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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                             FORM 10-K ANNUAL REPORT

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                          COMMISSION FILE NO. 000-22755

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

                              COMPUTER MOTION, INC.
             (Exact name of Registrant as specified in its charter)


             DELAWARE                                        77-0458805
   (State or other jurisdiction                            (I.R.S. Employer
 of incorporation or organization)                        Identification No.)


                               130-B CREMONA DRIVE
                                GOLETA, CA 93117
                    (Address of principal executive offices)


                                 (805) 968-9600
              (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, $.001 PAR VALUE
                                (Title of Class)

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

        Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days.   Yes [X]  No ___

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, or will not be contained, to
the best of the Registrant's knowledge, in definitive proxy information
statement 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 the voting stock held by non-affiliates of
the Registrant was approximately $58.4 million at March 22, 1999 when the
closing sale price of such stock, as reported on the NASDAQ National Market was
$9.00 per share.

        The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of March 22, 1999 was 8,404,479 shares.

        Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference in Parts II and IV. Portions of
the Proxy Statement dated March 26, 1999 are incorporated by reference in Part
III.

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                                     PART I
ITEM 1. BUSINESS

        This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the securities exchange act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to "Risk Factors that May Affect Future
Results" below.

COMPANY OVERVIEW

        Computer Motion, Inc. ("Computer Motion" or the "Company") is committed
to developing, manufacturing and marketing proprietary robotic and computerized
surgical systems that are intended to enhance a surgeon's performance and
centralize and simplify the surgeon's control of the operating room ("OR").

        The Company believes that its products have the potential to
revolutionize surgery and the OR by providing surgeons with the precision and
dexterity necessary to perform complex, minimally invasive surgical procedures,
and by enabling surgeons to control critical devices in the OR through simple
verbal commands. Computer Motion believes that its products have the potential
to broaden the scope and increase the effectiveness of minimally invasive
surgery ("MIS"), improve patient outcomes and create a safer, more efficient and
cost effective OR.

        Traditionally, the vast majority of all surgeries have been open,
requiring large incisions measuring up to 18 inches to access the operative
site. Although this approach can be highly effective, it often results in
significant trauma, pain and complications, as well as significant costs related
to lengthy convalescent periods for the patient. In an effort to minimize these
negative factors, minimally invasive surgical techniques and related
technologies have been developed. MIS is as effective as traditional open
surgery while offering patients substantially reduced pain and trauma, shortened
convalescent periods and decreased overall patient care costs. While these
benefits are significant, the minimally invasive approach presents challenges to
surgeons, including the intricate reconstruction of patient tissue by suturing,
delicate manipulation of small anatomical features and constrained access to,
and limited visualization of, the operative site.

        Computer Motion's vision is to bring the power of computers and robotics
to the operating room to facilitate a surgeon's ability to perform complex
surgical procedures and enable new, minimally invasive microsurgical procedures
that are currently very difficult or impossible to perform. The Company's
products are intended to provide better visualization and improved dexterity for
the surgeon, particularly for minimally invasive techniques.

        The Company currently markets the Automated Endoscopic System for
Optimal Positioning ("AESOP(R)"), a surgical robot capable of positioning an
endoscope in response to a surgeon's verbal commands. AESOP approximates the
form and function of a human arm and allows control of the endoscope through
simple verbal commands, eliminating the need for a member of a surgical staff to
manually control the camera, while providing a more stable and sustainable
endoscopic image. The Company estimates that over 60,000 MIS procedures have
been successfully assisted by AESOP in over 400 hospitals and surgery centers
around the world.

        The Company's product development strategy is intended to leverage
AESOP's broad-based technology platform, and lead to a family of products that
improve the control of devices in the operating room and enable new minimally
invasive surgical procedures. To centralize and simplify control of the OR,
Computer Motion is developing the HERMES(TM) Control Center for the voice
control of medical devices in the operating room. To enable new minimally
invasive microsurgery procedures, such as endoscopic coronary artery bypass
grafting ("E-CABG(TM)"), the Company is developing the ZEUS(TM) Robotic Surgical
System.


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        The modernization of the OR has resulted in numerous medical devices
that aid a surgeon, but also increase the complexity and costs of the OR. In
many instances, these devices are manually controlled and monitored by someone
other than a surgeon in response to a surgeon's spoken commands and request for
status. The HERMES Control Center is designed to enable a surgeon to directly
control multiple OR devices, including the Company's AESOP, through simple
verbal commands. HERMES provides standardized visual and digitized voice
feedback to a surgical team. The Company believes that the enhanced control and
feedback provided by HERMES can improve safety, increase efficiency, shorten
procedure times and reduce costs.

        The ZEUS Robotic Surgical System is designed to improve a surgeon's
ability to perform complex surgical procedures and enable new, minimally
invasive microsurgical procedures that are currently impossible or very
difficult to perform. The Company believes that ZEUS will improve a surgeon's
dexterity and precision and enhance visualization of, and access to, confined
operative sites. The Company believes that new MIS procedures performed with
ZEUS can, like currently available MIS procedures, result in reduced pain and
trauma, fewer complications, lessened cosmetic concerns and shortened
convalescent periods and will increase the number of patients qualified for
certain surgical procedures.

AESOP PRODUCT LINE

        Computer Motion's AESOP is a surgical robot capable of positioning an
endoscope (a specially designed optical tube which, when connected to a medical
video camera and light source, is passed into the body to allow the surgeon to
view the operative site on a video monitor) in response to a surgeon's verbal
commands. This allows the surgeon to have very direct control over the endoscope
in minimally invasive surgical procedures.

        The Company believes that AESOP is the world's first Food and Drug
Administration ("FDA") cleared surgical robot and incorporates the world's first
FDA-cleared voice control interface for use in the operating room. AESOP was
first introduced in the fourth quarter 1994. Since then, the Company estimates
that over 60,000 minimally invasive surgical procedures have been successfully
assisted by AESOP in over 400 hospitals and surgery centers around the world.

        AESOP 2000 with voice control was introduced in the fourth quarter 1996.
AESOP 3000, introduced in December 1997, is the world's first FDA-cleared
surgical robot capable of assisting in new advanced minimally invasive
cardiothoracic procedures. The AESOP 3000 robotic arm features added flexibility
and functionality over its predecessor, providing the range of motion necessary
for endoscopic viewing in the thoracic (chest) cavity.

        Computer Motion is leveraging the core technologies underlying AESOP to
develop the HERMES Control Center and the ZEUS Robotic Surgical System.

