
 
   Our success will depend in part on our ability to maintain existing
intellectual property and to obtain and maintain further intellectual property
protection for our products, both in the U.S. and in other countries. Our
inability to do so could harm our competitive position. As of February 28,
2001, we have two issued U.S. patents and 46 pending U.S. patent applications.
We have two foreign-issued patents and 111 pending foreign patent applications.
We intend to rely on our portfolio of issued and pending patent applications in
the U.S. and in other countries to protect a large part of our intellectual
property and our competitive position. However, our currently pending or future
patent filings may not issue as patents. Additionally, any patents issued to us
may be challenged, invalidated, held unenforceable, circumvented, or may not be
sufficiently broad to prevent third parties from producing competing products
similar in design to our products. In addition, protection afforded by foreign
patents may be more limited than that provided under U.S. patents and
intellectual property laws.
 
                                       16

<PAGE>
 
   We also rely on protection of copyrights, trade secrets, know-how and
proprietary information. We generally enter into confidentiality agreements
with our employees, consultants and our collaborative partners upon
commencement of a relationship with us. However, these agreements may not
provide meaningful protection against the unauthorized use or disclosure of our
trade secrets or other confidential information and adequate remedies may not
exist if unauthorized use or disclosure were to occur. Our inability to
maintain the proprietary nature of our technology through patents, copyrights
or trade secrets would impair our competitive advantages and could have a
material adverse effect on our operating results, financial condition and
future growth prospects. In particular, a failure of our proprietary rights
might allow competitors to copy our technology, which could adversely affect
pricing and market share.
 
If we infringe the patents or proprietary rights of other parties, our ability
to grow our business will be severely limited.
 
   Extensive litigation over patents and other intellectual property rights is
common in the medical device industry. We have been sued for infringement of
another party's patent in the past and, while that action has been dismissed,
we may be the subject of patent or other litigation in the future.
 
   In January 2000, Ormco Corporation filed suit against us asserting an
infringement of U.S. Patent Nos. 5,447,432 and 5,683,243. The complaint sought
unspecified monetary damages and equitable relief. The complaint alleged that
the Invisalign System infringed certain claims of the two patents relating to
computer modeling of an ideal dentition and the production of orthodontic
appliances based upon the ideal dentition. The suit has been dismissed but can
be recommenced under certain circumstances. See "Item 3--Legal Proceedings." If
the Ormco suit were recommenced and if Ormco were to prevail, we would have to
seek a license from Ormco, which license might not be available on commercially
reasonable terms or at all. In that event, we could be subject to damages or an
injunction which could materially adversely affect our business.
 
   From time to time, we have received and may again receive letters from third
parties drawing our attention to their patent rights. While we do not believe
that we infringe any valid and enforceable rights which have been brought to
our attention, there may be other more pertinent rights of which we are
presently unaware. The defense and prosecution of intellectual property suits,
interference proceedings and related legal and administrative proceedings could
result in substantial expense to us and significant diversion of effort by our
technical and management personnel. An adverse determination in a patent suit
by Ormco or in any other litigation or interference proceeding to which we may
become a party could subject us to significant liabilities. An adverse
determination of this nature could also put our patents at risk of being
invalidated or interpreted narrowly or require us to seek licenses from third
parties. Licenses may not be available on commercially reasonable terms or at
all, in which event, our business would be materially adversely affected.
 
We have limited experience in manufacturing our products and if we encounter
manufacturing problems or delays, our ability to generate revenue will be
limited.
 
   We have manufactured a limited number of our products to date. Our
manufacturing processes rely on complex three-dimensional scanning, geometrical
manipulation and modeling technologies that have historically not been used on
the scale we require. Each item that we manufacture is geometrically unique and
we have not manufactured our products in the commercial volumes which will be
required to make us profitable. Accordingly, we may be unable to establish or
maintain reliable, high-volume manufacturing capacity. Even if this capacity
can be established and maintained, the cost of doing so may increase the cost
of our products. We may encounter difficulties in scaling up production to meet
demand, including:
 
  . problems involving production yields;
 
  . shortages of key manufacturing equipment;
 
  . shortages of qualified personnel, in particular dental and orthodontic
    personnel;
 
                                       17

<PAGE>
 
  . failure to develop new software processes; and
 
  . compliance with applicable Quality System regulations enforced by the
    FDA.
 
   Our manufacturing process is complex. Since all our products are designed
for individual patients, we manufacture our products to fill purchase orders
rather than maintaining inventories of assembled products. If demand for our
products exceeds our manufacturing capacity, we could develop a substantial
backlog of customer orders. If we are unable to establish and maintain larger-
scale manufacturing capabilities, our ability to generate revenue will be
limited and our reputation in the marketplace would be damaged.
 
We currently rely on third parties to provide key inputs to our manufacturing
process, and if our access to these inputs is diminished, our business may be
harmed.
 
   We currently outsource key portions of our manufacturing process. We rely on
a third party manufacturer in Mexico to fabricate Aligners and to ship the
completed product to customers. In addition, third party rapid prototyping
bureaus fabricate some molds from which the Aligners are formed. As a result,
if any of our third party manufacturers fail to deliver their components or if
we lose their services, we may be unable to deliver our products in a timely
manner and our business may be harmed. Finding substitute manufacturers may be
expensive, time-consuming or impossible. Although we are in the process of
developing the capability to fabricate all molds and Aligners internally, we
may not be successful and may continue to rely on outsourcing in the future.
 
   In addition, we are highly dependent on manufacturers of specialized
scanning equipment, rapid prototyping machines, resin and other advanced
materials. We maintain single supply relationships for many of these machines
and materials technologies. Our rapid growth may exceed the capacity of these
manufacturers to produce the needed equipment and materials in sufficient
quantities to support our growth. In the event of delivery delays or shortages
of these items, our business and growth prospects may be harmed.
 
We are dependent on our international manufacturing operations, which exposes
us to foreign operational and political risks that may harm our business.
 
   Two of our key production steps are performed in manufacturing operations
located outside the U.S. We currently rely on our facilities in Pakistan to
create electronic treatment plans with the assistance of sophisticated
software. We employ approximately 610 people in Lahore, Pakistan, in this
effort. We anticipate that we will need to expand our personnel and facilities
in Pakistan in order to scale our manufacturing operations. In addition, we
rely on third party manufacturers in Mexico to fabricate Aligners and to ship
the completed product to customers. Our reliance on international operations
exposes us to risks and uncertainties, including:
 
  . difficulties in staffing and managing international operations;
 
  . controlling quality of manufacture;
 
  . political, social and economic instability;
 
  . interruptions and limitations in telecommunication services;
 
  . product or material transportation delays or disruption;
 
  . trade restrictions and changes in tariffs;
 
  . import and export license requirements and restrictions;
 
  . fluctuations in currency exchange rates; and
 
  . potential adverse tax consequences.
 
   If any of these risks materialize, our operating results may be harmed.
 
                                       18

<PAGE>
 
We are growing rapidly, and our failure to manage this growth could harm our
business.
 
   We have experienced significant growth in recent periods. Our headcount
increased from 50 employees as of June 30, 1999 to approximately 1,065
employees as of December 31, 2000. In mid-2000, we approved major renovations
and expansions to our existing facilities. We expect that our growth will place
significant demands on our management and other resources and will require us
to continue to develop and improve our operational, financial and other
internal controls both in the U.S. and internationally. In particular,
continued growth increases the challenges involved in a number of areas,
including: recruiting and retaining sufficient skilled personnel, providing
adequate training and supervision to maintain our high quality standards, and
preserving our culture and values. Our inability to manage this growth
effectively would harm our business.
 
If we lose our key personnel or are unable to attract and retain key personnel,
we may be unable to pursue business opportunities or develop our products.
 
   We are highly dependent on the key employees in our clinical engineering and
management teams. The loss of the services of those individuals may
significantly delay or prevent the achievement of our product development and
other business objectives and could harm our business. Our future success will
also depend on our ability to identify, recruit, train and retain additional
qualified personnel. There is currently a shortage of skilled clinical,
engineering and management personnel and intense competition for these
personnel, especially in Silicon Valley where our headquarters is located. In
addition, few orthodontists are accustomed to working in a manufacturing
environment since they are generally trained to work in private practices,
universities and other research institutions. Thus, we may be unable to attract
and retain personnel with the advanced qualifications necessary for the further
development of our business. Furthermore, we may not be successful in retaining
our key personnel or their services.
 
We experience competition from manufacturers of traditional braces and expect
aggressive competition in the future.
 
   We are not aware of any company that is marketing or developing a system
directly comparable to our Invisalign System. However, manufacturers of
traditional braces, such as 3M Company, Sybron Dental Specialities and Dentsply
International, Inc. have substantially greater financial resources and
manufacturing and marketing experience than we do and may, in the future,
attempt to develop an orthodontic system similar to ours. Large consumer
products companies may also enter the orthodontic supply market. Furthermore,
we may face competition in the future from new companies that may introduce new
technologies. We may be unable to compete with these competitors and one or
more of these competitors may render our technology obsolete or economically
unattractive. If we are unable to compete effectively with existing products or
respond effectively to any products developed by our competitors, our business
will be harmed.
 
Complying with the Food and Drug Administration 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 and subject to extensive regulation in the
U.S. and internationally. FDA regulations are wide ranging and govern, among
other things:
 
  .product design, development, manufacture and testing;
 
  .product labeling;
 
  .product storage;
 
  .pre-market clearance or approval;
 
  .advertising and promotion; and
 
  .product sales and distribution.
 
                                       19

<PAGE>
 
   Noncompliance with applicable regulatory requirements can result in
enforcement action which may include recalling products, ceasing product
marketing, and paying significant fines and penalties, which could limit
product sales, delay product shipment and adversely affect our profitability.
 
   In the U.S., we must comply with facility registration and product listing
requirements of the FDA and adhere to applicable Quality System regulations.
The FDA enforces its Quality System regulations through periodic unannounced
inspections, which we have yet to undergo. If we or any third party
manufacturer of our products do not conform to applicable Quality System
regulations, we may be required to find alternative manufacturers, which could
be a long and costly process.
 
   Before we can sell a new medical device in the U.S., we must obtain FDA
clearance or approval, which can be a lengthy and time-consuming process. Even
though the devices we market have obtained the necessary clearances from the
FDA through the pre-market notification provisions of Section 510(k) of the
federal Food, Drug, and Cosmetic Act, we may be unable to maintain the
necessary clearances in the future. Furthermore, we may be unable to obtain the
necessary clearances for new devices that we market in the future. Please see
"Business--Government Regulation" for a more detailed discussion of the
regulations that govern our industry.
 
Extensive and changing government regulation of the healthcare industry may be
expensive to comply with and exposes us to the risk of substantial government
penalties.
 
   In addition to medical device laws and regulations, numerous state and
federal healthcare-related laws regulate our business, covering areas such as:
 
  . storage, transmission and disclosure of medical information and
    healthcare records;
 
  . prohibitions against the offer, payment or receipt of remuneration to
    induce referrals to entities providing healthcare services or goods; and
 
  . the marketing and advertising of our products.
 
   Complying with these laws and regulations could be expensive and time-
consuming, and could increase our costs or reduce or eliminate certain of our
activities or our revenues. See "Business--Government Regulation."
 
We face risks related to our international operations, including the need to
obtain necessary foreign regulatory clearance or approvals.
 
   Sales of our products outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. The time required to
obtain clearances or approvals required by other countries may be longer than
that required for FDA clearance or approval, and requirements for such
approvals may differ from FDA requirements. We may be unable to obtain
regulatory approvals in other countries. We may also incur significant costs in
attempting to obtain and in maintaining foreign regulatory approvals. If we
experience delays in receipt of approvals to market our products outside of the
U.S., or if we fail to receive these approvals, we may be unable to market our
products or enhancements in international markets in a timely manner, if at
all.
 
Our business exposes us to risks of product liability claims, and we may incur
substantial expenses if we are sued for product liability.
 
   Medical devices involve an inherent risk of product liability claims and
associated adverse publicity. We may be held liable if any product we develop
or any product that uses or incorporates any of our technologies causes injury
or is otherwise found unsuitable. Although we intend to continue to maintain
product liability insurance, adequate insurance may not be available on
acceptable terms and may not provide adequate
 
                                       20

<PAGE>
 
coverage against potential liabilities. A product liability claim, regardless
of its merit or eventual outcome, could result in significant legal defense
costs. These costs would have the effect of increasing our expenses and could
harm our business.
 
We may be unable to raise additional capital if it should be necessary, which
could harm our ability to compete.
 
   We have incurred significant operating losses, negative operating cash flows
since inception and have not achieved profitability. As of December 31, 2000,
we had an accumulated deficit of approximately $108.6 million.
 
   We expect to expend significant capital to establish a national brand, build
manufacturing infrastructure and develop both product and process technology.
We believe that the existing cash balances, the proceeds from our initial
public offering in January 2001 and other potential financing alternatives will
be sufficient to meet our capital and operating requirements for at least the
next 12 months.
 
   We are currently working towards our objective of realizing profitability by
achieving the key goal of successfully marketing our product throughout the
U.S. and internationally, while controlling our expenses. The failure to win
increased acceptance by orthodontists and dentists of the Invisalign System
could have a material adverse effect on our business, results of operations and
financial conditions.
 
   If we are unable to generate adequate operating cash flows, we may need to
seek additional sources of capital through equity or debt financing,
collaborative or other arrangements with other companies, bank financing and
other sources in order to realize our objectives and to continue our
operations. There can be no assurance that we will be able to obtain additional
debt or equity financing on terms acceptable to us, or at all. If adequate
funds are not available, we could be required to delay establishing a national
brand, building manufacturing infrastructure and developing our product and
process technology, or to reduce our expenditures in general. According, the
failure to obtain sufficient funds on acceptable terms when needed could have a
material adverse effect on our business, results of operations and financial
condition.
 
