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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K/A

Amendment No. 2


|                                                                                       |  | 
|-------------------------------------------------------------------------------------- |  | 
|ANNUAL REPORT UNDER SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                      
|For the fiscal year ended December 31,
    2002                                       

Commission File No. 000-22755



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Computer Motion, Inc.

(Exact name of Registrant as specified in its
charter)


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

130-B Cremona Drive

Goleta, CA 93117


(Address of principal executive
offices)


(805) 968-9600

(Registrants telephone number, including
area code)




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

Common Stock, $.001 Par Value

(Title of Class)



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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 þ          No o

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.     þ

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based upon the closing
price of Common Stock on June 28, 2002, as reported by
Nasdaq, was approximately $10,675,000. Shares of voting stock
held by each officer and director and by each person who owns 5%
or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This
assumption regarding affiliate status is not necessarily a
conclusive determination for other purposes.

The number of shares outstanding of the
Registrants Common Stock, $.001 par value, as of
May 15, 2003 was 21,556,328 shares.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|PART II      
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers                                                    
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Controls and Procedures                                                             
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|EXHIBIT INDEX
|EXHIBIT 10.29
|EXHIBIT 16.1 
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 99.1 
|EXHIBIT 99.1 



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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, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. 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 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 postoperative convalescent
periods for the patient. In an effort to minimize these negative
factors, MIS techniques and related technologies have been
developed. MIS has proven to be 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 OR 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 works with leading practitioners in multiple surgical
disciplines to develop new MIS procedures using the
Companys products to provide better visualization and
improved dexterity for the surgeon.

The Company has developed four major products and
a suite of supporting supplies, accessories and services. The
four major products are the AESOP®Endoscope Postioner, a
surgical robot capable of positioning an endoscope in response
to a surgeons commands; the ZEUS® Surgical System, a
robotic platform 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 HERMES® Control Center, a
voice activated OR control system designed to enable a surgeon
to directly control multiple OR devices, including the
Companys AESOP system, through simple verbal commands; and
the SOCRATESTM Telementoring System, an interactive
telecollaborative system allowing a surgeon to mentor and
collaborate with another surgeon during an operation. SOCRATES
also allows a remote surgeon to participate in a surgery by
remotely controlling AESOP, our endoscope-positioning robot.



| |                
| | ---------------
| | Robotic Systems

The Companys line of computer and robotic
systems enhance a surgeons ability to perform complex,
minimally invasive surgeries. The Company has developed the
EVOLVE surgical continuum to support a gradient learning curve
for surgeons to safely and economically develop the skills
required to transition from open to endoscopic surgery. All four
of the Companys robotic products are integral to the
EVOLVE process.

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| |               
| | --------------
| | AESOP Platform

The Computer Motion AESOP system is a surgical
robot which approximates the form and function of a human arm
and allows control of the 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) using simple verbal
commands. This eliminates the need for a member of a surgical
staff to manually control the camera and provides a more stable
endoscopic image and more precise positioning of the endoscope.
The Company estimates that over 175,000 MIS procedures have been
successfully assisted by more than 800 AESOP systems in
more than 600 hospitals and surgery centers around the
world.

The Company believes that the AESOP platform is
the worlds first Food and Drug Administration
(FDA) cleared surgical robot and incorporates what
the Company believes is the worlds first FDA-cleared voice
control interface for use in the OR. The AESOP system was
introduced in the fourth quarter of 1994. AESOP 2000 with voice
control was introduced in the fourth quarter of 1996. The AESOP
3000 platform, introduced in December 1997, is the worlds
first FDA-cleared surgical robot capable of assisting in
advanced minimally invasive cardiothoracic procedures. The AESOP
3000 robotic arm features added flexibility and functionality
over its predecessor, adding the range of motion necessary for
endoscopic viewing in the thoracic (chest) cavity. AESOP is
cleared for use by the FDA in general surgery, ear nose throat,
cardio thorasic, urologic, vascular, bariatric, and
gynecological procedures. The AESOP HR platform allows for
control of AESOP through the HERMES Control Center. AESOP HR
enables the operative surgeon to view the status of the AESOP
device, save memory positions, and view the AESOP menu structure
on a surgical monitor. The AESOP HR platform also allows the
surgeon to adjust AESOPs speed to an optimal setting based
on the constraints of the procedure.