HERMES PRODUCT LINE

        Computer Motion's HERMES Control Center is designed to serve as a
centralized and simplified interface for a surgeon to voice-control multiple
medical devices in the operating room. HERMES has the potential to increase the
effectiveness of a surgical team by enhancing the efficiency and safety of
surgical procedures, while reducing operating room costs.

        HERMES is comprised of a control unit which can be networked with
multiple HERMES-compatible devices and is controlled by a surgeon using simple
verbal commands or an interactive touch screen pendant. The devices controlled
by HERMES which are currently FDA-cleared include the


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endoscopic camera and light source, insufflator, arthroscopic shaver, VCR, video
printer, video frame grabber and Computer Motion's AESOP. The HERMES system
provides both visual and digitized voice feedback to the surgical team. The
visual feedback is displayed on the endoscopic video monitor and the digitized
voice feedback is device-specific. Both feedback features are customizable by a
surgeon in real time, allowing a surgeon to modify the amount and type of
feedback received.

        To leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic markets, Computer Motion has partnered with
Stryker Corporation, a leading manufacturer of endoscopic equipment. Stryker
will purchase HERMES on an original equipment manufacturer ("OEM") basis and
will market HERMES as an integrated component of several of its laparoscopic and
arthroscopic products. The Company expects to make additional 510(k) submissions
to the FDA in 1999 for HERMES control of Stryker's arthroscopic pump, Berchtold
Corporation's OR overhead cameras and lights, and STERIS Corporation's OR table
and overhead cameras and lights.

        Computer Motion intends to partner with other leading medical device
manufacturers to expand the number and type of devices to be integrated with
HERMES, including electrocautery devices, various imaging systems and devices
for the cardiac catheter laboratory and other medical clinic environments.

ZEUS PRODUCT LINE

        Computer Motion's ZEUS Robotic Surgical System is designed to
fundamentally improve a surgeon's ability to perform complex, minimally invasive
surgical procedures and to enable new, minimally invasive microsurgical
procedures that are currently very difficult or impossible to perform with
conventional surgical methods. The Company believes that these new minimally
invasive surgical procedures will result in reduced patient pain and trauma,
fewer complications, lessened cosmetic concerns and shortened convalescent
periods, and will increase the number of patients qualified for certain surgical
procedures. Additionally, the Company believes that an increase in minimally
invasive procedures would result in lower overall healthcare costs to patients,
hospitals and healthcare payors.

        ZEUS is comprised of three surgeon-controlled robotic arms, one of which
positions an endoscope while the other two hold disposable and reusable surgical
instruments. The ZEUS robotic arms are directly attached to the surgical table
to maintain a constant orientation to the patient. A surgeon controls the
movement of the robotic arms by manipulating two corresponding robotic
instrument handles which are housed in a mobile console. These instrument
handles are similar to conventional surgical instrument handles. A surgeon's
precise manipulation of the instrument handles is communicated to a proprietary
computer controller which filters, scales and translates the movements to the
robotic surgical instruments. A surgeon can operate these instrument handles
from a comfortable, ergonomic position. The surgeon controls the robotic arm
which holds the endoscope through means of simple verbal commands spoken into a
headset microphone. A video display of the endoscopic image is placed directly
in front of the surgeon, and a second monitor is positioned next to the patient
for use by the other members of the surgical team.

        Computer Motion has commenced Phase I clinical testing with ZEUS and
expects to file an Investigational Device Exemption with the FDA to gain
approval to begin a multi-center clinical evaluation of the product in 1999. The
Company intends to sell ZEUS on a direct basis in North America and co-market
ZEUS with Medtronic, Inc., a leading manufacturer of medical devices, in Europe,
the Middle East and Africa.

        The Company believes that ZEUS will provide clinicians with the
following significant benefits:

IMPROVED PRECISION. ZEUS incorporates technology that is designed to enable a
surgeon to scale his/her movements, allowing manipulation of instruments on a
microsurgical scale while utilizing normal hand and arm movements. For instance,
in microsurgical procedures which involve extremely small anatomical structures
and which utilize sutures ranging from 20 to 40 microns (1/3 to 2/3 the width of
a human hair), if a surgeon selects a scaling ratio of 4 to 1, each one inch
movement by the surgeon would result in a 1/4 inch movement by the robotic
surgical instruments.


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IMPROVED DEXTERITY. ZEUS is designed to enhance a surgeon's performance by
enabling robotic manipulation of surgical instruments, as opposed to hand-held
instruments which are very difficult or impossible to manipulate manually when
performing challenging minimally invasive surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his/her range
of motion to complete a particular movement, such as suturing, without having to
physically contort his/her arms. In addition, in order to gain anatomical access
to certain regions of the body in a minimally invasive manner, the instruments
must be placed in positions that would be extremely difficult for a surgeon to
manipulate manually using conventional minimally invasive surgical techniques
due to the distance between the instruments and their relative positions to each
other.

ELIMINATION OF INVOLUNTARY HAND TREMOR. ZEUS is designed to hold the surgical
instruments and the endoscope in a steady manner, eliminating a surgeon's
incidental and unintended hand motions and tremors which are intensified when
holding surgical instruments for extended periods of time.

ENHANCED TACTILE FEEDBACK. ZEUS is designed to provide a surgeon with
computerized, scalable feedback which enhances and amplifies the surgeon's sense
of touch while grasping delicate tissue as compared to traditional minimally
invasive surgical instruments.

ENHANCED VISUALIZATION. ZEUS incorporates a robotic arm which controls the
endoscope to produce a steady, magnified video image which facilitates
performance of minimally invasive surgical procedures.

IMPROVED MINIMALLY INVASIVE ANATOMICAL ACCESS. ZEUS is designed to provide a
surgeon with access to confined areas in the body and critical anatomical
structures that are currently only accessible by means of highly invasive, open
surgical procedures or multiple "less invasive" incisions. In the case of
cardiac surgery, these less invasive approaches can require multiple 3 to 5 inch
incisions and often involve the removal of rib cartilage. In contrast, ZEUS is
designed to provide a surgeon with complete access to the heart through several
3-5 millimeter ports.

MINIMIZED SURGEON FATIGUE. ZEUS allows a surgeon to operate the surgical
instrument handles in a comfortable, ergonomic position, including sitting down
and positioning his/her forearms on armrests. The Company believes these
enhanced ergonomics can extend the professional lives of surgeons and increase
the efficiency and effectiveness of demanding and lengthy microsurgical
procedures.