The market price for our common stock may be highly volatile.
 
   The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
 
  . quarterly variations in our results of operations;
 
  . changes in recommendations by the investment community or in their
    estimates of our revenues or operating results;
 
  . speculation in the press or investment community;
 
  . strategic actions by our competitors, such as product announcements or
    acquisitions; and
 
  . general market conditions.
 
   In addition, the stock market in general, and the market for technology and
medical device companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated to or disproportionate to
the operating performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance.
 
   In the past, following periods of volatility in the market price of a
company's securities, class action litigation has often been brought against
the company. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
 
                                       21

<PAGE>
 
Concentrations of ownership and agreements among our existing executive
officers, directors and principal stockholders may prevent other stockholders
from influencing significant corporate transactions.
 
   The interest of management could conflict with the interest of our other
stockholders. As of March 19, 2001, our executive officers, directors and
principal stockholders beneficially owned, in total, approximately 54% of our
outstanding common stock. As a result, these stockholders are able to exercise
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This could
have the effect of delaying or preventing a change of control of the Company,
which in turn could reduce the market price of our stock.
 

I
TEM 2. PROPERTIES
 
   Our headquarters are located in Santa Clara, California. We lease
approximately 70,000 square feet of space where we house our manufacturing,
customer support, software engineering and administrative personnel. The lease
for the larger of the two Santa Clara facilities will expire in August 2005,
while the lease for the smaller facility, roughly 15,000 square feet, will
expire in August 2002. The combined monthly rent for the Santa Clara facilities
is approximately $240,000.
 
   We operate two facilities in Pakistan, both in the city of Lahore. Each
facility accommodates approximately 325 employees. The main facility comprises
over 5,000 square feet of office space. The lease for this facility expires at
the end of 2002. The second facility comprises over 10,000 square feet of
office space. The lease for this facility expires in August 2010.
 

ITEM 3. LEGAL PROCEEDINGS
 
   On February 22, 2001 a complaint was filed against us by Jon L. Richter in
the United States District Court for the Eastern District of Pennsylvania. Mr.
Richter, a general practice dentist, purports to sue on behalf of himself and
all licensed dentists in the U.S., excluding orthodontists. Mr. Richter alleges
that we reached an agreement with unspecified orthodontists to restrict the
sales of the Invisalign System only to orthodontists, and thereby violated U.S.
antitrust laws. The complaint seeks injunctive relief and damages. While the
Invisalign System is not available to dentists, we have not entered into any
agreements with orthodontists restricting the distribution of the Invisalign
System. For this reason, among others, we believe the lawsuit is without merit.
 
   In January 2000, Ormco Corporation filed suit against us asserting
infringement of U.S. Patent Nos. 5,447,432 and 5,683,243. The complaint sought
unspecified and monetary damages and injunctive relief. In March 2000, we
answered the complaint and asserted counterclaims seeking a declaration by the
Court of invalidity and non-infringement of the asserted patents.
 
   In June 2000, we entered into a Stipulation of Dismissal with Ormco. Ormco
agreed for a period of at least two years not to pursue litigation with respect
to these patents, except as set forth below. Further, Ormco agreed that it
would not bring any patent action against us for at least a period of one year
with respect to any as yet unissued patents. If Ormco were to bring such an
action concerning as yet unissued patents after one year, the Stipulation of
Dismissal would allow Ormco to include in such an action claims involving U.S.
Patent Nos. 5,447,432 and 5,683,243. No assurance can be given that Ormco will
not bring another action against us or, that if brought, it will not be
successful. Should the suit be recommenced and should our technology be found
to infringe, we would have to seek a license from Ormco, which license might
not be available on commercially reasonable terms or at all. In that event, we
could be subject to damages or an injunction which could materially adversely
affect our business. It is possible that, depending on the scope of any new
patents that are issued to Ormco, Ormco will bring another patent action after
a period of one year has passed.
 
                                       22

<PAGE>
 
   The claims at issue in the Ormco suit relate to methods and systems for
forming and manufacturing custom orthodontic appliances. The relevant claims
are limited to the calculation of the final positioning of a patient's teeth
based upon a derived or ideal dental archform of the patient. The treatment
plan simulation developed in our Pakistan facilities determines the final
positioning of a patient's teeth but not based on a derived or ideal dental
archform of the patient.
 
   From time to time, we have received, and may again receive, letters from
third parties drawing our attention to their patent rights. While we do not
believe that we infringe any such rights which have been brought to our
attention, there may be other more pertinent rights of which we are presently
unaware.
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
   On December 12, 2000 an Action by Written Consent of the Stockholders of
Align Technology, Inc. was circulated to the Company's stockholders. The matter
which was voted on was an amendment of the Company's 1997 Equity Incentive Plan
to increase the number of shares authorized under the Plan by 1,300,000 shares.
The amendment to the 1997 Equity Incentive Plan was approved by a majority of
the holders of the Company's common stock as well as each series of the
Company's preferred stock, with the holders of Series C preferred stock
approving the amendment with greater than 67% of the shares voted.
 
                                       23

<PAGE>
 

                                    PART II
 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
     MATTERS.
 
  (a) Price Range of Common Stock
 
   Our common stock is listed on the Nasdaq National Market under the symbol
"ALGN." Public trading of our common stock commenced on January 26, 2001. Prior
to that date, there was no public market for our common stock.
 
   As of March 19, 2001 there were 540 holders of record of our common stock.
 
   We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operations of our business.
 
  (b) Sales of Unregistered Securities
 
   During the year ended December 31, 2000, we granted options to purchase
5,890,000 shares of common stock to existing and new employees and consultants
at a weighted average exercise price of $0.86 per share. The options were
granted pursuant to our 1997 Stock Incentive Plan.
 
   In May, June and October 2000, we sold 9,535,052 shares of Series D
preferred stock to a group of investors for a total cash consideration of
$101,272,000.
 
   The foregoing transactions did not involve any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) and Regulation D promulgated thereunder or Rule 701
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under Rule 701. The recipients in each transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in these transactions. All recipients had adequate access, through their
relationships with us, to information about us.
 
  (c) Use of Proceeds from Sales of Registered Securities
 
   On January 25, 2001 the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1 (File No. 333-49932) relating
to our initial public offering of our common stock. The 10,000,000 shares
offered by us under the Registration Statement were sold at a price of $13.00
per share on January 31, 2001. The managing underwriters for the offering were
Deutsche Banc Alex. Brown, Bear, Stearns & Co. Inc., JP Morgan and Robertson
Stephens. The underwriters also exercised an overallotment option on March 15,
2001 for 628,706 shares. The overallotment shares were sold at a price of
$13.00 per share. The aggregate proceeds to the Company from the offering were
$128,501,055 after deducting the underwriting discounts and commissions of
$9,672,123, and exclude expenses incurred in connection with the offering of
approximately $2,300,000. No direct or indirect payments were made to
directors, officers, general partners of the issuer or their associates, or to
persons owning 10% or more of any class of equity securities of the issuer, or
to any affiliates of the issuer in connection with the offering. No proceeds
from the sale of registered securities were received in the year ended December
31, 2000.
 
                                       24

<PAGE>
 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
 
   The selected consolidated statement of operations data for 2000, 1999 and
1998 and consolidated balance sheet data as of December 31, 2000 and 1999 set
forth below have been derived from our consolidated financial statements, and
are qualified by reference to our consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountant included herein. The
selected consolidated statement of operations data for the period from
inception (April 3, 1997) to December 31, 1997 and the consolidated balance
sheet data as of December 31, 1997 and 1998 have been derived from our audited
financial statements not included herein. These historical results are not
necessarily indicative of the results of operations to be expected for any
future period.
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)
 

<TABLE>
<CAPTION>
                                                                  Period from
                                                                   Inception
                                   Year Ended December 31,      (April 3, 1997)
                                  ----------------------------  to December 31,
                                    2000       1999     1998         1997
                                  ---------  --------  -------  ---------------
<S>                               <C>        <C>       <C>      <C>
Consolidated Statement of
 Operations Data:
Net Revenue.....................  $   6,741  $    411  $   --       $  --
Loss from operations............    (81,115)  (14,705)  (3,951)       (688)
Net loss........................    (88,748)  (15,415)  (3,775)       (664)
Dividend related to beneficial
 conversion feature of preferred
 stock..........................    (53,516)      --       --          --
Net loss available to common
 stockholders...................   (142,264)  (15,415)  (3,775)       (664)
Net loss per share available to
 common stockholders, basic and
 diluted........................  $  (25.64) $  (3.65) $ (1.33)     $(0.43)
                                  =========  ========  =======      ======
Shares used in computing net
 loss per share available to
 common stockholders, basic and
 diluted........................      5,548     4,218    2,842       1,542
                                  =========  ========  =======      ======
 
<CAPTION>
                                                 December 31,
                                  ---------------------------------------------
                                    2000       1999     1998         1997
                                  ---------  --------  -------  ---------------
<S>                               <C>        <C>       <C>      <C>
Consolidated Balance Sheet Data:
Working capital.................  $  18,273  $ 10,027  $ 6,815      $1,370
Total assets....................     70,561    17,091    8,117       1,642
Total long term liabilities.....      1,455         3       10           4
Convertible preferred stock and
 preferred stock warrants.......    130,691    32,755   12,147       2,164
Stockholders' deficit...........    (84,674)  (19,414)  (4,433)       (661)
</TABLE>

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.
 
   The following discussion and analysis of our financial condition and results
of operations should be read together with "Selected Consolidated Financial
Data" and our consolidated financial statements and related notes included
elsewhere in this report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to those set forth under "Factors That May Affect Operating Results"
and elsewhere in this report on Form 10-K.
 
Overview
 
   From our inception in April 1997 to July 2000, we were engaged in the
design, manufacture and marketing of the Invisalign System, a proprietary new
system for treating malocclusion, or the misalignment of
 
                                       25

<PAGE>
 
teeth. In July 1999, we commenced commercial sales of our Invisalign System.
Prior to July 1999, we devoted nearly all our resources to developing our
software and manufacturing processes, clinical trials of the Invisalign System
and to building our sales force, customer support and management teams. We
exited the development stage in July 2000.
 
   The Invisalign System has two components: ClinCheck and Aligners. ClinCheck
is an Internet-based application that allows orthodontists to simulate
treatment, in three dimensions, by modeling two-week stages of tooth movement.
Aligners are thin, clear plastic, removable dental appliances that are
manufactured in a series to correspond to each two-week stage of the ClinCheck
simulation. Aligners are customized to perform the treatment prescribed for an
individual patient by an orthodontist using ClinCheck.
 
   In the third quarter of 1999, we recognized revenue for the first time from
the sale of the Invisalign System and related dental impression machines
manufactured by ESPE America, Inc. We expect to sell dental impression machines
to an orthodontist only once, if at all. Accordingly, sales of such machines
are expected to represent a lower proportion of our revenue in the future.
Substantially all our revenue is generated in the U.S. and Canada, which, taken
together, we regard as our domestic market.
 
   While our expansion outside of our domestic market is still in an
exploratory stage, we do incur substantial operating costs outside of our
domestic market. Two of our key production steps are performed in operations
located outside of the U.S. In our facilities in Pakistan, technicians use a
sophisticated, internally developed computer modeling program to prepare
electronic treatment plans, which are transmitted via the Internet back to the
U.S. These files form the basis of our ClinCheck product and are used for the
manufacture of Aligner molds. In addition, a third party manufacturer in Mexico
fabricates and performs finishing work on completed Aligners and ships the
completed products to our customers. Our costs associated with these operations
are denominated in Pakistani rupees and Mexican pesos. Our reliance on
international operations exposes us to risks and uncertainties that may affect
our business or results of operations including, among others, difficulties in
staffing and managing international operations, controlling quality of
manufacture, political, social and economic instability, interruptions and
limitations in telecommunication services, product or material transportation
delays or disruption, and trade restrictions and changes in tariffs. However,
we believe these risks are mitigated in Pakistan by the fact that our
operations there do not involve the shipping or manufacturing of any physical
products, and in Mexico by the fact that our operations there are governed
under the provisions of the North American Free Trade Agreement, or NAFTA.
 
   We incurred net losses of $88.7 million in 2000, $15.4 million in 1999 and
$3.8 million in 1998. As of December 31, 2000, we had an accumulated deficit of
$108.6 million. We expect to have net losses and negative operating cash flows
for at least the next 18 months due, in part, to our national consumer
advertising campaign, the expansion of manufacturing capacity and continued
research and development efforts.
 
   We earn revenue primarily from the sale of our Invisalign System. Our
revenue consists of the ClinCheck fee and the charge for each Aligner. We
charge orthodontists a fixed fee for the treatment simulation viewed via
ClinCheck on our website, Invisalign.com. This fee is invoiced when the
orthodontist orders ClinCheck prior to the production of Aligners. In addition,
we charge orthodontists a fee for Aligners as we ship them. Fees from the sale
of ClinCheck and Aligners, taken together, are treated as revenue from a single
System and are recognized ratably as batches of Aligners are shipped to the
orthodontist.
 
   We also earn ancillary revenue from the sale to orthodontists of dental
impression machines. To facilitate adoption of the Invisalign System, we sell
machines to some of our customers to assist them in preparing the impressions
required for submission of Invisalign cases. These machines, which cost
approximately $600 each, are manufactured by ESPE America, Inc. Many of our
customers have adequate dental impression making equipment or pay general
dentists to take impressions on their behalf and, as such, do not purchase an
impression machine from us.
 