The introduction of the AlphaTM
Virtual Port in June 2000 enabled the application of AESOP in
open procedures, which is especially useful when used in
conjunction with the EVOLVE education continuum. The Alpha
Virtual Port provides a free-space pivot point for the use of
AESOP in sternotomy accessed cardiac procedures as well as open
abdominal procedures. The application of the Alpha Virtual Port
in conjunction with AESOP is the first step in the EVOLVE
programs step-wise transition from open to closed
procedures. The Alpha Virtual Port allows the operative surgeon
in-training to gain experience with the technology prior to
advancing to a closed MIS procedure approach.

Computer Motion has leveraged the core
technologies underlying the AESOP platform to develop the ZEUS
Surgical System, the HERMES Control Center, and the SOCRATES
Telementoring System.



| |              
| | -------------
| | ZEUS Platform

The Computer Motion ZEUS Surgical System is
designed to fundamentally improve a surgeons ability to
perform complex, MIS 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 MIS procedures will
result in reduced patient pain and trauma, fewer complications,
lessened cosmetic concerns, shortened convalescent periods and
will increase the number of patients qualified for certain
surgical procedures. As a result, the Company believes that an
increase in minimally invasive procedures will produce lower
overall healthcare costs to patients, hospitals and healthcare
payors.

The ZEUS platform is comprised of three
surgeon-controlled robotic arms, one of which positions an
endoscope while the other two hold disposable and reusable
surgical instruments. Each arm is individually mounted on the
operating room table using the standard table rails. Because the
arms are attached to the table, the table can be adjusted during
a surgical procedure without removing the instruments. The
surgeon sits near the operating room table at an open,
comfortable, and portable console. The open design of the
console provides the surgeon with an unobstructed view of the
patient and allows clear communication with the operating room
staff. At the console, the surgeon controls the instrument
handles and views the operative site on a 3D video monitor or a
boom mounted 3D binocular display. ZEUS senses the
surgeons hand movements through the new MicroWrist surgeon
interface. It then scales the surgeons hand movements into
precise, tremor-free micro movements at the operative site.

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The Company received the first in a series of
FDA 510(k) clearances for ZEUS in October 2001. This 510(k)
clearance allowed ZEUS to be used with blunt dissectors,
retractors, atraumatic graspers and stabilizers during
laparoscopic and thorascopic surgery. In September 2002, the
company received an FDA 510(k) clearance for the marketing
of ZEUS in general laparoscopic surgery. This clearance allows
clinical use of the ZEUS system for a broad set of general
surgery applications such as laparoscopic cholecystectomy and
laparoscopic nissen fundoplication. The Company is also seeking
additional FDA clearances for thoracic surgery, laparoscopic
radical prostatectomy and cardiac procedures, with clinical
trials ongoing.

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Improved Precision.The ZEUS platform incorporates technology that is designed to
    enable a surgeon to scale his or 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. Various useful
    scaling ratios can be selected by the surgeon intra-operatively.                                                                                                                                                                                                               
|
| | Improved Dexterity.The ZEUS platform 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 to manipulate manually when performing challenging
    minimally invasive surgery. For instance, a surgeon can activate
    and deactivate the instrument handles to further extend his or
    her range of motion to complete a particular movement, such as
    suturing, without having to physically contort his or her arms.
    In addition, in order to gain anatomical access to certain
    regions of the body in a minimally invasive manner, the robotic
    instruments can be placed in positions that would be extremely
    difficult for a surgeon to manipulate manually using
    conventional MIS techniques due to the distance between the
    instruments and their relative positions to each other.
|
| | Elimination of Involuntary Hand
    Tremor.The ZEUS platform 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
    Visualization.The ZEUS platform
    incorporates a robotic arm, which controls the endoscope to
    produce a steady, magnified video image displayed directly in
    front of the surgeon, which facilitates performance of MIS
    procedures. ZEUS also provides a state of the art stereo 3D
    endoscope system attached to the robotic arm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Improved Minimally Invasive Anatomical
    Access.The ZEUS platform 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, rib spreading and nerve trauma. In contrast, the ZEUS
    system is designed to provide a surgeon with complete access to
    the heart through several 3 to 5 millimeter ports.                                                                                                                                                                                                                                                              
|
| | Minimized Surgeon
    Fatigue.The ZEUS platform allows a
    surgeon to operate the surgical instrument handles in a
    comfortable, ergonomic position, including sitting down and
    positioning his or her forearms on armrests. The Company
    believes this enhanced ergonomic design can increase the
    efficiency and effectiveness of demanding and lengthy
    microsurgical procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