MANUFACTURING AND SUPPLIERS

        The Company's manufacturing operations are required to comply with the
FDA's Quality System Regulations ("QSR"), which address the design, controls,
methods, facilities and quality assurance used in manufacturing, packing,
storing and installing medical devices. In addition, certain international
markets have quality assurance and manufacturing requirements. Specifically, the
Company is subject to the compliance requirements of ISO 9001 and 9002
certification and Conformity Europeane ("CE") mark directives which impose
certain procedural and documentation requirements with respect to device design,
development, manufacturing and quality assurance activities. The Company has
obtained such certification and is subject to audit on a semiannual basis for
compliance. The Company's manufacturing capability to date has been limited to
manufacturing moderate quantities of its AESOP product, and limited quantities
of its HERMES and ZEUS products. The Company does not have experience
manufacturing its products in the volumes that will be necessary to achieve
significant commercial sales. The Company may encounter difficulties in scaling
up production of its products, in procuring the necessary supply of materials,
components and contract services, or in hiring and training additional
manufacturing personnel to support domestic and international demand. If the
Company is unable to achieve commercial-scale production capability on a timely
basis with acceptable quality and manufacturing yields and costs, or to achieve
FDA and other governmental approvals, the ability of the Company to deliver
products on a timely basis could be impaired.


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COMPETITION

        The Company is aware that there are other companies working on design
and development of both endoscope holding robots and surgical robots, as well as
voice control of medical devices. Beyond direct competition, there is
significant indirect competition. Many medical conditions that can be treated by
the Company's products can also be treated with pharmaceuticals or other medical
devices and procedures. Many of these alternative treatments are widely accepted
in the medical community and have a long history of use.

MARKETING

        The Company's products are sold throughout the world. Payment terms
worldwide are consistent with local practice. Orders are shipped as they are
received and, therefore, no material backlog exists. No distributor organization
or single customer accounted for more than 10% of 1998 revenue except for
Stryker Corporation which accounted for $1,501,000 (14%) of 1998 revenue. In the
United States, the Company sells directly to hospitals through an employee based
sales organization. In Western Europe, the Company is developing an employee
based sales organization which will be principally focused on sales in France
and Germany. The Company intends to co-market the ZEUS product line with
Medtronic, Inc. in Europe, the Middle East and Africa. Throughout the rest of
the world, the Company uses independent distributor organizations including the
Ethicon Endo-Surgery Division of Johnson & Johnson, Inc. Under the Company's OEM
agreement with Stryker Corporation, Stryker may distribute the Company's HERMES
product for control of various Stryker endoscopic devices on a worldwide basis.

RESEARCH AND DEVELOPMENT

        The Company's research and development function is focused on the
development of new medical products and improvements to existing products. In
addition, research and development expense reflects the Company's efforts to
obtain FDA approval of certain products and processes and to maintain the
highest quality standards of existing products. The Company's research and
development expenses were $7,905,000 (75% of revenue), $4,149,000 (63% of
revenue) and $1,359,000 (34% of revenue) in 1998, 1997 and 1996, respectively.

GOVERNMENT REGULATION

        The medical devices manufactured and marketed by the Company are subject
to regulation by the FDA and, in most instances, by state and foreign
governmental authorities. Under the Federal Food, Drug and Cosmetic Act, and
regulations thereunder, manufacturers of medical devices must comply with
certain policies and procedures that regulate the composition, labeling,
testing, manufacturing, packaging and distribution of medical devices. Medical
devices are subject to different levels of government approval requirements, the
most comprehensive of which require the completion of an FDA approved clinical
evaluation program and submission and approval of a pre-market approval ("PMA")
application before a device may be commercially marketed. The Company's ZEUS
product may be subject to a PMA.

        In addition, the FDA may require testing and surveillance programs to
monitor the effect of approved products which have been commercialized and it
has the power to prevent or limit further marketing of a product based on the
results of these post-marketing programs. The FDA also conducts inspections to
determine compliance with both good manufacturing practice regulations and
medical device reporting regulations. If the FDA were to conclude that the
Company was not in compliance with applicable laws or regulations, it could
institute proceedings to detain or seize products, issue a recall,


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impose operating restrictions, assess civil penalties against employees and
recommend criminal prosecution. Furthermore, the FDA could proceed to ban, or
request recall, repair, replacement or refund of the cost of, any device
manufactured or distributed.

        The FDA also regulates recordkeeping for medical devices and reviews
hospital and manufacturers' required reports of adverse experiences to identify
potential problems with FDA-cleared devices. Aggressive regulatory action may be
taken due to adverse experience reports. FDA device tracking and post-market
surveillance requirements are expected to increase future regulatory compliance
costs.

        Diagnostic-related groups ("DRG") reimbursement schedules regulate the
amount the United States government, through the Health Care Financing
Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient
care of persons covered by Medicare. While the Company is unaware of specific
domestic price resistance as a result of DRG reimbursement policies, changes in
current DRG reimbursement levels could have an adverse effect on its domestic
pricing flexibility.

        The Company's business outside the United States is subject to medical
device laws in individual foreign countries. These laws range from extensive
device approval requirements in some countries to requests for data or
certifications in other countries. Generally, regulatory requirements are
increasing in these countries. In addition, government funding of medical
procedures is limited and in certain instances being reduced. In the European
Economic Union ("EEU"), the regulatory systems have been harmonized and approval
to market in EEU countries can be obtained through one agency.

PATENTS, LICENSES AND PROPRIETARY RIGHTS

        Protection of the Company's intellectual property is important to the
Company's business. The Company maintains a policy of seeking device and method
patents on its inventions, obtaining copyrights on copyrightable materials and
entering into proprietary information agreements with its employees and
consultants with respect to technology which it considers important to its
business. The Company also files for trademark registration and service mark
registration on those marks which may be used in marketing efforts with respect
to the products developed, sold and distributed by the Company. The Company also
relies upon trade secrets, unpatented know-how and continuing technological
innovation to develop and maintain its competitive position.

        The Company currently holds 14 issued United States patents and has over
50 domestic and foreign patent applications pending disclosing concepts related
to medical devices and methods, medical robotics and speech recognition
applications. More particularly, the Company has issued patents protecting
several key aspects of its AESOP and ZEUS product lines. The Company has
additional patent applications pending disclosing key aspects of its ZEUS
Robotic Surgical System, as well as key aspects of its HERMES Control Center.
The Company has filed corresponding international patent applications on certain
of its key United States patents.