                                       26

<PAGE>
 
   To date, we have shipped Aligners in batches. The first batch, which
typically represents the first several months of treatment, is produced once
the prescribing orthodontist approves ClinCheck. Thereafter, Aligners are sent
at approximately six month intervals until treatment is complete.
 
   In mid-February 2001, for cases where ClinCheck was approved, we began
shipping all the Aligners in a single batch. In addition, we began accelerating
the shipments of Aligners for cases where ClinCheck was approved prior to mid-
February 2001. For orders placed subsequent to notification of our change to
single batch shipments, all of the revenue associated with a given case,
including ClinCheck fees, will be recognized at the time the Aligners are
shipped. Payment terms will range from 30 days from case acceptance to net 90
days from Aligner shipment.
 
   The costs of producing the ClinCheck treatment plan, which are incurred
prior to the production of Aligners, are capitalized and recognized as related
revenue is earned. In the cases where we expect a net loss, the entire loss is
recognized immediately.
 
Deferred Compensation
 
   In connection with the grant of stock options to employees and
non-employees, we recorded deferred stock-based compensation as a component of
stockholders' deficit. Deferred stock-based compensation for options granted to
employees is the difference between the fair value of our common stock on the
date such options were granted and their exercise price. 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 a
change in the deferred compensation charge. This stock-based compensation is
amortized as charges to operations over the vesting periods of the options. We
recorded amortization of deferred compensation of $13.4 million for the year
ended December 31, 2000 and $394,000 for the year ended December 31, 1999.
 
Results of Operations
 
Comparison of Years Ended December 31, 2000 and 1999:
 
   Revenues. Revenues for the year ended December 31, 2000 increased to $6.7
million compared to $411,000 for the year ended December 31, 1999. We recorded
revenue for the first time in the third quarter of 1999. For the year ended
December 31, 2000, revenue of $5.4 million was derived from the sale of our
Invisalign System compared to revenue of $98,000 for the year ended December
31, 1999. The balance of our revenue for year ended December 31, 2000 and 1999
represented sales of dental impression machines. We expect to sell a dental
impression machine to an orthodontist only once, if at all. Accordingly, sales
of these machines are expected to represent a substantially lower proportion of
our revenue in the future.
 
   Cost of revenues. Cost of revenues includes the salaries of staff involved
in production, the cost of materials and packaging used in production and
shipping together with an allocation of the cost of facilities and depreciation
on the capital equipment used in the production process. Cost of revenues for
the year ended December 31, 2000 increased to $20.3 million compared to $1.8
million for the year ended December 31, 1999. Cost of revenues for the year
ended December 31, 2000 includes $11.2 million of unabsorbed manufacturing
costs due to a substantial increase in our manufacturing capacity in 2000. As
we employ this manufacturing capacity to produce higher volumes of the
Invisalign System, combined with the resultant manufacturing efficiencies and
our recent price increase, we expect to record positive gross margins. We
currently believe it will be at least 12 months before we are able to achieve
positive gross margins.
 
   Sales and marketing. Sales and marketing expenses include sales force
compensation together with the expense of professional marketing, principally,
conducting training workshops and market surveys, advertising and attending
orthodontic trade shows. Sales and marketing expense for the year ended
December 31, 2000 increased to $40.4 million compared to $5.7 million for the
year ended December 31, 1999. This increase resulted primarily from: increases
in advertising expenses of $19.1 million; increases in headcount and related
 
                                       27

<PAGE>
 
expenses of $6.2 million; expenses relating to participation in the annual
convention of the American Association of Orthodontists of $1.9 million;
expenses relating to orthodontist training of $1.3 million; and expenses
related to the outsourced call center function to support our national
advertising campaign of $1.0 million.
 
   General and administrative. General and administrative expenses include
costs for the compensation of administrative personnel, outside consulting
services, facilities, legal expenses and general corporate expenses. General
and administrative expenses for the year ended December 31, 2000 increased to
$18.0 million compared to $3.5 million for the year ended December 31, 1999,
primarily due to increased headcount and related expenses. We expect
administrative expenses to continue to increase in the future to support
expanding business activities and the additional administrative costs related
to being a public company.
 
   Research and development. Research and development expenses include the
costs associated with software engineering, the costs of designing, developing
and testing our products and the conduct of both clinical and post-marketing
trials. Research and development is expensed as incurred. Research and
development expenses for the year ended December 31, 2000 increased to $9.2
million compared to $4.2 million for the year ended December 31, 1999. Expenses
through the third quarter of 1999, until we recognized revenue for the first
time from the sale of the Invisalign System, include the costs of researching
processes to manufacture our product.
 
   Interest and other income (expense), net. Net interest and other expense
increased to $7.6 million for the year ended December 31, 2000 compared to
$710,000 for the year ended December 31, 1999. This increase, partially offset
by interest income on marketable securities, resulted primarily from non-cash
interest expense related to the beneficial conversion feature. In January 2001,
we recorded non-cash interest expense of $1.8 million related to the beneficial
conversion feature embedded in convertible subordinated notes.
 
   Dividend related to beneficial conversion feature of preferred stock. In
2000 we issued 9,535,052 shares of Series D preferred stock. The difference
between the conversion price and the fair value per share of the common stock
on the commitment date resulted in a beneficial conversion feature of $53.5
million which has been reflected as a preferred stock dividend in the December
31, 2000 consolidated financial statements. In January 2001, we recorded the
final dividend related to the beneficial conversion feature of preferred stock
of $11.2 million.
 
Comparison of Years Ended December 31, 1999 and 1998:
 
   Revenues. Revenues were recorded for the first time in 1999. For the year
ended December 31, 1999, we recorded $411,000 in revenues from sales of the
Invisalign System and related ancillary products. Approximately $98,000 was
derived from the sale of the Invisalign System products. The balance of our
revenue, or $313,000, represented sales to orthodontists of dental impression
machines.
 
   Cost of revenues. We incurred cost of revenues of $1.8 million relating to
the manufacture of products sold for the year ended December 31, 1999. No cost
of revenues was incurred in 1998.
 
   Sales and marketing. Sales and marketing expense increased to $5.7 million
in 1999 compared to $133,000 in 1998, primarily due to the hiring of our sales
force, the training of doctors to support our commercial launch and the testing
of direct advertising in two markets. Sales and marketing expenses in 1998 were
insignificant because we had not commercially launched our product.
 
   General and administrative. General and administrative expenses for the year
ended December 31, 1999 increased to $3.5 million compared to $2.3 million for
the year ended December 31, 1998, primarily due to growth in our administrative
staff, rent on our facilities and other general expenses as we prepared for
commercial launch of the Invisalign System.
 
                                       28

<PAGE>
 
   Research and development. Research and development expenses for the year
ended December 31, 1999 increased to $4.2 million compared to $1.5 million for
the year ended December 31, 1998, primarily due to the development of
manufacturing processes and continuation of our clinical trials.
 
   Interest and other income (expense), net. Net interest and other expense for
the year ended December 31, 1999 increased to $710,000 compared to net interest
and other income of $176,000 in 1998 primarily due to non-cash interest expense
created by the amortization of warrants issued in connection with a line of
credit.
 
Income Taxes
 
   We have not incurred any income tax expense to date since we have not been
profitable. As of December 31, 2000, we had federal and state net operating
loss carryforwards of $75.9 million. As of December 31, 2000 we had recorded a
full valuation allowance for our existing net deferred tax assets due to
uncertainties regarding their realization. We also have federal and state
research tax credit carryforwards of $1.1 million as of December 31, 2000. The
federal and state net operating loss and research credit carryforwards expire
beginning in the year 2017 for federal and 2005 for state purpose if not
utilized. Utilization of the federal net operating losses and credit
carryforwards may be limited by the change of ownership provisions contained in
Section 382 of the Internal Revenue Code.
 
Liquidity and Capital Resources
 
   Historically, we have funded our operations with the proceeds from the sale
of our common and preferred stock, equipment leases and bridge loans. As of
December 31, 2000, we had $12.5 million in cash, cash equivalents and short-
term marketable securities and an accumulated deficit of $108.6 million.
Additionally, we have $16.0 million of restricted cash of which $15.5 million
is held in an escrow account to fund our national advertising campaign.
 
   Net cash used in operating activities totaled $58.8 million in 2000, $11.6
million in 1999 and $3.8 million in 1998. In each of these years net cash used
by operating activities consisted primarily of net operating losses, partially
offset by increases in accounts payable and accrued liabilities, depreciation
and amortization, and amortization of deferred stock-based compensation.
Additionally, in 2000 operating losses were partially offset by non-cash
interest expense derived from a beneficial conversion feature on a convertible
subordinated note, subsequently converted to Series D preferred stock.
 
   Net cash used in investing activities totaled $41.6 million in 2000, $3.6
million in 1999 and $3.8 million in 1998. In each of these years, net cash used
in investing activities consisted primarily of purchases of property and
equipment and marketable securities offset by sales and maturities of
marketable securities. Additionally, for the year ended December 31, 2000,
there was a substantial increase in restricted cash of $15.6 million which
primarily consisted of cash related to the transfer of funds to our media
buying agent to fund our national advertising campaign. These funds are due to
be released to cover expenses related to our national advertising campaign over
the next three quarters.
 
   Net cash from financing activities was $96.4 million in 2000, $19.6 million
in 1999 and $10.0 million in 1998. In May 2000, we sold $14.0 million of
convertible promissory notes to preferred stockholders. Also in May 2000, the
convertible promissory notes were converted to preferred stock. In May, June
and October 2000, we sold $83.1 million of preferred stock to investors, net.
 
   We expect that our operating expenses will increase with an overall increase
in the level of our business activity, including increased sales and the
related costs of products sold, the launch of our national consumer advertising
campaign, continuing efforts to expand our manufacturing capacity, research and
development and other costs. We expect the change of pattern of Aligner
shipments in February 2001 will have a negligible effect on our cash flows. In
addition, we may use cash to fund acquisitions of complementary businesses or
technologies.
 
                                       29

<PAGE>
 
   In January 2001, we completed our initial public offering of 10 million
shares of common stock. In March 2001, the underwriters exercised an
overallotment option for 628,706 shares. Net proceeds to us were approximately
$126.2 million. We believe the net proceeds from the offering will be
sufficient to meet our operating, working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event
additional financing is required, we may not be able to raise it on acceptable
terms or at all.
 
Quarterly Results of Operations
 
   The following table sets forth certain quarterly financial information for
the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future periods.
 

<TABLE>
<CAPTION>
                                                           Three Months Ended
                          ----------------------------------------------------------------------------------------
                                             2000                                        1999
                          -------------------------------------------- -------------------------------------------
                          March 31  June 30   September 30 December 31 March 31  June 30  September 30 December 31
                          --------  --------  ------------ ----------- --------  -------  ------------ -----------
                                                 (in thousands, except per share data)
<S>                       <C>       <C>       <C>          <C>         <C>       <C>      <C>          <C>
Revenues................  $   629   $  1,397    $  1,439    $  3,276   $   --    $   --     $    77      $   334
Gross loss..............   (1,397)    (2,810)     (3,870)     (5,433)      --        --        (280)      (1,063)
Operating loss..........   (8,048)   (15,819)    (22,127)    (35,121)   (1,650)   (2,541)    (3,883)      (6,631)
Net loss................   (8,080)   (23,392)    (21,839)    (35,437)   (1,582)   (2,781)    (4,210)      (6,842)
Net loss available to
 common stockholders....   (8,080)   (67,542)    (21,839)    (44,803)   (1,582)   (2,781)    (4,210)      (6,842)
Net loss per share
 available to common
 stockholders, basic and
 diluted................    (1.55)    (12.31)      (3.84)      (7.39)    (0.42)    (0.69)     (0.96)       (1.45)
Shares used in computing
 per share amounts,
 basic and diluted......    5,225      5,489       5,682       6,066     3,743     4,061      4,379        4,710
</TABLE>

 
   Historical quarterly operating results do not necessarily reflect our
expectations of future quarterly operating results. We believe that future
operating results will fluctuate on a quarterly basis due to a variety of
factors, including; the rate of adoption of the Invisalign system for the
treatment of orthodontic malocclusion, the rate which manufacturing operations
is scaled, the timing of automation of manufacturing processes and the extent
of national direct to consumer marketing campaigns.
 
Recent Accounting Pronouncements
 
   In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," or SFAS No. 133. SFAS No. 133 establishes
accounting and reporting standards for derivative investments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. In July 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," or SFAS No. 137. SFAS No. 137
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. We will adopt SFAS No. 133 during fiscal 2001. To date, we have
not engaged in derivative or hedging activities and do not expect SFAS No. 133
to have a material impact upon our financial results.
 
 
                                       30

<PAGE>
 

I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Quantitative Disclosures
 
   We are exposed to market risks inherent in our operations, primarily related
to interest rate risk and currency risk. These risks arise from transactions
and operations entered into in the normal course of business. We do not use
derivatives to alter the interest characteristics of our marketable securities
or our debt instruments. We have no holdings of derivative or commodity
instruments.
 
   Interest Rate Risk. We are subject to interest rate risks on cash and cash
equivalents, available-for-sale marketable securities, existing long-term debts
and any future financing requirements. Interest rate risks related to
marketable securities are managed by managing maturities in our marketable
securities portfolio. The long-term debt at December 31, 2000 consists only of
outstanding balances on lease obligations.
 