The ZEUS system is designed as an open platform
system. This allows products from other corporations to
integrate into the system. The Company has entered into
alliances with these outside companies to develop complementary
products to the ZEUS system, and to often offer their products
as components of the ZEUS system. Included in these are:
(i) visualization systems from Karl Storz, GMBH, Vista
Medical Technologies,

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Inc., and Smith and Nephew Endoscopy;
(ii) instrumentation from Scanlan International, Inc. and
Karl Storz, GMBH, (iii) sutures from W.L. Gore &
Associates and (iv) other specialty instruments from
various medical device companies.




| |                
| | ---------------
| | Hermes Platform

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 system, through simple verbal
commands. The HERMES Control Center provides standardized visual
and digitized voice feedback to a surgical team. The Company
believes that the enhanced control and feedback provided by the
HERMES Control Center improves safety, increases efficiency,
shortens procedure times and reduces cost.

HERMES is a centralized control system that
networks multiple HERMES-ReadyTM medical devices and
provides the surgeon and OR staff with direct control using
simple verbal commands or an interactive touch screen pendant.
The HERMES system provides both visual graphic feedback and
digitized audio feedback to the surgical team. The visual
feedback is displayed directly on the endoscopic video monitor
and the digitized audio feedback provides valuable
device-specific status information. The 28+ FDA-cleared devices
controlled by the HERMES system include: endoscopic cameras,
overhead cameras, light sources, insufflators, arthroscopic
shavers, arthroscopic pumps, VCRs, printers, digital image
capture device, OR lights, surgical tables, electrosurgical
units, and the Companys telephone, port expander, AESOP
and ZEUS systems. The HERMES-Ready interfaces for these cleared
devices were created in collaboration between the Company and
various HERMES alliance partners, such as Stryker Endoscopy,
Smith and Nephew Endoscopy, Berchtold, Steris, Skytron,
ValleyLab (TYCO), and ConMed. There is additional HERMES
interface projects currently under development with these same
HERMES alliance partners for an additional ten devices. These
models are expected to release for commercial sale during the
year 2003.

To leverage its proprietary voice recognition
technology in the arthroscopic and laparoscopic markets, the
Company has partnered with Stryker Endoscopy, a division of
Stryker Corporation, to market and distribute the HERMES system
and various associated HERMES-Ready device interfaces. Stryker
is a leading manufacturer of endoscopic medical equipment.
Stryker purchases the HERMES system as an original equipment
manufacturer (OEM) and markets the HERMES system as
an integrated component with several of its laparoscopic and
arthroscopic products.

The Company has also entered into two additional
HERMES alliance agreements with Smith & Nephew Endoscopy and
Karl Storz Endoscopy America. Both Smith & Nephew and Karl
Storz are leading manufacturers of endoscopic medical equipment.
These agreements define collaboration between the Company and
these two medical device companies to create HERMES-Ready
interfaces for 40 additional medical device models. This
engineering development work is currently underway, and the
Company expects to make additional 510(k) submissions to the FDA
in 2003 to allow some of these devices to be released for sale
by Smith & Nephew and Karl Storz during 2003. Smith &
Nephew will market a HERMES system as a component of their
integrated digital OR offering. Karl Storz will distribute a
HERMES related product that allows device integration with their
integrated OR1 offering.