        There can be no assurance that patents will issue from any of the
pending applications, or that issued patents will be of sufficient scope to
provide meaningful protection of the Company's technology. In addition, there
can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or commercial advantage to the Company.
Notwithstanding the scope of the patent protection available to the Company, a
competitor could develop other devices or methods for enabling minimally
invasive surgical procedures that do not require the use of robotics or speech
recognition, aspects of which are patented or pending patents.

        Additionally, there has been substantial litigation regarding patents
and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents issued or licensed to the


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Company, to protect trade secrets or know-how owned by the Company, or to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Adverse
determinations in litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
some or all of its products, any of which could have a material adverse affect
on the Company's business, financial condition or results of operations. The
Company is not currently a party to any patent litigation or other litigation
regarding proprietary rights and is not aware of any challenge to its patents or
proprietary rights.

PRODUCTS LIABILITY AND INSURANCE

        The medical device industry has historically been subject to products
liability claims. Such claims could be asserted against the Company in the
future for events not known to management at this time. Management has adopted
risk management practices, including procurement of products liability insurance
coverage, which management believes are prudent.

EMPLOYEES

        As of December 31, 1998, the Company had 146 full-time employees
including 53 employees in sales and marketing, 50 employees in research and
development, 28 employees in production and 15 employees in administration. It
has never experienced a work stoppage as a result of labor disputes and none of
its employees are represented by a labor organization.

INDUSTRY SEGMENT AND INTERNATIONAL OPERATIONS

        The medical device industry is the single industry segment in which the
Company operates. The Company's export revenues were $1,225,000 (12% of
revenue), $1,871,000 (28% of revenue) and $1,147,000 (28% of revenue) in 1998,
1997 and 1996, respectively.

        As the Company's foreign business expands, it will be subject to such
special risks as exchange controls, currency devaluation, dividend restrictions,
the imposition or increase of import or export duties and surtaxes, and
international credit or financial problems. Since its international operations
will require the Company to hold assets in foreign countries denominated in
local currencies, some assets will be dependent for their U.S. dollar valuation
on the values of several foreign currencies in relation to the U.S. dollar.

YEAR 2000 COMPLIANCE

        The Company has completed its assessment of the impact of Year 2000. The
Company's products have no Year 2000 issues. The Company will be required to
update or replace its internal business systems software so that its business
systems will continue to function properly. Completion of this activity is
expected by October 1999 at an estimated cost of $300,000. See "Risk Factors
that May Affect Future Results - Year 2000 Matters."

OTHER

        The Company has not been materially impacted by the effects of inflation
or deflation during 1998.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

        Computer Motion operates in a rapidly changing environment that involves
a number of risks, some of which are beyond our control. A number of these risks
are highlighted below. These risks could affect our actual future results and
could cause them to differ materially from any forward-looking statements we
have made.


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WE HAVE NEVER OPERATED PROFITABLY. We have incurred significant losses from our
inception to date. Further, we expect to incur additional losses as we increase
spending for research and development efforts, clinical trials, manufacturing
capacity and sales force improvement. We can not assure you that we will ever
achieve significant commercial revenues, particularly from sales of our HERMES
or ZEUS product lines, both of which are still under development, or that we
will become profitable. It is possible that we may encounter substantial delays
or incur unexpected expenses related to the market introduction and acceptance
of HERMES and ZEUS, or any future products.

RELIANCE ON FUTURE PRODUCTS AND UNCERTAINTY OF REGULATORY APPROVAL AND MARKET
ACCEPTANCE. We anticipate that HERMES and ZEUS will comprise a substantial
majority of our sales in the future. Accordingly, our future success depends on
the successful development, regulatory clearance or approval, commercialization
and market acceptance of these products. Even if we are successful in obtaining
the necessary regulatory clearances or approvals for HERMES and ZEUS, their
successful commercialization will depend upon our ability to demonstrate the
clinical safety and efficacy, ease-of-use, reliability and cost-effectiveness of
these products in a clinical setting. HERMES has only recently begun to be
marketed and ZEUS has only recently begun to be used under a ten patient FDA
Phase I human clinical trial. In order to conduct a multi-center clinical trial
with ZEUS, we must submit and obtain approval from the FDA of an Investigational
Device Exemption ("IDE") application. We can not assure you that the FDA will
allow us to conduct clinical trials or that ZEUS will prove to be safe and
effective in clinical trials under United States or international regulatory
requirements. It is also possible that we may encounter problems in clinical
testing that cause a delay in or prohibit commercialization of ZEUS. Moreover,
the clinical trials may identify significant technical or other obstacles to
overcome prior to obtaining necessary regulatory or reimbursement approvals,
resulting in significant additional product development expense and delays. Even
if the safety and efficacy of procedures using HERMES and ZEUS is established,
surgeons may elect not to recommend the use of these products for any number of
reasons, including inadequate levels of reimbursement. Broad use of our products
will require significant surgeon training and practice, and the time and expense
required to complete such training and practice could adversely affect market
acceptance.

GOVERNMENT REGULATION. Our products in the United States are regulated as
medical devices by the FDA. The process of obtaining United States regulatory
approvals and clearances is lengthy, expensive and uncertain. Commercial
distribution of our products in foreign countries is also subject to varying
government regulations which could delay or restrict marketing of our products
in those countries. In addition, such regulatory authorities may impose
limitations on the use of our products. We have obtained the CE mark for all of
our products which means these products can be sold in all the member countries
of the European Union. Our manufacturing operations are subject to the FDA's
Quality System Regulations and similar regulations in other countries regarding
the manufacturing, testing, labeling, recordkeeping and storage of devices and
the failure to maintain compliance would have an adverse effect on our
operations.

INTENSE COMPETITION. The minimally invasive surgery market has been, and will
likely continue to be, highly competitive. Many competitors in this market have
significantly greater financial resources and experience than us. Many medical
conditions that can be treated using our products, particularly ZEUS, can also
be treated by pharmaceuticals or other medical devices and procedures. Many of
these alternative treatments are widely accepted in the medical community and
have a long history of use. In addition, technological advances with other
procedures could make such therapies more effective or less expensive than using
our products and could render our products obsolete or unmarketable. We can not
be certain that physicians will use our products to replace or supplement
established treatments or that our products will be competitive with current or
future technologies.