   The fair value of our investment portfolio or related income would not be
significantly impacted by changes in interest rates since the marketable
securities maturities do not exceed fiscal year 2002 and the interest rates are
primarily fixed. Our capital lease obligations of $1.5 million at December 31,
2000 carry a fixed interest rate of 6.53% and 11.15% per annum with principle
payments due in 48, respectively 60 equal annual installments beginning in
2000.
 
   The following table presents the future principal cash flows or amounts and
related weighted average interest rates expected by year for our existing cash
and cash equivalents, marketable securities and long-term debt instruments:
 

<TABLE>
<CAPTION>
                          Expected Maturity date (as of December 31, 2000)
                          ------------------------------------------------------
                           2001    2002   2003   2004   2005   Total  Fair value
                          ------  ------  -----  -----  -----  ------ ----------
                                           (in thousands)
<S>                       <C>     <C>     <C>    <C>    <C>    <C>    <C>
        ASSETS:
        -------
Cash, cash equivalents..  $2,828  $  --   $ --   $ --   $ --   $2,828   $2,828
Short-term marketable
 securities.............   9,633     --     --     --     --    9,633    9,633
Weighted average
 interest rate..........    1.94%    --     --     --     --
 
Long-term marketable
 securities.............  $  --   $6,251  $ --   $ --   $ --   $6,251   $6,251
Weighted average
 interest rate..........     --     6.84%   --     --     --
 
      LIABILITIES:
      ------------
Fixed rate debt lease
 obligation.............  $  579  $  574  $ 574  $ 348  $ 130  $2,205   $1,900
Weighted average
 interest rate..........    8.30%   8.30%  6.53%  6.53%  6.53%
</TABLE>

 
Qualitative Disclosures
 
 Interest Rate Risk. Our primary interest rate risk exposures relate to:
 
  . The available-for-sale securities will fall in value if market interest
    rates increase.
 
  . Our ability to pay long-term debts at maturity.
 
  . The impact of interest rate movements on our ability to obtain adequate
    financing to fund future operations.
 
   We have the ability to hold at least a portion of the fixed income
investments until maturity and therefore would not expect the operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our short- and long-term marketable securities
portfolio.
 
   We manage interest rate risk on our outstanding long-term debts through the
use of fixed rate debt. Management evaluates our financial position on an
ongoing basis.
 
                                       31

<PAGE>
 
 Currency Rate Risk. Our primary currency rate risk exposures relate to:
 
  . Our decentralized or outsourced operations, whereby approximately $3.6
    million of our expenses are related to operations outside the United
    States, denominated in currencies other than the U.S. dollar.
 
  . Our investments in a foreign subsidiary being directly from the U.S.
    parent, resulting in U.S. dollar investments in foreign currency
    functional companies.
 
   We do not hedge any balance sheet exposures and intercompany balances
against future movements in foreign exchange rates. The exposure related to
currency rate movements would not have a material impact on future net income
or cash flows.
 

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Accountants..........................................  33
 
Consolidated Balance Sheets................................................  34
 
Consolidated Statements of Operations......................................  35
 
Consolidated Statements of Stockholders' Deficit...........................  36
 
Consolidated Statements of Cash Flows......................................  37
 
Notes to Consolidated Financial Statements.................................  38
</TABLE>

 
                                       32

<PAGE>
 

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Stockholders and Board of Directors of Align Technology, Inc. and
subsidiary
 
   In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of Align
Technology, Inc. and subsidiary at December 31, 2000 and 1999, and the results
of their operations and their 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.
 
/s/ PricewaterhouseCoopers LLP
 
San Jose, California,
February 9, 2001, except for Note 13

 which is as of March 15, 2001
 
                                       33

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)
 

<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                              2000       1999
                                                            ---------  --------
<S>                                                         <C>        <C>
ASSETS
 
Current assets:
  Cash and cash equivalents...............................  $   2,828  $  6,832
  Restricted cash.........................................     15,986       340
  Marketable securities, short-term.......................      9,633     5,253
  Accounts receivable, net of allowance for doubtful
   accounts of $ 494 and $33 at December 31, 2000 and
   1999, respectively.....................................      4,465       314
  Inventories.............................................      2,024       366
  Deferred costs..........................................      2,431       --
  Other current assets....................................      3,995       669
                                                            ---------  --------
   Total current assets...................................     41,362    13,774
  Property and equipment, net.............................     21,100     3,317
  Marketable securities, long-term........................      6,251       --
  Other assets............................................      1,848       --
                                                            ---------  --------
   Total assets...........................................  $  70,561  $ 17,091
                                                            =========  ========
 
LIABILITIES, CONVERTIBLE PREFERRED STOCK, WARRANTS
AND STOCKHOLDERS' DEFICIT
 
Current liabilities:
  Accounts payable........................................  $   5,541  $  1,572
  Accrued liabilities.....................................     14,753     2,050
  Deferred revenue........................................      2,350       119
  Current portion of capital lease obligations............        445         6
                                                            ---------  --------
   Total current liabilities..............................     23,089     3,747
  Capital lease obligations, net of current portion.......      1,455         3
                                                            ---------  --------
   Total liabilities......................................     24,544     3,750
                                                            ---------  --------
Commitments and contingencies (Note 4)
 
Convertible preferred stock:
  $0.0001 par value; Authorized: 27,211 shares; Issued and
   outstanding: 25,788 and 16,253 shares at December 31,
   2000 and 1999, respectively, (aggregate liquidation
   preference: $134,306 and $32,996 at December 31, 2000
   and 1999, respectively)................................    128,873    31,713
  Preferred stock warrants................................      1,818     1,042
                                                            ---------  --------
                                                              130,691    32,755
                                                            ---------  --------
Stockholders' deficit:
  Common stock: $0.0001 par value; Authorized: 120,000
   shares; Issued and outstanding: 9,622 and 5,644 shares
   at December 31, 2000 and 1999, respectively............          1         1
  Additional paid-in capital..............................    105,828     2,219
  Deferred stock-based compensation.......................    (80,160)   (1,780)
  Notes receivable from stockholders......................     (1,814)      --
  Accumulated other comprehensive income..................         73       --
  Accumulated deficit.....................................   (108,602)  (19,854)
                                                            ---------  --------
   Total stockholders' deficit............................    (84,674)  (19,414)
                                                            ---------  --------
   Total liabilities, convertible preferred stock,
    warrants, and stockholders' deficit...................  $  70,561  $ 17,091
                                                            =========  ========
</TABLE>

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       34

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
 

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     2000       1999     1998
                                                   ---------  --------  -------
<S>                                                <C>        <C>       <C>
Revenues:
  Revenue--Invisalign............................  $   5,436  $     98  $   --
  Revenue--Ancillary products....................      1,305       313      --
                                                   ---------  --------  -------
    Total revenues...............................      6,741       411      --
                                                   ---------  --------  -------
Cost of revenues:
  Cost of revenue and manufacturing costs--
   Invisalign....................................     19,031     1,508      --
  Cost of revenue--Ancillary products............      1,220       246      --
                                                   ---------  --------  -------
    Total cost of revenues.......................     20,251     1,754      --
                                                   ---------  --------  -------
Gross loss.......................................    (13,510)   (1,343)     --
Operating expenses:
  Sales and marketing............................     40,445     5,688      133
  General and administrative.....................     17,991     3,474    2,344
  Research and development.......................      9,169     4,200    1,474
                                                   ---------  --------  -------
    Total operating expenses.....................     67,605    13,362    3,951
                                                   ---------  --------  -------
Loss from operations.............................    (81,115)  (14,705)  (3,951)
  Interest income................................      2,306       362      185
  Interest expense...............................     (9,807)     (986)     --
  Other expense..................................       (132)      (86)      (9)
                                                   ---------  --------  -------
Net loss.........................................    (88,748)  (15,415)  (3,775)
Dividend related to beneficial conversion feature
 of preferred stock..............................    (53,516)      --       --
                                                   ---------  --------  -------
Net loss available to common stockholders........  $(142,264) $(15,415) $(3,775)
                                                   =========  ========  =======
Net loss per share available to common
 stockholders, basic and diluted.................  $  (25.64) $  (3.65) $ (1.33)
                                                   =========  ========  =======
Shares used in computing net loss per share
 available to common stockholders, basic and
 diluted.........................................      5,548     4,218    2,842
                                                   =========  ========  =======
</TABLE>

 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       35

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
      For the years ended December 31, 2000, 1999 and 1998 (in thousands)
 

<TABLE>
<CAPTION>
                                                                    Notes      Accumulated

                          Common Stock   Additional   Deferred    Receivable      Other
                          --------------  Paid-In   Stock-based      from     Comprehensive Accumulated
                          Shares  Amount  Capital   Compensation Stockholders    Income       Deficit    Total
                          ------  ------ ---------- ------------ ------------ ------------- ----------- --------
<S>                       <C>     <C>    <C>        <C>          <C>          <C>           <C>         <C>
Balance at December 31,
 1997...................  5,999    $ 1    $      2    $    --      $   --         $ --       $    (664) $   (661)
Net loss................    --      --          --         --          --           --          (3,775)   (3,775)
Stock options
 exercised..............     92     --           5         --          --           --             --          5
Repurchase of common
 stock..................   (740)    --          (2)        --          --           --             --         (2)
Issuance of common
 stock..................      4     --          --         --          --           --             --        --
                          -----    ---    --------    --------     -------        ----       ---------  --------
Balance at December 31,
 1998...................  5,355      1           5         --          --           --          (4,439)   (4,433)
Net loss................    --      --          --         --          --           --         (15,415)  (15,415)
Stock options
 exercised..............    331     --          42         --          --           --             --         42
Repurchase of common
 stock..................    (42)    --          (2)        --          --           --             --         (2)
Deferred stock
 compensation, net of
 cancellations..........    --      --       2,174      (2,174)        --           --             --        --
Amortization of deferred
 stock compensation.....    --      --         --          394         --           --             --        394
                          -----    ---    --------    --------     -------        ----       ---------  --------
Balance at December 31,
 1999...................  5,644      1       2,219      (1,780)        --           --         (19,854)  (19,414)
                                                                                                        --------
Net loss................    --      --         --          --          --           --         (88,748)  (88,748)
Net change in unrealized
 gain from available-
 for-sale securities....    --      --         --          --          --           73             --         73
                                                                                                        --------
Comprehensive loss......                                                                                 (88,675)
                                                                                                        --------
Stock options
 exercised..............  4,121     --       2,828         --       (1,814)         --             --      1,014
Repurchase of common
 stock..................   (143)    --         (48)        --          --           --             --        (48)
Deferred stock
 compensation, net of
 cancellations..........    --      --      91,752     (91,752)        --           --             --        --
Amortization of deferred
 stock compensation.....    --      --         --       13,372         --           --             --     13,372
Charge for accelerated
 vesting of employee
 stock options..........    --      --         429         --          --           --             --        429
Beneficial conversion
 feature embedded in
 convertible
 subordinated notes.....    --      --       8,648         --          --           --             --      8,648
Beneficial conversion
 feature embedded in
 preferred stock sold...    --      --      53,516         --          --           --             --     53,516
Deemed dividend on
 preferred stock........    --      --     (53,516)        --          --           --             --    (53,516)
                          -----    ---    --------    --------     -------        ----       ---------  --------
Balance at December 31,
 2000...................  9,622    $ 1    $105,828    $(80,160)    $(1,814)       $ 73       $(108,602) $(84,674)
                          =====    ===    ========    ========     =======        ====       =========  ========
</TABLE>

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       36

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
 

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                     2000      1999     1998
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss........................................ $(88,748) $(15,415) $(3,775)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation and amortization.................    2,513       559      115
    Amortization of deferred stock-based
     compensation.................................   13,372       394      --
    Amortization of accelerated vesting of stock
     options......................................      429       --       --
    Gain on sale of property......................      --        --        32
    Loss on retirement on fixed assets............       98       --       --
    Realized loss on marketable securities .......       10       --       --
    Allowance for doubtful accounts...............      461        33      --
    Amortization of capitalized financing costs
     and debt discount............................      834       984      --
    Non-cash interest income on notes receivable
     from stockholders............................      (23)      --       --
    Non-cash interest expense on convertible
     subordinated note............................    8,648       --       --
  Changes in operating assets and liabilities:
    Accounts receivable...........................   (4,612)     (347)     --
    Deferred costs................................   (2,431)      --       --
    Inventories...................................   (1,658)     (366)     --
    Other current assets..........................   (1,425)     (187)    (415)
    Accounts payable..............................    4,401       672      167
    Accrued liabilities...........................    7,100     1,921       84
    Deferred revenue..............................    2,231       119      --
                                                   --------  --------  -------
      Net cash used in operating activities.......  (58,800)  (11,633)  (3,792)
                                                   --------  --------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment..............  (13,571)   (2,463)    (973)
  Increase in restricted cash.....................  (15,646)     (340)     --
  Purchase of marketable securities...............  (19,645)   (5,906)  (6,451)
  Maturities of marketable securities.............    1,250     3,365    2,665
  Proceeds from sale of marketable securities.....    7,827     1,740      804
  Proceeds from sale of property..................      --        --       198
  Change in other assets..........................   (1,848)      --       --
                                                   --------  --------  -------
      Net cash used in investing activities.......  (41,633)   (3,604)  (3,757)
                                                   --------  --------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock..........    1,037        42        5
  Proceeds from issuance of convertible preferred
   stock, net of issuance costs...................   83,085    18,740    9,983
  Proceeds from note receivable for preferred
   stock..........................................      --         76      --
  Repurchase common stock.........................      (48)       (2)      (2)
  Proceeds from convertible subordinated notes....   14,000       750      --
  Payments for incurred IPO costs.................   (1,327)      --       --
  Proceeds from draw down of line of credit.......    5,000       --       --
  Repayment of line of credit.....................   (5,000)      --       --
  Payments on capital lease obligations...........     (318)       (8)      (3)
                                                   --------  --------  -------
      Net cash provided by financing activities...   96,429    19,598    9,983
                                                   --------  --------  -------
Net (decrease) increase in cash and cash
 equivalents......................................   (4,004)    4,361    2,434
Cash and cash equivalents, beginning of year......    6,832     2,471       37
                                                   --------  --------  -------
Cash and cash equivalents, end of year............ $  2,828  $  6,832  $ 2,471
                                                   ========  ========  =======
</TABLE>

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       37

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 Organization
 
 Formation and business of the Company
 
   Align Technology, Inc., (the "Company") was incorporated in April 1997 and
is engaged in the development, manufacturing and marketing of the Invisalign
System (the "System"), used for treating malocclusion, or the misalignment of
teeth. The System uses a series of clear plastic "Aligners" to move the
patients' teeth in small increments from their original state to a final
treated state. The Company exited the development stage as of July 2000.
 
   On January 4, 2001, the Company's Board of Directors approved a 2 for 1
stock split. All common and preferred stock and per share amounts for all
periods presented in the accompanying financial statements have been restated
to reflect the stock split.
 
   On January 25, 2001, the Company launched its initial public offering of
10,000,000 shares of common stock at $13.00 per share. The aggregate proceeds
of the offering amount to $120.9 million after deducting underwriting discounts
and commissions and exclude expenses incurred in connection with the offering
of approximately $2.3 million.
 
Note 2 Summary of Significant Accounting Policies
 
 Basis of consolidation
 
   The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All intercompany transactions have been
eliminated in consolidation.
 
 Use of estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Fair value of financial instruments
 
   The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents and accounts payable approximate fair value
due to their short maturities. Based on borrowing rates currently available to
the Company for leases with similar terms, the carrying value of its lease
obligations approximates fair value.
 
 Cash and cash equivalents
 
   Cash equivalents are stated at cost, which approximates market value. The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company invests
primarily in money market funds and commercial paper, accordingly, these
investments are subject to minimal credit and market risks.
 
 Restricted cash
 
   Restricted cash as of December 31, 2000 is primarily comprised of $ 15.5
million held in escrow for deposits on future advertising (Note 4) and $533,000
for security on customer credit card transactions, on lease of manufacturing
facility and others. Restricted cash as of December 31, 1999 primarily
comprised amounts for security on customer credit card transactions and others.
 
                                       38

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Short- and long-term marketable securities
 
   Marketable securities are classified as available-for-sale in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Securities" and are carried at fair value.
Marketable securities classified as current assets have scheduled maturities
of less than one year, while marketable securities classified as non-current
assets have scheduled maturities of more than one year. Unrealized holding
gains or losses on such securities are included in accumulated comprehensive
income/(loss) in stockholders' deficit. Realized gains and losses on sales of
all such securities are reported in earnings and computed using the specific
identification cost method.
 
   There were $73,000 in unrealized gains as of December 31, 2000 included in
the comprehensive income in stockholders' deficit and no unrealized gains or
losses as of December 31, 1999.
 
   The cost and fair value of available-for-sale securities at December 31,
2000 are as follows (in thousands):
 

<TABLE>
<CAPTION>
                                     Unrealized
                              Cost      Gain    Fair Value    Maturity date
                             ------- ---------- ---------- -------------------
<S>                          <C>     <C>        <C>        <C>
Short-term marketable
 securities
  Commercial paper.......... $ 6,682    $--       $6,682   January--March 2001
  Corporate notes...........   2,937     14        2,951     September 2001
                             -------    ---       ------
                             $ 9,619    $14       $9,633
                             =======    ===       ======
Long-term marketable
 securities
  Corporate notes........... $ 3,286    $30       $3,316   February--June 2002
  Medium term notes.........   2,906     29        2,935        July 2002
                             -------    ---       ------
                             $ 6,192    $59       $6,251
                             =======    ===       ======
</TABLE>

 
   The cost and fair value of short-term available-for-sale securities at
December 31, 1999 are as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                Cost  Fair Value
                                                               ------ ----------
   <S>                                                         <C>    <C>
   Commercial paper........................................... $1,239   $1,239
   Corporate notes............................................    997      997
   Medium term notes..........................................  3,017    3,017
                                                               ------   ------
                                                               $5,253   $5,253
                                                               ======   ======
</TABLE>

 
 Certain risks and uncertainties
 
   The Company's operating results depend to a significant extent on the
Company's ability to market and develop its products. The life cycles of the
Company's products are difficult to estimate due in part to the effect of
future product enhancements and competition. The inability of the Company to
successfully develop and market its products as a result of competition or
other factors would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
   Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash equivalents and
accounts receivable. The Company invests excess cash primarily in money market
funds of major financial institutions, commercial paper and notes. The Company
provides credit to customers in the normal course of business. Collateral is
not required for accounts receivable, but ongoing credit evaluations of
customers' financial condition are performed. The Company maintains reserves
for potential credit losses and such losses have been within management's
expectations.
 
 
                                      39

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   In the United States of America, the Food and Drug Administration ("FDA")
regulates the design, manufacture, distribution, preclinical and clinical
study, clearance and approval of medical devices. Products developed by the
Company may require approvals or clearances from the FDA or other international
regulatory agencies prior to commercialized sales. There can be no assurance
that the Company's products will receive any of the required approvals or
clearances. If the Company was denied approval or clearance or such approval
was delayed, it may have a material adverse impact on the Company.
 
   The Company has manufacturing operations located outside the United States.
The Company currently relies on its manufacturing facilities in Pakistan to
create virtual treatment plans with the assistance of sophisticated software.
In addition, the Company relies on third party manufacturers in Mexico to
fabricate Aligners and to ship the completed product to the Company's
customers. The Company's reliance on international operations exposes it to
related risks and uncertainties, including; difficulties in staffing and
managing international operations; controlling quality of manufacture;
political, social and economic instability; interruptions and limitations in
telecommunication services; product and/or material transportation delays or
disruption; trade restrictions and changes in tariffs; import and export
license requirements and restrictions; fluctuations in currency exchange rates;
and potential adverse tax consequences. If any of these risks materialize, the
Company's international manufacturing operations, as well as its operating
results, may be harmed.
 
   The Company receives certain of its components from sole suppliers.
Additionally, the Company relies on a limited number of hardware manufacturers.
The inability of any supplier or manufacturer to fulfill supply requirements of
the Company could materially impact future operating results.
 
 Inventory
 
   Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
 
 Property and equipment
 
   Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Amortization of leasehold improvements is
computed using the straight-line method over the estimated useful lives of the
assets, or the remaining lease term, whichever is shorter. Upon sale or
retirement, the asset's cost and related accumulated depreciation are removed
from the accounts and any related gain or loss is reflected in operations.
 
 Development costs for internal used software and web-site development
 
   The Company accounts for development costs for internal used software in
accordance with the AICPA Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The Company has
also adopted Emerging Issues Task Force Issue No. 00-2 "Accounting for the
Costs of Developing a Web Site".
 
   Web site development and related costs consist of external and internal
costs incurred to purchase and implement the web site software and significant
enhancements used in the Company's business. Costs incurred in the development
of application and infrastructure of the web site are capitalized and amortized
over the useful life of the web site. Web site development costs of $397,000
and $35,000 had been capitalized as of December 31, 2000 and 1999,
respectively. Amortization of web site development costs commenced in July 2000
upon launch of the web site. Accumulated amortization as of December 31, 2000
amounted to $66,000.
 
   Internal and external costs of designing, creating and maintaining web site
content, graphics and user interface on the web site are expensed as incurred
and included in the accompanying Statement of Operations in accordance with SOP
98-1.
 
                                       40

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   There was other software developed for internal use and capitalized as of
December 31, 2000 in the amount of $111,000. Amortization has not yet been
started as this software is not in use. No other software developed for
internal use was capitalized and no amortization was needed in the year ended
December 31, 1999.
 
 Impairment of long-lived assets
 
   The Company identifies and records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets are
less than the carrying amounts of those assets. Recoverability is measured by
comparison of the assets carrying amount to future net undiscounted cash flows
the assets are expected to 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.
 
 Revenue recognition
 
   The Company has adopted the provisions of Staff Accounting Bulletin ("SAB")
No. 101 "Revenue Recognition in Financial Statements" and believes that its
current revenue recognition is in compliance with the SAB. The Company has also
applied Emerging Issues Task Force Issue No. 00-10 "Accounting for Shipping and
Handling Fees and Costs" retroactively to all periods presented.
 
   Revenue from the Invisalign product and Ancillary product sales are
recognized upon receipt of a purchase order and product shipment provided no
significant obligations remain and collection of the receivables is deemed
probable. Up-front fees received in connection with the Invisalign product are
deferred and recognized over the associated product shipments. The costs of
producing the ClinCheck treatment plan, which are incurred prior to the
production of Aligners, are capitalized and recognized as related revenues are
earned. Ancillary product sales consist primarily of dental impression
machines. The Company accrues for estimated warranty costs upon shipment of
products in accordance with SFAS No. 5, "Accounting for Contingencies." Actual
warranty costs incurred have not materially differed from those accrued. The
Company's warranty policy is effective for shipped products which are
considered defective or fail to meet the product specifications.
 
   The Company estimates its loss on the sale, and records a provision for the
entire amount of estimated loss in the period such losses are determined.
Accrued loss is set off against deferred costs in all those cases that are not
in a net loss position. The sales recorded by the Company through September 30,
2000 had significant losses, the sales recorded by the Company between October
and December 2000 have not had any significant losses.
 
 Research and development
 
   Research and development costs are expensed as incurred.
 
 Advertising costs
 
   The cost of advertising is expensed as incurred. For the year ended December
31, 2000 and 1999 advertising costs totaled $20,804,000 and $1,722,000,
respectively.
 
 Foreign currency
 
   The Company uses the U.S. dollar as its functional currency. Foreign
currency assets and liabilities are re-measured into U.S. dollars at current
exchange rates. Revenues and expenses are generally translated at average
 
                                       41

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
exchange rates in effect during each period. Gains or losses from foreign
currency re-measurement are included in consolidated net earnings. In 2000, the
effect of foreign currency exchange rate fluctuations on the Company's cash and
cash equivalents denominated in foreign currencies was not material.
 
 Income taxes
 
   Income taxes are recorded under the liability method, under which deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
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 amount 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 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
 
   Under APB 25, compensation expense for grants to employees is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the option's exercise price. SFAS 123 defines a "fair
value" based method of accounting for an employee stock option or similar
equity investment. The pro forma disclosure of the difference between
compensation expense included in net loss and the related cost measured by the
fair value method is presented in Note 8.
 
   The Company also adopted FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25."
 
   The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees, or in Conjunction with Selling Goods and Services," and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plan" ("FIN 28").
 
 Segments
 
   The Company operates in one segment, using one measurement of profitability
to manage its business. There were no export sales.
 
   The Company maintains two facilities in Pakistan which generate no revenues
and are comprised of $1,497,000 and $256,000 of identifiable assets as of
December 31, 2000 and 1999, respectively.
 
 Net loss and pro forma net loss per share
 
   Basic and diluted net loss per share are computed by dividing the net loss
available to common stockholders for the period by the weighted average number
of shares of common stock outstanding during the period. The calculation of
diluted net loss per share excludes potential common stock if their effect is
anti-dilutive. Potential common stock consists of common stock subject to
repurchase, incremental common shares issuable upon the exercise of stock
options and warrants and shares issuable upon conversion of the
preferred stock.
 
 
                                       42

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   Pro forma net loss per share for the year ended December 31, 2000 was
computed using the weighted-average number of shares of common stock
outstanding, including the pro forma effect of the automatic conversion of all
of the Company's preferred stock into shares of the Company's common stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred on January 1, 2000 or at the date of original issuance, if
later.
 
   In accordance with the Company's certificate of incorporation, as amended in
connection with the Series D preferred stock sale, as of December 31, 2000, as
the Company has issued 1,257,614 shares of common stock in excess of the
3,331,978 shares of common stock permitted, as defined in the certificate of
incorporation, the Company will be required to issue additional 419,700 shares
of common stock upon the conversion of the preferred stock.
 
   The resulting pro forma adjustment includes an increase in the weighted-
average shares used to compute pro forma basic net loss per share of total
21,269,000 shares for the year ended December 31, 2000.
 
   The calculation of pro forma diluted net loss per share excludes warrants
and stock options as their effect would be anti-dilutive.
 