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LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. In the United States, our products
will be acquired primarily by medical institutions which then bill various
third-party payors, such as Medicare, Medicaid and other government programs and
private insurance plans for the healthcare services they provide their patients.
Government agencies, certain private insurers and certain other payors generally
reimburse hospitals for medical treatment at a fixed rate based on schedules
established by the Health Care Finance Administration. We believe that the
procedures using our products will be eligible for reimbursement under existing
reimbursement schedules. However, Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement. Even if a procedure is covered by such schedules, payors may deny
reimbursement if they determine that the device used in the treatment was
unnecessary, inappropriate, not cost-effective, experimental or used for a
non-approved indication. Many international markets have government managed
healthcare systems that control reimbursement for new products and procedures.
In most markets, there are private insurance systems, as well as governmental
managed systems, that control reimbursement for new products and procedures.
Market acceptance of our products may depend on the availability and level of
reimbursement in international markets we target. We can not be certain that we
will obtain reimbursement in any country within a particular time, or at all.

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. Our success will depend, in
part, on our ability to obtain and maintain patent protection for our products,
to preserve our trade secrets, and to operate without infringing the proprietary
rights of others. We seek to protect our proprietary positions by filing United
States and foreign patent applications related to our technology, inventions and
improvements that are important to the development of our business. We cannot be
certain that our issued patents or any patents that may be issued will not be
challenged, invalidated or circumvented in the future. Further, it is possible
that our competitors, many of which have substantially more resources than us
and have made substantial investments in competing technologies, will apply for
and obtain patents that will prevent, limit or interfere with our ability to
make, use or sell our products either in the United States or internationally.
We can not assure you that we will not become subject to patent infringement
claims or litigation.

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT. The market for our
products is characterized by rapidly changing technology and new product
introductions and enhancements. Our success will depend to a significant extent
upon our ability to enhance and expand the utility of our products so that they
gain market acceptance. We maintain research and development programs to
continually improve and refine our current product offerings and develop new
products. We can not assure you that we will be successful in identifying,
developing, manufacturing and marketing new products or enhancing our existing
products on a timely or cost-effective basis. Moreover, we may encounter
technical problems in connection with our product development efforts that could
delay the introduction of new products or product enhancements.

CONTROL BY MANAGEMENT. Our present directors and executive officers beneficially
own approximately 30% of the Company's outstanding common stock. These
shareholders, acting together, have the ability to significantly influence the
election of the Company's directors and other shareholder actions and, as a
result, direct the operation of our business, including delaying or preventing a
proposed acquisition of the Company.

DEPENDENCE ON KEY PERSONNEL. Our future business and operating results depend in
significant part on our key management, scientific, technical and sales
personnel, many of whom would be difficult to replace, and future success will
depend partially upon our ability to retain these persons and recruit additional
qualified management, technical, marketing, sales, regulatory, clinical and
manufacturing personnel. Competition for such personnel is intense, and we may
have difficulty in attracting or retaining such personnel.


                                       10
<PAGE>   11

FLUCTUATIONS IN OPERATING RESULTS AND MARKET VOLATILITY. Our results of
operations may vary significantly from quarter to quarter depending upon
numerous factors, including the following: (i) delays associated with the FDA
and other regulatory clearance and approval processes; (ii) healthcare
reimbursement policies; (iii) timing and results of clinical trials; (iv) demand
for our products; (v) changes in pricing policies by us or our competitors; (vi)
the number, timing and significance of our competitors' product enhancements and
new products; and (vii) product quality issues.

The market price of our common stock is likely to be volatile and may be
affected by: (i) actual or anticipated decisions by the FDA with respect to
approvals or clearances of our or our competitors' products; (ii) actual or
anticipated fluctuations in our operating results; (iii) announcements of
technological innovations; (iv) new commercial products announced or introduced
by us or our competitors; (v) changes in third party reimbursement policies;
(vi) developments concerning our or our competitors' proprietary rights; (vii)
conditions and trends in the medical device industry; (viii) governmental
regulation; (ix) changes in financial estimates by securities analysts; and (x)
general stock market conditions.

EXPANSION OF MARKETING ACTIVITIES AND LIMITED DISTRIBUTION. We anticipate
significantly increasing the number of sales personnel to more fully cover our
target markets, particularly as we expand our product offerings. It is possible
we will be unable to compete effectively in attracting, motivating and retaining
qualified sales personnel. We currently intend to market and sell our products
outside the United States and Europe principally through distributors. In order
to accomplish this, we will be required to expand our distributor network. We
may not be able to identify suitable distributors or negotiate acceptable
distribution agreements. Any such distribution agreements may not result in
significant sales.

DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS AND LIMITED MANUFACTURING
EXPERIENCE. We rely on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of
AESOP. Shortages of raw materials, production capacity constraints or delays on
the part of our contract manufacturers could negatively affect our ability to
ship products and derive revenue. We do not have experience manufacturing our
products in commercial quantities. Our manufacturing experience to date has been
focused primarily on assembling components produced by third party manufacturers
for AESOP. Our manufacturing activities to date with respect to HERMES and ZEUS
have consisted primarily of manufacturing a limited number of products. In
scaling up manufacturing of new products, we may encounter difficulties
involving quality control and assurance, component availability, adequacy of
control policies and procedures, lack of qualified personnel and compliance with
FDA's Quality System Regulations requirements. We may elect to internally
manufacture components currently provided by third parties or to implement new
production processes. We can not assure you that manufacturing yields or costs
will not be adversely affected by a transition to in-house production or to new
production processes if such efforts are undertaken.

YEAR 2000 MATTERS. Many existing information technology ("IT") systems, such as
computer systems and software products, were not designed to correctly process
dates after December 31, 1999. We have assessed the impact of such "Year 2000"
issues on our products and internal IT systems, as well as on our significant
suppliers. We have completed testing of our products and have not identified any
areas of non-compliance with respect to Year 2000 issues. We have also evaluated
our internal IT systems and have determined that our business system is not Year
2000 compliant. We have developed a plan to replace this system in a timely
fashion at a cost of approximately $300,000. We have also initiated discussions
with our significant suppliers regarding their plans to investigate, identify
and remedy their Year 2000 issues. While we anticipate cooperation in these
efforts from our significant suppliers, they are outside our control. If any of
our significant suppliers fail to appropriately address their Year 2000 issues,
such failure could have a material adverse effect on our business, financial
condition and results of operations. For example, if Year 2000 problems
experienced by any of our significant suppliers result in or contribute to
delays or interruptions of our delivery of products or services, such delays or
interruptions could have a material adverse effect on our business, financial
condition and results of operations. In addition, many of our customers depend,
in part, on third-party payors, both private and governmental, for much of their
revenues. Any inability of our customers to obtain payment from such payors
could impact their ability to pay for our products. Finally, we could be
materially adversely affected by a disruption in the economy generally resulting
from Year 2000 issues.