   The following is a reconciliation of the numerator (net loss available to
common stockholders) and the denominator (number of shares) used in the basic
and diluted Earnings per Share ("EPS") calculations (in thousands, except per
share data):
 

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                   2000       1999     1998
                                                 ---------  --------  -------
<S>                                              <C>        <C>       <C>
Basic and diluted:
Net loss available to common stockholders....... $(142,264) $(15,415) $(3,775)
                                                 =========  ========  =======
Weighted-average common shares outstanding......     6,861     5,334    5,620
Less: Weighted-average shares subject to
 repurchase.....................................     1,313     1,116    2,778
                                                 ---------  --------  -------
Weighted-average shares used in basic and
 diluted net loss per share.....................     5,548     4,218    2,842
                                                 =========  ========  =======
Net loss per share available to common
 stockholders................................... $  (25.64) $  (3.65) $ (1.33)
                                                 =========  ========  =======
Pro forma basic and diluted:
Net loss........................................ $ (88,748)
                                                 =========
Adjustments to reflect weighted-average effect
 of assumed conversion of preferred stock.......    21,269
                                                 =========
Weighted-average shares used in pro forma basic
 and diluted net loss per share.................    26,817
                                                 =========
Pro forma basic and diluted net loss per share
 ............................................... $   (3.31)
                                                 =========
</TABLE>

 
                                       43

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share available to common stockholders
because to do so would be anti-dilutive for the years indicated (in thousands):
 

<TABLE>
<CAPTION>
                                                            Year Ended December
                                                                    31,
                                                            --------------------
                                                             2000   1999   1998
                                                            ------ ------ ------
<S>                                                         <C>    <C>    <C>
Preferred stock (as if converted).......................... 26,209 16,253 11,067
Options to purchase common stock...........................  2,862  1,285    952
Common stock subject to repurchase.........................  3,608    654  1,779
Warrants...................................................    646    533    --
                                                            ------ ------ ------
                                                            33,325 18,725 13,798
                                                            ====== ====== ======
</TABLE>

 
 Recent accounting pronouncements
 
   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative investments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 during fiscal 2001. To
date, the Company has not engaged in derivative or hedging activities and does
not expect SFAS 133 to have a material impact upon financial results.
 
Note 3  Balance Sheet Components
 
   Inventories consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   --------------
                                                                    2000   1999
                                                                   ------- ------
   <S>                                                             <C>     <C>
   Raw materials.................................................. $ 1,183 $  73
   Work in progress...............................................     294   --
   Finished goods.................................................     547   293
                                                                   ------- -----
                                                                    $2,024 $ 366
                                                                   ======= =====
</TABLE>

 
   Other current assets consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   ------------
                                                                    2000  1999
                                                                   ------ -----
   <S>                                                             <C>    <C>
   Initial Public Offering costs.................................. $1,884 $ --
   Prepaid rent...................................................    245   175
   Prepaid trade shows............................................    420   --
   Loan to officer................................................     97   --
   Notes receivable from stockholder of preferred stock...........     75   --
   Other..........................................................  1,274   494
                                                                   ------ -----
                                                                   $3,995 $ 669
                                                                   ====== =====
</TABLE>

 
                                       44

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Property and equipment consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000     1999
                                                                -------  ------
   <S>                                                          <C>      <C>
   Clinical and manufacturing equipment........................ $12,372  $1,537
   Computer hardware...........................................   4,809   1,580
   Computer software...........................................   2,681     302
   Furniture and fixtures......................................   1,648     313
   Leasehold improvements......................................   2,580     275
                                                                -------  ------
                                                                 24,090   4,007
   Less: Accumulated depreciation and amortization.............  (2,990)   (690)
                                                                -------  ------
                                                                $21,100  $3,317
                                                                =======  ======
</TABLE>

 
   Property and equipment includes $2,220,040 and $18,957 of assets under
capital leases at December 31, 2000 and 1999, respectively. Accumulated
amortization of assets under capital leases totaled $333,862 and $9,607 at
December 31, 2000 and 1999, respectively.
 
   Depreciation expense was $2,513,000, $559,000 and $115,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
 
   Accrued liabilities consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  2000    1999
                                                                 ------- ------
<S>                                                              <C>     <C>
Accrued marketing expenses...................................... $ 5,592 $  385
Accrued payroll and benefits....................................   2,844    744
Accrued loss reserve on product sales...........................     --     351
Accrued Initial Public Offering costs...........................     557    --
Accrued costs for property and equipment acquired...............   5,046    --
Other...........................................................     714    570
                                                                 ------- ------
                                                                 $14,753 $2,050
                                                                 ======= ======
</TABLE>

 
Note 4  Commitments and Contingencies
 
 Operating leases
 
   In October 1999, the Company entered into a non-cancelable operating lease
agreement with GE Capital Fleet Services and offers vehicles to all
salespeople. The lease term is for 3 years, commencing upon acceptance of
delivery.
 
   In June 2000, the Company entered into a non-cancelable operating lease to
lease a manufacturing facility in Santa Clara, California. The lease term is
for five years, commencing July 1, 2000. The Company paid $1,175,000 security
deposit upon execution of the lease.
 
   In July 2000, the Company entered into an agreement to sublease additional
office space in Santa Clara, California. The lease term begins on July 14, 2000
and expires on August 14, 2002. A security deposit of $184,448 was paid by the
Company upon execution of the lease.
 
   Total rent expense was $2,146,000, $295,000 and $147,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. The terms of the facility lease
provide for rental payments on a graduated scale. The
 
                                       45

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Company recognizes rent expense on a straight-line basis over the lease period,
and has accrued for rent expense incurred but not paid.
 
   The future minimum lease payments under these leases as of December 31, 2000
are $3,112,000, $2,812,000, $2,268,000, $2,311,000, $1,177,000 and $66,000 for
the years ended December 31, 2001, 2002, 2003, 2004, 2005 and thereafter.
 
 Advertising Commitments
 
   In May 2000, the Company entered into an escrow agreement between TBWA
Chiat/Day, Inc. ("TBWA") and Greater Bay Trust Company ("Escrow Agent"). TBWA
has been engaged by the Company to procure non-cancelable television and radio
media time on behalf of the Company. In consideration of the services provided
by TBWA, the Company has agreed to deposit a certain amount with the Escrow
Agent for purposes of repaying TBWA. The Company's total commitment will not at
any time exceed the total amount held in escrow. At December 31, 2000, the
Company had $15,453,000 held in money market funds with the Escrow Agent. This
amount has been classified as restricted cash.
 
 Software Development Commitments
 
   In January 2001, the Company entered into a master software development and
services agreement with Raindrop Geomagic, Inc. ("Raindrop"). Under the
agreement, the Company will make non-refundable monthly payments of $250,000 to
Raindrop in exchange for software development services, software source and
object codes, documentation, software and other tangible and intangible work
product. Additionally, at any time during the term of the agreement, the
Company may obtain three fully paid-up, non-exclusive, non-terminable object
code licenses for $240,000. The Company made an initial non-refundable payment
of $600,000, of which $220,000 may be applied as a credit towards the $240,000
of license fees. The minimum term of the agreement is four months, after which
the agreement may be terminated by either party without cause upon 30 days
written notice.
 
 Contingencies
 
   The Company was involved in a patent infringement proceeding with a
plaintiff asserting infringement of two of its patents. On June 30, 2000, the
Company entered into a stipulation of dismissal with the plaintiff whereby the
plaintiff agreed not to recommence a suit against the Company for two years
with respect to the disputed patents. Pursuant to the agreement, if a patent is
subsequently issued to the plaintiff and the plaintiff believes the Company is
infringing it, then the plaintiff may commence suit after one year from the
effective date of the agreement and include in such action claims involving the
two previously disputed patents. If any such action is successful, it could
result in a significant monetary damages judgment against the Company.
 
   The Company is subject to claims and assessments from time to time in the
ordinary course of business. Management does not believe that any such matters,
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
 
 Capitalized lease obligations
 
   The Company is leasing equipment from a leasing company. Under the terms of
the lease agreement, the capital lease obligation bears interest of 10.155% at
December 31, 2000 and expires in October 2001.
 
   In February 2000, the Company leased a stereolithography apparatus from
Leasing Technologies International, Inc. ("LTI") under a master lease agreement
entered into between the Company and LTI in
 
                                       46

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
August 1999. Under the terms of the lease, the value of the leased equipment is
$729,000 at a borrowing rate of 11.154% per annum. The term of the lease is for
48 months with a bargain purchase option at the end of the lease to purchase
the equipment at 15% of the purchase price. Accordingly, the Company has
capitalized the leased equipment in accordance with SFAS 13, "Accounting for
Leases."
 
   In May and June 2000, the Company leased two stereolithography machines from
3D Capital Corporation ("3D") under a Master Lease Agreement entered into in
March 2000 for a total value of $1,479,000 at a borrowing rate of 6.533% per
annum for a period of 60 months. The Company has capitalized these machines in
accordance with SFAS 13.
 
   Future minimum payments under capital lease obligations are as follows (in
thousands):
 

<TABLE>
<CAPTION>
     Year Ended December 31,
     -----------------------
     <S>                                                                 <C>
     2001............................................................... $  579
     2002...............................................................    574
     2003...............................................................    574
     2004...............................................................    348
     2005...............................................................    130
                                                                         ------
     Minimum lease payments.............................................  2,205
     Less: Amount representing interest.................................   (305)
                                                                         ------
     Present value of minimum lease payments............................  1,900
     Amount due within one year.........................................   (445)
                                                                         ------
     Amount due after one year.......................................... $1,455
                                                                         ======
</TABLE>

 
Note 5 Credit Facilities
 
   The Company entered into a line of credit agreement (the "Line") with a
financing institution (the "Lender") on April 12, 1999 to make available up to
an aggregate principal amount of $5,000,000. The Line is available in minimum
advances of $1,000,000 with each advance to be evidenced by a note bearing
interest at 12% per annum. The agreement requires that each note shall be
payable in 36 monthly installments of principal and interest. The assets of the
Company are pledged as collateral for the loan agreement. Under the Line, the
Company is required to maintain certain negative and financial covenants, which
require, among other things, written consent from the Lender prior to the
declaration and payment of dividends and sale of material assets of the
Company. The Company did not draw money under this agreement in 1999. In
connection with this Line the Company issued 533,334 warrants to purchase
Series B convertible preferred stock at an exercise price of $1.50 per share
(Note 6).
 
   In January 2000, the Company exercised its right to extend its draw period
relating to the Line entered into with the Lender in April 1999 from an
original draw expiration date of January 2000 to October 2000. In conjunction
with the draw period extension, the Company issued the Lender a warrant to
purchase 112,500 shares of the Company's Series C preferred stock at a price of
$4.00 per share (Note 6). In April 2000, the Company drew down a total of
$5,000,000 against the line. The note was subsequently repaid in full in
July 2000.
 
   In August 1999, the Company entered into an agreement with a leasing company
for a leasing line of credit of $1,000,000. Amounts borrowed under this
agreement bear interest at a rate of 11.154% and are collateralized by leased
assets. At December 31, 1999, the Company had not utilized this line of credit.
At December 31, 2000, the Company leased one of the stereolithography machines
against this leasing line of credit.
 
                                       47

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   In August 1999, the Company entered into an agreement with a leasing company
for a leasing line of credit of $2,000,000. Amounts borrowed under this
agreement bear interest at a rate of 12.00% and are collateralized by leased
assets. At December 31, 1999, the Company had not borrowed against this line of
credit. The line of credit expired in June 2000.
 
Note 6 Convertible Preferred Stock
 
   Upon occurrence of the initial public offering (Note 1) all outstanding
shares of convertible preferred stock were converted into shares of common
stock. In accordance with the articles of incorporation the conversion price
was $0.50 for Series A, $1.50 for Series B, $4.00 for Series C and $9.43 for
Series D preferred stock. As a result of the revised conversion price for
Series D preferred stock the Company issued 26,998,290 shares of common stock
upon conversion of outstanding preferred stock.
 
   Convertible preferred stock consists of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                December 31,
                                                              ----------------
                                                                2000    1999
                                                              -------- -------
<S>                                                           <C>      <C>
Series A: 4,350 shares authorized, issued and outstanding at
 December 31, 2000 and 1999 (liquidation preference at
 December 31, 2000 $2,175)..................................  $  2,164 $ 2,164
Series B: 7,650 shares authorized; 6,717 shares issued and
 outstanding at December 31, 2000 and 1999 (liquidation
 preference at December 31, 2000 $10,076)...................    10,059  10,059
Series C: 5,313 shares authorized; 5,186 shares issued and
 outstanding at December 31, 2000 and 1999 (liquidation
 preference at December 31, 2000 $20,745)...................    19,490  19,490
Series D: 9,898 shares and none authorized at December 31,
 2000 and 1999, respectively, 9,535 shares and none issued
 and outstanding at December 31, 2000 and 1999, respectively
 (liquidation preference at December 31, 2000 $101,310).....    97,160     --
                                                              -------- -------
                                                              $128,873 $31,713
                                                              ======== =======
</TABLE>

 
 Sale of preferred securities
 
   In May, June and October 2000, the Company sold 9,535,052 shares of Series D
preferred shares for gross proceeds of $101,272,000. Included in the 9,535,052
total shares issued, the Company issued 1,321,202 Series D shares upon the
conversion of the Convertible Subordinated Promissory Notes financing (the
"Notes") and associated interest as discussed below. The issuance of Series D
convertible preferred stock resulted in a beneficial conversion feature,
calculated in accordance with Emerging Issues Task Force Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios." Accordingly, the Company has
recognized $47,564,000 as a charge to additional paid in capital to account for
the deemed dividend on the preferred stock as of the issuance as of December
31, 2000. As noted, the Series D preferred shares have certain contingent
rights and preferences that were perfected and caused the Company to record an
incremental beneficial conversion feature charge.
 
   The Company has accounted for a beneficial conversion feature embedded in
convertible subordinated notes (the "Notes") entered into on May 15, 2000. The
beneficial conversion feature, amounting to $7,689,000, represents an
additional interest yield on the debt which may be converted at any time at the
option of the holders into immediately convertible preferred stock.
Accordingly, the beneficial conversion feature has been recorded as an
immediate charge to interest expense in May 2000. Under the terms of the loan
agreement, the Notes and associated accrued interest were converted into the
Company's convertible Series D preferred stock ("Series D shares") in May 2000.
The Company sold the Notes, in the aggregate face amount of $14,000,000,
bearing a stated interest rate of 10% per annum and a maturity date one month
from the date of issuance.
 
                                       48

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   In accordance with the Company's certificate of incorporation, as amended in
connection with the Series D preferred stock sale, as of December 31, 2000, as
the Company has issued 1,257,614 shares of common stock in excess of the
3,331,978 shares of common stock permitted, as defined in the certificate of
incorporation, the Company will be required to issue additional 419,700 shares
of common stock upon the conversion of the preferred stock. As a result, the
additional shares issued upon conversion of Series D result in a beneficial
conversion feature, calculated in accordance with Emerging Issues Task Force
Issue No. 98-5. The Company recognized a deemed dividend based on the fair
value of the common stock at the commitment date of $5,952,000 related to the
preferred stock sold and a charge to interest expense of $959,000 for the
beneficial conversion feature embedded in the convertible subordinated notes
that previously converted.
 
   As of January 25, 2001, because the Company has issued 3,591,458 shares of
common stock in excess of the 3,331,978 shares of common stock permitted, as
defined in the certificate of incorporation, the Company is required to issue
790,342 shares of common stock upon the conversion of the preferred stock in
addition to 419,700 shares as of December 31, 2000. As a result, the Company
recorded a deemed dividend based on the fair value of the common stock at the
commitment date of $11,191,000 related to the preferred stock sold and a charge
to interest expense of $1,803,000 for the beneficial conversion feature
embedded in convertible subordinated notes, that previously converted, in
January 2001.
 
 Convertible subordinated note
 
   During 1999, the Company issued $750,000 in convertible subordinated notes
payable to certain preferred stockholders. The amount subsequently converted
into 187,500 shares of Series C convertible preferred stock at $4.00 per share.
 
 Convertible preferred stock
 
   The rights, preferences and privileges of Series A, Series B, Series C and
Series D preferred stock are as follows:
 
 Voting rights
 
   Holders of Series A, Series B, Series C and Series D preferred stock are
entitled to one vote for each share of common stock into which such shares can
be converted. Certain votes, as defined in the Company's Articles of
Incorporation, require the approval of at least a majority of Series A, Series
B, Series C and Series D preferred stock stockholders. The holders of Series A
and Series B preferred stock, voting as separate classes, are each entitled to
elect one member to the Company's Board of Directors. Beginning January 1,
2001, the holders of the Series D preferred stock are entitled to elect one
member of the Company's Board of Directors in the event that the Company has
not yet closed an initial public offering of its common stock at that time. The
holders of common stock and Preferred Stock, voting together as a single class,
are entitled to elect all remaining members of the Board of Directors.
 
 Dividends
 
   The holders of Series A, Series B, Series C and Series D preferred stock are
entitled to noncumulative dividends, when and if declared by the Board of
Directors, in the amount of $0.04, $0.12, $0.32 and $0.85, respectively, per
share per annum, on each outstanding share of Series A, Series B, Series C and
Series D preferred stock, subject to certain adjustments. No dividends have
been declared or paid as of December 31, 2000.
 
                                       49

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Conversion rights
 
   Shares of Series A, Series B, Series C and Series D preferred stock are
convertible into common stock at the option of the holder or automatically upon
a public offering of at least $75,000,000 of common stock or upon the written
consent of the holders of more than two-thirds of the then outstanding shares
of Series A, Series B, Series C and Series D preferred stock. The conversion
rate is one share of common stock for one share of preferred stock (subject to
certain adjustments). In the event of a sale of common stock below any
preferred stock conversion price, such preferred stock conversion price shall
be adjusted. In addition, in the event that the Company issues more than
3,331,978 additional shares of common stock, as defined, before the earlier of
January 31, 2001, or the effectiveness of a registration statement, the Series
D conversion price will be adjusted as of such date. As of December 31, 2000,
the Company has issued 1,257,614 stock options above the 3,331,978 shares as
defined above. As a result the Series D stockholders would receive an
additional 419,700 shares of common stock upon conversion of the preferred
stock.
 
 Liquidation
 
   In the event of liquidation or sale of the Company, each class of preferred
stock shall be entitled to be paid out of the assets of the Company an amount
of $0.50, $1.50, $4.00 and $10.625, respectively, for the Series A, Series B,
Series C and Series D, plus all declared but unpaid dividends relating to
preferred stock.
 
   Holders of Series D preferred stock have preference over holders of Series
A, Series B, Series C and common stockholders. Holders of Series C preferred
stock have preference over holders of Series A and Series B preferred stock and
common stockholders. Holders of Series B preferred stock have preference over
holders of Series A preferred stock. Holders of Series A preferred stock have
preference over common stockholders.
 
   The remaining assets of the Company shall be distributed among all
stockholders on an as-if-converted basis until such time as the Series D
preferred stockholders have received $31.875 per share, Series C preferred
stockholders have received $8.00 per share, the Series B preferred stockholders
have received $4.50 per share and the Series A preferred stockholders have
received $2.00 per share. The remaining assets of the Company shall then be
distributed ratably to the common stockholders.
 
   The following events are considered a liquidation: (i) any consolidation,
merger or corporate reorganization in which the stockholders immediately prior
to such transaction own less than 50% of the Company's voting power immediately
after the transaction; or any transaction or series of related transactions in
which in excess of 50% of the Company's voting power is transferred and (ii) a
sale, lease or other disposition of all or substantially all of the Company's
assets.
 
 Warrants
 
   In April 1999, in connection with a financing arrangement, the Company
issued 533,334 warrants to purchase Series B convertible preferred stock at
$1.50 per share. The warrants are exercisable for a period of ten years from
the date of issuance or 5 years from the Company's initial public offering of
common stock, whichever is shorter. The fair value of the warrants of
$1,042,000 was calculated using the Black-Scholes pricing method and has been
charged to preferred stock warrants. The related amount is being amortized as
interest expense over the life of the notes. A total of $58,000 and $984,000
were amortized in 2000 and 1999, respectively.
 
   In conjunction with the draw period extension, the Company issued the Lender
a warrant to purchase 112,500 shares of the Company's Series C preferred stock
at a price of $4.00 per share. The warrants are
 
                                       50

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
exercisable for a period of ten years from the date of issuance or 5 years from
the Company's initial public offering of common stock, whichever is shorter.
The fair value of the warrants of $776,000 was calculated using the Black-
Scholes pricing method and has been charged to preferred stock warrants and
amortized as interest expense over the life of the note. A total of $776,000
was amortized as of December 31, 2000.
 
Note 7 Common Stock
 
 Common stock
 
   The holders of common stock, voting as a separate class, may elect two
members of the Board of Directors. Any additional members of the Board of
Directors shall be elected by the holders of common stock and preferred stock
voting together as a class.
 
   The holders of common stock are also entitled to receive dividends whenever
funds are legally available and when declared by the Board of Directors subject
to the prior rights of holders of all classes of stock having priority rights
as to dividends. No dividends have been declared or paid as of December 31,
2000.
 
   On January 4, 2001, the Company's Board of Directors approved a 2 for 1
stock split. All common and preferred stock and per share amounts for all
periods presented in the accompanying financial statements have been restated
to reflect the stock split.
 
 Restricted stock purchase agreement
 
   The Company has sold shares of its common stock to founders of the Company
under agreements which provide for repurchase of the stock by the Company at
the stock's original purchase price upon termination of employment. The
Company's right to repurchase lapses at any time prior to the earlier of: (i)
three years from date of agreement; (ii) the closing of an "Asset Transfer" or
an "Acquisition"; or (iii) the voluntary liquidation, dissolution, or winding
up of the Company. The Company has also sold shares of its common stock to
employees, directors and consultants under the terms of the 1997 Equity
Incentive Plan that includes an early exercise feature. The Company's right to
repurchase under those terms lapses over the vesting period of the underlying
option exercised. At December 31, 2000 and 1999, 3,608,442 and 653,542 shares
of common stock, respectively, were subject to repurchase, including 104,516
shares of common stock which were subject to a right of repurchase at the
Company's discretion until October 2002.
 
Note 8 Stock Options
 
 1997 Equity Incentive Plan
 
   In April 1997, the Company adopted the 1997 Equity Incentive Plan (the
"Plan") under which the Board of Directors may issue incentive and non-
qualified stock options to employees, directors and consultants. The Company
has reserved 9,709,092 shares of common stock for issuance under the Plan. The
Board of Directors has the authority to determine to whom options will be
granted, the number of shares, the term and exercise price. Options are to be
granted at an exercise price not less than fair market value for incentive
stock options or 85% of fair market value for non-qualified stock options. For
individuals holding more than 10% of the voting rights of all classes of stock,
the exercise price of incentive stock options will not be less than 110% of
fair market value. Options become exercisable and vest on a cumulative basis at
the discretion of the Board of Directors but at a rate not less than 20% per
year over five years from the date of grant and generally vest at a rate of 25%
on the first anniversary and 1/48th each month thereafter. The term of the
options is no longer than five years for incentive stock options for which the
grantee owns greater than 10% of the voting power of all classes of stock and
no longer than ten years for all other options.
 
                                       51

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Activity under the Plan is set forth below (in thousands, except per share
data):
 

<TABLE>
<CAPTION>
                                                        Options Outstanding
                                                     ---------------------------
                                                              Weighted
                                            Shares            Average
                                           Available          Exercise Aggregate
                                           for Grant Shares    Price     Price
                                           --------- -------  -------- ---------
<S>                                        <C>       <C>      <C>      <C>
Balances at December 31, 1997.............    1,335      195  $0.0451         9
  Options granted.........................   (1,009)   1,009  $0.1040       105
  Options exercised.......................      --       (92) $0.0543        (5)
  Options cancelled.......................      160     (160) $0.0500        (8)
                                            -------  -------            -------
Balances at December 31, 1998.............      486      952  $0.1061       101
  Increase in pool........................    1,600      --       --        --
  Options granted.........................     (737)     737  $0.1953       144
  Options exercised.......................      --      (331) $0.1269       (42)
  Options cancelled.......................       73      (73) $0.1369       (10)
                                            -------  -------  -------   -------
Balances at December 31, 1999.............    1,422    1,285  $0.1501       193
  Increase in pool........................    5,600      --       --        --
  Options granted.........................   (5,890)   5,890  $0.8564     5,044
  Options exercised.......................      --    (4,121) $0.6863    (2,828)
  Options cancelled.......................      192     (192) $0.3345       (64)
                                            -------  -------            -------
Balances at December 31, 2000.............    1,324    2,862  $0.8194     2,345
                                            =======  =======            =======
</TABLE>

 
   The options outstanding and currently exercisable by exercise price at
December 31, 2000 are as follows (in thousands, except per share data):
 

<TABLE>
<CAPTION>
                   Options Outstanding and Exercisable
           ----------------------------------------------------
                    Number Outstanding     Weighted Average
           Exercise        and                Remaining
            Price      Exercisable     Contractual Life (Years)
           -------- ------------------ ------------------------
     <S>   <C>      <C>                <C>
           $0.05             85                  7.44
            0.15            202                  8.33
            0.30             35                  8.66
            0.40            609                  9.22
            1.07          1,931                  9.83
                          -----
                          2,862
                          =====
</TABLE>

 
                                       52

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation." Had compensation cost for the Incentive Stock Plan been
determined based on the fair value at the grant date for awards during 2000,
consistent with the provisions of SFAS No. 123, the Company's pro forma net
loss and pro forma net loss per share would have been as follows (in thousands,
except per share amounts):
 

<TABLE>
<CAPTION>
                                                        December 31,
                                                 ----------------------------
                                                   2000       1999     1998
                                                 ---------  --------  -------
<S>                                              <C>        <C>       <C>
Net loss available to common stockholders, as
 reported....................................... $(142,264) $(15,415) $(3,775)
Net loss available to common stockholders, pro
 forma.......................................... $(142,363) $(15,435) $(3,777)
Net loss per share available to common
 stockholders, as reported, basic and diluted... $  (25.64) $  (3.65) $ (1.33)
Net loss per share available to common
 stockholders, pro forma, basic and diluted..... $  (25.66) $  (3.66) $ (1.33)
</TABLE>

 
   Such pro forma disclosure may not be representative of future compensation
cost because options vest over several years and additional grants are
anticipated to be made each year.
 
   The value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted assumptions:
 

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                -------------------------------
                                                  2000       1999       1998
                                                ---------  ---------  ---------
   <S>                                          <C>        <C>        <C>
   Risk-free interest rate..................... 5.17-6.71% 4.91-6.03% 4.22-5.63%
   Expected life...............................   5 years    5 years    5 years
   Expected dividends..........................         0%         0%         0%
</TABLE>

 
   Volatility was not included in the calculation of the fair value of options
grants as the Company's equity securities were not publicly traded at the time
of grant.
 
   The weighted average per share fair values of options granted during the
year ended December 31, 2000, 1999 and 1998 were $16.878, $3.285 and $0.06,
respectively.
 
 2001 Stock Incentive Plan
 
   On January 4, 2001, the Board of Directors adopted the 2001 Stock Incentive
Plan (the "2001 Plan"). The 2001 Plan, which will terminate no later than 2011,
provides for the granting of incentive stock options, non statutory stock
options and restricted stock purchase rights and stock bonuses to employees,
and consultants. A total of 8,000,000 shares of common stock have been
authorized for issuance under the 2001 Plan. The 2001 Plan was approved by the
Stockholders prior to the Initial Public Offering. No options have been granted
under this plan as of December 31, 2000.
 
 Employee Stock Purchase Plan
 
   On January 4, 2001, the Board of Directors adopted the Employee Stock
Purchase Plan (the "Purchase Plan"), authorizing the issuance of 1,500,000
shares of common stock pursuant to purchase rights granted to in the United
States employees. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended. The Purchase Plan was approved by the Stockholders prior to
the Initial Public Offering. As of December 31, 2000, no shares of common stock
have been purchased under the Purchase Plan.
 