                                       11
<PAGE>   12

Should we not be completely successful in mitigating internal and external Year
2000 risks, the result could be a system failure or miscalculation causing
disruption of our or our customers' or suppliers' operations, including among
other things, a temporary inability to process transactions, manufacture
products, send invoices, or engage in similar normal business activities. We
believe that under a worst case scenario, we could continue the majority of
normal business activities on a manual basis. As to our suppliers and customers,
we do not currently have a contingency plan with respect to potential Year 2000
failures of these parties. In the event that we can not obtain reasonable
assurances from current suppliers, particularly single source suppliers, we may
choose to qualify additional suppliers.

RISK OF PRODUCT LIABILITY CLAIMS. We face an inherent business risk of financial
exposure to product liability claims in the event that the use of our products
results in personal injury or death. We also face the possibility that defects
in the design or manufacture of our products might necessitate a product recall.
It is possible that we will experience losses due to product liability claims or
recalls in the future. We currently maintain product liability insurance with
coverage limits of $5,000,000, but future claims may exceed these coverage
limits.

MANAGEMENT OF GROWTH. Our growth will continue to place significant demands on
our management and resources. In order to compete effectively against current
and future competitors, prepare products for clinical trials and develop future
products, we believe we must continue to expand our operations, particularly in
the areas of research and development and sales and marketing. It is likely that
we will be required to implement additional operating and financial controls,
hire and train additional personnel, install additional reporting and management
information systems and expand our physical operations. Our future success will
depend, in part, on our ability to manage future growth and we can not assure
you that we will be successful.

ADVERSE DILUTIVE IMPACT OF OPTIONS AND WARRANTS. The exercise of existing stock
options and warrants, totaling 2,982,531 shares, of which 1,944,920 were
exercisable at December 31, 1998, would have a dilutive effect on the interests
of current investors and may have an adverse effect on the market price of our
common stock.

ITEM 2. PROPERTIES

        The Company leases approximately 32,000 square feet of office and
manufacturing space in an office park in Goleta, California and a small sales
office in Strasbourg, France. The Company is currently seeking to expand its
leased space in Goleta.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not currently a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.


                                       12
<PAGE>   13

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY

         Information on executive officers is set forth below:

<TABLE>
<CAPTION>

NAME                       AGE                               POSITION
----                       ---                               --------
<S>                        <C>       <C>
Robert W. Duggan            54       Chairman of the Board and Chief Executive Officer
Yulun Wang                  38       Chief Technical Officer, Founder and Director
Stephen L. Wilson           46       Executive Vice President, Chief Financial Officer
                                     and Secretary
John M. Greathouse          37       Vice President of Business Development
David A. Stuart             43       Vice President of Operations
</TABLE>

        ROBERT W. DUGGAN has been Chief Executive Officer since October 1997,
and Chairman of the Board of Directors since 1990. Mr. Duggan has been a private
venture investor for more than 25 years, and has participated as a director of,
investor in and advisor to numerous small and large businesses in the medical
equipment, computer local and wide area network, PC hardware and software
distribution, digital encryption, consumer retail goods and outdoor media
communications industries. He has also assisted in corporate planning, capital
formation and management for his various investments. He is a member of the
University of California, Santa Barbara Foundation Board of Trustees, as well as
the University's Engineering Steering Committee.

        YULUN WANG, PH.D., has been Chief Technical Officer of the Company since
January 1996, and a Director since 1990, and has served in numerous other
capacities since he founded the Company in 1989.

        STEPHEN L. WILSON joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in June 1997. Prior to joining the Company, Mr.
Wilson had served as the Vice President of Finance and Chief Financial Officer
of St. Jude Medical, Inc., a medical device manufacturer, since 1990.

        JOHN M. GREATHOUSE joined the Company as Director of Finance in 1993 and
has served as the Company's Vice President of Business Development since
February 1997. Prior to joining the Company, Mr. Greathouse served as Manager of
Corporate Development with Mitchell Humphrey & Co., a developer of financial
software, from 1990 to 1993.

        DAVID A. STUART joined the Company as Vice President of Operations in
June 1996. From 1992 to 1996, Mr. Stuart served as Director of Materials at
Quantum Corporation, a disk drive manufacturer. Previously, he was Director of
Materials and Manager of Manufacturing Finance for LTX Corporation, a
manufacturer of semi-conductor test equipment.


                                       13

<PAGE>   14

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
        MATTERS

        The Company's common stock is quoted on the Nasdaq National Market under
the symbol "RBOT." The high and low sale prices for the Company's common stock
during 1998 and 1997 (from August 12, 1997, the date trading in the stock
commenced) are set forth below.

<TABLE>
<CAPTION>

                                                           High          Low
                                                           ----          ---
<S>                                                       <C>           <C>
      Year Ended December 31, 1998
      ----------------------------
      Fourth Quarter....................................  $13.38        $7.50
      Third Quarter.....................................  $13.06        $6.25
      Second Quarter....................................  $17.63        $9.88
      First Quarter.....................................  $13.00        $8.81
</TABLE>

<TABLE>
<CAPTION>

                                                           High          Low
                                                           ----          ---
<S>                                                       <C>          <C>
      Year Ended December 31, 1997
      ----------------------------
      Fourth Quarter....................................  $13.63        $7.88
      Third Quarter (commencing August 12, 1997)........  $15.00       $13.38
      Second Quarter....................................    N/A          N/A
      First Quarter.....................................    N/A          N/A
</TABLE>

        The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Like the stock prices of other medical device companies,
the market price of the Company's common stock has been and will be, subject to
significant volatility. Factors such as reports on the clinical efficacy and
safety of the Company's products, government approval status, fluctuations in
the Company's operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in estimates of the
Company's performance by securities analysts, failure to meet securities
analysts' expectations and developments with respect to patents or proprietary
rights, may have a significant effect on the market price of the common stock.
In addition, the price of the Company's common stock could be affected by stock
price volatility in the medical device industry or the capital markets in
general without regard to the Company's operating performance.