                                       53

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Purchase Plan permits eligible employees to purchase common stock at a
discount through payroll deductions during defined offering periods. The price
at which stock is purchased under the purchase plan is equal to 85% of the
fair market value of the common stock on the first day of the offering period
or 85% of the fair market value on the subsequent designated purchase dates,
whichever is lower. The initial offering period will commence on January 25,
2001.
 
 Stock-based compensation
 
   During the year ended December 31, 1999, the Company recorded deferred
stock-based compensation for the excess of the deemed fair market value over
the exercise price at the date of grant of $1,772,000 related to options
granted to employees. The Company has recorded additional deferred stock-based
compensation of $87,687,000 related to options issued to employees to purchase
common stock issued through December 31, 2000. The compensation expense is
being recognized over the option vesting period of four years using the
straight-line method. For the years ended December 31, 2000 and 1999, the
Company recorded amortization of stock-based compensation of $11,252,000 and
$267,000, respectively, in connection with options granted to employees.
 
   During the year ended December 31, 1999, the Company recorded deferred
stock-based compensation $402,000 related to options granted to consultants.
For options granted to consultants, the Company determined the fair value of
the options using the Black-Scholes pricing model. The Company has recorded
additional deferred stock-based compensation of $4,065,000 related to options
issued to consultants to purchase common stock issued through December 31,
2000. The compensation expense is being recognized over the option vesting
period of four years, using the method presented by FIN 28. For the years
ended December 31, 2000 and 1999, the Company recorded amortization of stock-
based compensation of $2,120,000 and $127,000, respectively, in connection
with options granted to consultants.
 
   Amortization of deferred stock compensation has been allocated to cost of
revenues, sales and marketing, general and administrative and research and
development expenses as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                   ------------
                                                                    2000   1999
                                                                   ------- ----
   <S>                                                             <C>     <C>
   Cost of revenues............................................... $ 2,939 $ 80
   Sales and marketing............................................   2,357  111
   General and administrative.....................................   5,345  106
   Research and development.......................................   2,731   97
                                                                   ------- ----
                                                                   $13,372 $394
                                                                   ======= ====
</TABLE>

 
   There was no amortization of deferred stock-based compensation for the year
ended December 31, 1998.
 
   From January 1, 2001 through January 25, 2001, the Company granted 333,844
options to purchase common stock under its 1997 Plan, and additional option
grants outside of the 1997 Plan, which were approved by the stockholders prior
to the Initial Public Offering, to purchase 1,000,000 shares, at an exercise
price of $15.00 per share, to each of the Company's Chief Executive Officer
and President. The options granted under the 1997 Plan were issued at an
exercise price of $1.07 per share, and as a result the Company will record
gross incremental deferred stock-based compensation of $4.0 million in the
first quarter of 2001.
 
                                      54

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Accelerated Vesting
 
   During the fiscal 2000, the Company accelerated the vesting of options to
several employees in connection with a severance package. The acceleration was
accounted for in accordance with FIN 44 as a one time charge of $429,000 to the
statement of operations. The charge was equal to the intrinsic value difference
between the exercise price of the accelerated options and the fair value of the
common stock on the date of acceleration.
 
Note 9 Income Taxes
 
   No provision for federal or state income taxes has been recorded for the
year ended December 31, 2000 and 1999 as the Company incurred net operating
losses.
 
   Deferred tax assets and liabilities consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     --------------------------
                                                       2000     1999     1998
                                                     --------  -------  -------
   <S>                                               <C>       <C>      <C>
   Deferred tax assets:
     Start-up costs................................. $  1,920  $ 2,514  $ 1,014
     Net operating loss carryforwards...............   28,830    3,968      695
     Research and development credit................    1,128      606      219
     Other..........................................      645      181       (4)
                                                     --------  -------  -------
   Deferred tax assets..............................   32,523    7,269    1,924
   Less: Valuation allowance........................  (32,523)  (7,269)  (1,924)
                                                     --------  -------  -------
   Net deferred tax asset........................... $    --   $   --   $   --
                                                     ========  =======  =======
</TABLE>

 
   Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against all of its net deferred tax assets. At such time as it is determined
that it is more likely than not that the deferred tax assets are realizable,
the valuation allowance will be reduced. The valuation allowance increased
$25,254,000, $5,345,000 and $1,635,000 during 2000, 1999 and 1998,
respectively.
 
   At December 31, 2000, 1999 and 1998, the Company had federal and state net
operating loss carry forwards of approximately $75,912,000, $11,531,000 and
$1,700,000, respectively, available to offset future regular and alternative
minimum taxable income. The Company's federal and state net operating loss
carry forwards will begin to expire in 2017 for federal purposes and 2005 for
state purposes if not utilized.
 
   At December 31, 2000, 1999 and 1998, the Company had federal and state
research and experimentation tax credit carry forwards of approximately
$1,128,000, $606,000 and $219,000, respectively, available to offset future
income tax liabilities. The Company's federal research and experimentation
credit will begin to expire in 2017.
 
   The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carry forwards in certain situations where changes occur in the stock
ownership of a Company. If the Company should have an ownership change, as
defined by the tax law, utilization of the carry forwards could be restricted.
 
                                       55

<PAGE>
 
                     ALIGN TECHNOLOGY, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 10 Supplemental Cash Flow Information
 
   The supplemental cash flow information consists of the following (in
thousands):
 

<TABLE>
<CAPTION>
                                                            Year Ended December
                                                                    31,
                                                            -------------------
                                                             2000    1999  1998
                                                            ------- ------ ----
<S>                                                         <C>     <C>    <C>
Taxes paid................................................. $     1 $    1 $  4
                                                            ======= ====== ====
Interest paid.............................................. $   382 $  614 $ --
                                                            ======= ====== ====
Non-cash investing and financing activities:
  Note receivable for preferred stock...................... $    75 $  --  $ 76
                                                            ======= ====== ====
  Note receivable for common stock......................... $ 1,791 $  --  $ --
                                                            ======= ====== ====
  Fixed assets acquired under capital lease................ $ 2,209 $  --  $ 14
                                                            ======= ====== ====
  Fixed assets acquired with accounts payable or accrued
   liabilities............................................. $ 5,257 $  643 $ --
                                                            ======= ====== ====
  Accrual for IPO costs.................................... $   557 $  --  $ --
                                                            ======= ====== ====
  Issuance of warrants in conjunction with line of credit
   financing............................................... $   776 $1,042 $ --
                                                            ======= ====== ====
  Deferred stock-based compensation........................ $91,752 $2,174 $ --
                                                            ======= ====== ====
  Conversion of convertible subordinated notes into
   convertible preferred stock............................. $14,000 $  750 $ --
                                                            ======= ====== ====
</TABLE>

 
Note 11 Employee Benefit Plan
 
   In January 1999, the Company adopted a defined contribution retirement plan
under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all employees who meet minimum age and service requirements and
allows participants to defer a portion of their annual compensation on a pre-
tax basis. Company contributions to the plan may be made at the discretion of
the Board of Directors. There have been no contributions by the Company since
the inception of the plan.
 
Note 12 Related Party Transactions
 
 Loan to Officer
 
   In September 2000, the Company issued a loan in the amount of $95,000 at a
rate of 6% per annum to the Company's Vice President of Corporate Strategy. The
loan is due on demand, but in no event later than September 19, 2001. However,
the Company plans to forgive the loan as of the first anniversary of the
issuance date.
 
 Employee Notes Receivable
 
   In November through December 2000, the Company loaned $1,790,948 to certain
employees and officers for the exercise of incentive stock options. All of the
full recourse notes accrue interest at 9.5% and are due on the second
anniversary of the issuance date. The notes are secured by the shares of common
stock held by the employees.
 
Note 13 Subsequent Events
 
   On March 15, 2001, the underwriters for the initial public offering
exercised an overallotment option for 628,706 shares of common stock at a price
$13.00 per share. The aggregate proceeds amount to approximately $7.6 million,
after deducting underwriting discounts and commissions.
 
                                       56

<PAGE>
 

I
TEM 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 Form 10-K
because the Company will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Form 10-K, and certain information to be
included therein is incorporated herein by reference.
 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
   The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Election of Directors."
 

ITEM 11. EXECUTIVE COMPENSATION.
 
   The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation."
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
   The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Security Ownership of Certain
Beneficial Owners and Management."
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
   The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Certain Relationships and Related
Transactions."
 

                                    PART IV
 

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
   (a) Financial Statement Schedules and Exhibits
 
   1. Financial Statement Schedules
 
     None.
 
   2. Exhibits
 
     Exhibits submitted with the Annual Report on Form 10-K as filed with the
  Securities and Exchange Commission and those incorporated by reference to
  other filings are listed on the Exhibit Index.
 
   (b) Reports on Form 8-K
 
   None.
 
                                       57

<PAGE>
 
                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 
 <C>     <S>
  3.1*   Amended and Restated Certificate of Incorporation of registrant.
 
  3.2*   Amended and Restated Bylaws of registrant.
 
  4.1*   Form of Specimen Common Stock Certificate.
 
 10.1*   Amended and Restated Investors' Rights Agreement, among registrant and
         certain of its stockholders, dated September 16, 2000.
 
 10.2*+  Employment Agreement between registrant and Stephen Bonelli, dated
         November 6, 2000.
 
 10.3*   Lease and License Agreement by and between Pakistan Services Ltd. and
         registrant for its manufacturing space in Pakistan located at Pearl
         Continental, Pavilion 44, Lahore, Pakistan, dated March 4, 1999.
 
 10.4*   Lease Agreement by and between James Lindsay and registrant, dated
         June 20, 2000, for office space located at 881 Martin Avenue, Santa
         Clara, CA.
 
 10.5*   Sublease Agreement by and between GW Com, Inc. and registrant, dated
         July 2000, for office space located at 851 Martin Avenue, Santa Clara,
         CA.
 
 10.6*   Lease Agreement by and between registrant and Saadia Kahwar Khan
         Chishti for manufacturing space in Pakistan located at the Bhallah
         House, Bhalla Stop, Multan Road, Lahore, Pakistan dated September 1,
         2000.
 
 10.7*   Shelter Services Agreement between registrant and Elamex, S.A. de C.V.
         dated February 16, 2000.
 
 10.8*   Joint Development Agreement by and between registrant and 3D Systems
         dated September 9, 1999.
 
 10.9*   Loan and Security Agreement by and between Comdisco Inc. and
         registrant, dated April 12, 1999.
 
 10.10*  Secured Promissory Note Agreement by and between Comdisco Inc. and
         registrant, dated April 12, 2000.
 
 10.11*  Warrant Agreement, dated April 12, 1999, by and between Comdisco and
         registrant.
 
 10.12*  Warrant Agreement, dated January 7, 2000, by and between Comdisco and
         registrant.
 
 10.13*+ Registrant's 2001 Stock Incentive Plan.
 
 10.14*+ Registrant's Employee Stock Purchase Plan.
 
 10.15*  Form of Indemnification Agreement by and between registrant and its
         Board of Directors.
 
 21.1*   Subsidiaries of Registrant.
 
 23.1    Consent of PricewaterhouseCoopers LLP, Independent Accountants.
 
 24.1    Power of Attorney (see signature page)
</TABLE>

--------
* Incorporated herein by reference to the corresponding exhibit to Registrant's
  Form S-1, as amended, filed with the Securities and Exchange Commission on
  November 14, 2000 (File No. 333-49932).
 
+ Management contract or compensatory plan or arrangement filed as an Exhibit
  to this form pursuant to Items 14(a) and 14(c) of Form 10-K.
 
                                       58

<PAGE>
 

                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001.
 
                                          ALIGN TECHNOLOGY, INC.
 
                                                    /s/ Zia Chishti
                                          By: _________________________________
                                                        Zia Chishti
                                                Chief Executive Officer and
                                                   Chairman of the Board
 
                               POWER OF ATTORNEY
 
   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Zia Chishti and Stephen Bonelli, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Annual Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by
virtue thereof.
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 

<TABLE>
<CAPTION>
                Name                              Title                    Date
                ----                              -----                    ----
 
<S>                                  <C>                              <C>
        /s/ Zia Chishti              Chief Executive Officer and      March 30, 2001
____________________________________  Chairman of the Board
            Zia Chishti               (Principal Executive Officer)
 
      /s/ Stephen Bonelli            Chief Financial Officer and      March 30, 2001
____________________________________  Vice President, Finance
          Stephen Bonelli             (Principal Accounting Officer)
 
        /s/ Kelsey Wirth             President and Director           March 30, 2001
____________________________________
            Kelsey Wirth
 
        /s/ Brian Dovey              Director                         March 30, 2001
____________________________________
            Brian Dovey
 
        /s/ Joseph Lacob             Director                         March 30, 2001
____________________________________
            Joseph Lacob
 
         /s/ Mark Logan              Director                         March 30, 2001
____________________________________
             Mark Logan
 
       /s/ H. Kent Bowen             Director                         March 30, 2001
____________________________________
           H. Kent Bowen
</TABLE>

 
                                       59





<PAGE>
 
                                                                    EXHIBIT 23.1
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
   We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-55020) of Align Technology, Inc. and
subsidiary, of our report dated February 9, 2001, except for Note 13 which is
as of March 15, 2001, relating to the consolidated financial statements, which
appears in this Form 10-K. We also consent to the reference to us under the
heading "Selected Consolidated Financial Data" in such Registration Statement.
 
PricewaterhouseCoopers LLP
San Jose, California
March 30, 2001