        The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors at the time. As of March 22, 1999,
there were approximately 3,500 shareholders of record.

        The Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission (Registration No. 333-29505) for 2,875,000 shares
of its common stock was declared effective on August 11, 1997. Proceeds from the
offering, net of underwriting discounts and commissions and direct offering
expenses, were $36,740,000. During 1998, the Company used $16,978,000 of these
proceeds. The proceeds were principally used to support the cash loss from
operations of $12,928,000, increase working capital by $2,450,000 and purchase
property and equipment for $1,784,000. The remaining proceeds of the offering
have been invested in short-term investment grade debt securities. Proceeds from
the offering will continue to be used to fund the Company's operating losses and
capital requirements.


                                       14

<PAGE>   15

ITEM 6. SELECTED FINANCIAL DATA


        The following table summarizes certain selected financial data and is
qualified by reference to, and should be read in conjunction with, the Company's
consolidated financial statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the Company's 1998
Annual Report to Shareholders. The selected financial data is derived from
consolidated financial statements that have been audited by Arthur Andersen LLP,
independent public accountants.

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                       ----------------------------------------------------------------------------
                           1998             1997            1996           1995           1994
                       --------------   -------------    -----------    -----------    ------------
<S>                      <C>              <C>            <C>            <C>               <C>     
Revenue                  $10,586,000      $6,611,000     $4,057,000     $2,271,000        $607,000

Net loss                ($11,545,000)    ($9,219,000)   ($4,559,000)   ($3,590,000)    ($3,244,000)

Net loss per share            ($1.45)         ($2.12)        ($2.68)        ($2.12)         ($1.90)

Weighted average common
shares outstanding         7,959,000       4,343,000      1,701,000      1,691,000       1,706,000

Total assets             $30,444,000     $37,313,000     $3,489,000     $2,017,000      $4,699,000

Long-term liabilities    $        --     $        --     $9,132,000       $605,000        $126,000
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

        The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 19 through
21 of the Company's 1998 Annual Report to Shareholders is incorporated herein by
reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company's financial instruments include cash and short-term
investment grade debt securities. At December 31, 1998, the carrying values of
the Company's financial instruments approximated their fair values based on
current market prices and rates.

        It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have material foreign currency
exposure as the majority of its international transactions are denominated in
U.S. currency. Accordingly, the Company does not have significant overall
currency exposure at December 31, 1998.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The following Consolidated Financial Statements of the Company and
Report of Independent Public Accountants set forth on pages 22 through 30 of the
Company's 1998 Annual Report to Shareholders are incorporated herein by
reference:

        Consolidated Statements of Operations - Years ended December 31, 1998,
        1997 and 1996

        Consolidated Balance Sheets - December 31, 1998 and 1997

        Consolidated Statements of Shareholders' Equity (Deficit) - Years ended
        December 31, 1998, 1997 and 1996

        Consolidated Statements of Cash Flows - Years ended December 31, 1998,
        1997 and 1996

        Notes to Consolidated Financial Statements

        Report of Independent Public Accountants


                                       15

<PAGE>   16

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        The information set forth under the caption "Election of Directors" in
the Company's definitive proxy statement dated March 26, 1999, is incorporated
herein by reference. Information on executive officers is set forth in Part I,
Item 4A hereto.

ITEM 11. EXECUTIVE COMPENSATION

        The information set forth under the caption "Executive Compensation and
Other Information" in the Company's definitive proxy statement dated March 26,
1999, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" and "Election of Directors" in the
Company's definitive proxy statement dated March 26, 1999, is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information set forth under the caption "Election of Directors" in
the Company's definitive proxy statement dated March 26, 1999, is incorporated
herein by reference.


                                           PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

        (1) FINANCIAL STATEMENTS

            The following Consolidated Financial Statements of the Company and
            Report of Independent Public Accountants as set forth on pages 22
            through 30 of the Company's 1998 Annual Report to Shareholders are
            incorporated herein by reference:

            Consolidated Statements of Operations -Years ended December 31,
            1998, 1997 and 1996

            Consolidated Balance Sheets - December 31, 1998 and 1997

            Consolidated Statements of Shareholders' Equity (Deficit) - Years
            ended December 31, 1998, 1997 and 1996

            Consolidated Statements of Cash Flows - Years ended December 31,
            1998, 1997 and 1996

            Notes to Consolidated Financial Statements

            Report of Independent Public Accountants


                                       16

<PAGE>   17

        (2) FINANCIAL STATEMENT SCHEDULE

        The following financial statement schedule is filed as part of this
Report:

<TABLE>
<CAPTION>

       SCHEDULE                                                         PAGE
        NUMBER                      DESCRIPTION                        NUMBER
       --------                     -----------                        ------
<S>                      <C>                                           <C>
          II             Valuation and Qualifying Accounts               21
--------------------------------------------------------------------------------
</TABLE>

        The report of the Company's independent public accountants with respect
to the above-listed financial statement schedule appears on page 20 of this
Report.

        All other financial statements and schedules not listed have been
omitted because the required information is included in the consolidated
financial statements or the notes thereto, or is not applicable.

        (3) EXHIBITS

<TABLE>
<CAPTION>
          Exhibit
            No.                             Description
         ----------   ----------------------------------------------------------
<C>                   <S>
            3.1       Second Amended and Restated Certificate of Incorporation.*
            3.2       Bylaws of the Company.*
           10.1       Computer Motion, Inc. Tandem Stock Option Plan.*
           10.2       Development and Supply Agreement between the Stryker Endoscopy
                      Division of Stryker Corporation and the Company dated August 21,
                      1996.*(1)
           10.3       Registration Agreement between the Company and certain
                      shareholders.*
           10.4       Sales Agreement between the Company and Medtronic, Inc. 
                      dated May 28, 1997.*(1)
           10.5       Form of Warrant to Purchase Common Stock issued in connection 
                      with Bridge Financing Agreements.*
           10.6       Purchaser Representation and Subscription Agreement
                      relating to the Company's Series E Preferred Stock and 
                      Warrant to Purchase Common Stock.*
           10.7       Form of Redeemable Warrant to Purchase Common Stock of the
                      Company issued in conjunction with the Company's Series E
                      Preferred Stock.*
           10.8       Business Agreement between the Company and Bulova Technologies, 
                      L.L.C. dated February 18, 1997.*(1)
           10.9       Lease between the Company and University Business Center
                      Associates dated March 1, 1994 and amendment thereto dated
                      October 19, 1996.*
           10.10      Form of Indemnification Agreement for Officers and Directors
                      of the Company.*
           10.11      Agreement relating to the Company's employment of Stephen
                      L. Wilson.*
           10.12      Computer Motion, Inc. Employee Stock Purchase Plan, as amended
                      through September 30, 1997.**
           10.13      Leases between the Company and University Business Center 
                      Associates dated September 19, 1997.**
</TABLE>


                                       17

<PAGE>   18

<TABLE>
<CAPTION>

          Exhibit
            No.                             Description
         ----------   --------------------------------------------------------
<C>                   <S>
           10.14      Computer Motion, Inc. 1997 Stock Incentive Plan*
           13.1       Management's Discussion and Analysis of Financial 
                      Condition and Results of Operations and Consolidated 
                      Financial Statements from the 1998 Annual Report to 
                      Shareholders.
           21.1       Subsidiaries of the Company.
           23.1       Consent of Arthur Andersen LLP.
           27.1       Financial Data Schedule.
</TABLE>

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

 *  Incorporated by reference to the Company's Form S-1 Registration Statement
    No. 333-29505 declared effective August 11, 1997.

(1) Registrant has sought confidential treatment pursuant to Rule 406 for a
    portion of the referenced exhibit and has separately filed such exhibit with
    the Commission.

**  Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1997.

(b)  REPORTS ON FORM 8-K

     None.

(c)  EXHIBITS

     See Item 14(a)(3) of this Report.


                                       18


<PAGE>   19

                                   SIGNATURES


Pursuant to the requirements of Sections 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.


                                     COMPUTER MOTION, INC.


March 26, 1999                       /s/   Robert W. Duggan
--------------                       -------------------------------------------
Date                                 Robert W. Duggan
                                     Chairman and Chief Executive Officer
                                     (Principal Executive Officer)


March 26, 1999                       /s/   Stephen L. Wilson
--------------                       -------------------------------------------
Date                                 Stephen L. Wilson
                                     Executive Vice President, Chief Financial
                                     Officer and Secretary (Principal Financial
                                     and Accounting Officer)


        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 date indicated.

<TABLE>

<S>                                         <C>                       <C>
/s/   Daniel R. Doiron                      Director                  March 26, 1999
--------------------------------
Daniel R. Doiron


/s/   Robert W. Duggan                      Director                  March 26, 1999
--------------------------------
Robert W. Duggan


/s/   W. Peter Geis                         Director                  March 26, 1999
--------------------------------
W. Peter Geis


/s/   M. Jacqueline Eastwood                Director                  March 26, 1999
--------------------------------
M. Jacqueline Eastwood


/s/   William D. Williams                   Director                  March 26, 1999
--------------------------------
William D. Williams


/s/   Yulun Wang                            Director                  March 26, 1999
--------------------------------
Yulun Wang
</TABLE>


                                       19

<PAGE>   20

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
  Computer Motion, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Computer Motion, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 2, 1999. Our audits were made for the
purpose of expressing an opinion on those statements taken as a whole. The
schedule listed in the index above is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subject to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.



/s/  Arthur Andersen LLP


Woodland Hills, California
February 2, 1999


                                       20


<PAGE>   21

                              COMPUTER MOTION, INC.

                          YEAR ENDED DECEMBER 31, 1998

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                   BALANCE AT
                                   BEGINNING                                        BALANCE AT
         DESCRIPTION               OF PERIOD       ADDITIONS       DEDUCTIONS      END OF PERIOD
------------------------------     ----------      ---------       ----------      -------------
<S>                                <C>             <C>              <C>             <C>
Year ended December 31, 1998
  Allowance for doubtful accounts    $62,000        $298,000        $106,000          $254,000

Year ended December 31, 1997
  Allowance for doubtful accounts     75,000          28,000          41,000            62,000

Year ended December 31, 1996
  Allowance for doubtful accounts      5,000         118,000          48,000            75,000
</TABLE>


                                       21
<PAGE>   22

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>

          Exhibit
            No.                             Description
         ----------   ----------------------------------------------------------
<C>                   <S>
            3.1       Second Amended and Restated Certificate of Incorporation.*
            3.2       Bylaws of the Company.*
           10.1       Computer Motion, Inc. Tandem Stock Option Plan.*
           10.2       Development and Supply Agreement between the Stryker Endoscopy
                      Division of Stryker Corporation and the Company dated August 21,
                      1996.*(1)
           10.3       Registration Agreement between the Company and certain
                      shareholders.*
           10.4       Sales Agreement between the Company and Medtronic, Inc. 
                      dated May 28, 1997.*(1)
           10.5       Form of Warrant to Purchase Common Stock issued in connection 
                      with Bridge Financing Agreements.*
           10.6       Purchaser Representation and Subscription Agreement
                      relating to the Company's Series E Preferred Stock and 
                      Warrant to Purchase Common Stock.*
           10.7       Form of Redeemable Warrant to Purchase Common Stock of the
                      Company issued in conjunction with the Company's Series E
                      Preferred Stock.*
           10.8       Business Agreement between the Company and Bulova Technologies, 
                      L.L.C. dated February 18, 1997.*(1)
           10.9       Lease between the Company and University Business Center
                      Associates dated March 1, 1994 and amendment thereto dated
                      October 19, 1996.*
           10.10      Form of Indemnification Agreement for Officers and Directors
                      of the Company.*
           10.11      Agreement relating to the Company's employment of Stephen
                      L. Wilson.*
           10.12      Computer Motion, Inc. Employee Stock Purchase Plan, as amended
                      through September 30, 1997.**
           10.13      Leases between the Company and University Business Center 
                      Associates dated September 19, 1997.**
           10.14      Computer Motion, Inc. 1997 Stock Incentive Plan*
           13.1       Management's Discussion and Analysis of Financial 
                      Condition and Results of Operations and Consolidated 
                      Financial Statements
                      from the 1998 Annual Report to Shareholders.
           21.1       Subsidiaries of the Company.
           23.1       Consent of Arthur Andersen LLP.
           27.1       Financial Data Schedule.
</TABLE>
----------------------

 *  Incorporated by reference to the Company's Form S-1 Registration Statement
    No. 333-29505 declared effective August 11, 1997.

(1) Registrant has sought confidential treatment pursuant to Rule 406 for a
    portion of the referenced exhibit and has separately filed such exhibit with
    the Commission.

**  Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1997.