The Company intends to partner with other medical
device manufacturers to expand the number and type of devices to
be integrated with HERMES, including cautery/cutting devices,
various imaging systems, devices for the cardiac catheter
laboratory, and other equipment for varying clinical
environments.



| |                  
| | -----------------
| | SOCRATES Platform

The SOCRATES Telementoring System is the latest
generation technology platform currently under development by
the Company. SOCRATES enables remote access to HERMES networked
devices via proprietary software and standard teleconferencing
components. The SOCRATES system allows an operative surgeon to
virtually, cost-effectively, and on an as-needed basis,
communicate with a remote surgeon.

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SOCRATES enables the remote surgeon to help
direct a surgical procedure thereby augmenting the operative
surgeons prior training experience.


The SOCRATES system enhances the utility of the
HERMES Control Center with the AESOP-HR system by providing
shared-remote control capability of the endoscope. The SOCRATES
system provides the remote surgeon with an interface to the
AESOP-HR system, enabling the remote surgeon to share control of
the endoscope with the operative surgeon. AESOPs precision
and stability ensure the remote surgeons views are
tremor-free and accurately positioned. It is common for surgeons
to remotely collaborate; however, without the SOCRATES system, a
remote surgeon is typically only able to view video of a
procedure and provide feedback through video overlay and verbal
commands. The SOCRATES system enhances this collaboration by
making it more interactive by allowing remote physical control
of the endoscope in the operating room.

In October 2001, the Company received FDA
clearance for the Socrates Telementoring System for use as a
point-to-point communication system, under the newly created FDA
device category called Telemedicine devices.

Manufacturing and Suppliers

The Companys manufacturing operations are
required to comply with the FDAs Quality System Regulation
(QSR), which addresses 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, EN46001, the
Medical Device Directive 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 an annual basis for compliance. The Company assembles all
four of its product lines (AESOP, ZEUS, HERMES and SOCRATES) in
its 7,200 square foot manufacturing facility in Goleta,
California. Certain accessories and components are produced by
qualified third party vendors. The manufacturing and assembly of
the Companys products is a complex and lengthy process
involving a significant number of parts, assemblies and
procedures.

The Company purchases both custom made and stock
components from a large number of qualified suppliers and
subjects them to stringent incoming quality inspections. As part
of the Companys supplier qualification process, the
Company periodically conducts quality audits of its suppliers.
The Company relies on independent manufacturers, some of which
are single source suppliers for the manufacture of the principal
components of its products. Shortages of raw materials,
production capacity constraints or delays on the part of the
Companys suppliers could negatively affect the
Companys ability to ship products and derive revenue. In
some instances, the Company relies on companies that are sole
suppliers of key components of its products. In the event that
these single source suppliers can no longer provide the
necessary components, Computer Motion will have to locate direct
alternative suppliers. If one of these sole suppliers goes out
of business, the Company could face significant production
delays until an alternate supplier is found, or until the
product could be redesigned and revalidated to accommodate a new
suppliers replacement component. In addition, the Company
generally submits purchase orders based upon its suppliers
current price lists. Since the Company generally does not have
written contracts for future purchase orders with its suppliers,
these suppliers may increase the cost of the parts the Company
purchases in the future. Failure to find additional suppliers on
a timely basis could result in the delay or cancellation of
customer orders and a corresponding delay or reduction of
expected revenue.

Competition

There are four levels of competition for the
Companys products; pharmaceutical therapy, traditional
methods of surgery, new approaches to MIS, and direct
competition in robotic surgery. All four of the Companys
major systems face different levels of competition in each of
these areas.

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Traditional methods of surgery have been in
effect for over one hundred years. These methods often involve
large incisions in the patients body and long recovery
times. The challenge for the Company is to convince surgeons and
administrators to convert to a minimally invasive approach to
surgery through robotics. This requires the surgeons and
hospitals to expend significant amounts of time and money in
installation of the equipment and training on new procedures.
The Company also needs to convince potential patients of the
safety and benefits of surgery using the Companys
products. 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.

The field of MIS is growing rapidly. Several
companies have developed new minimally invasive technologies and
techniques, which are alternatives to the techniques and
products the Company offers. Many of these companies are well
established in the medical industry including Boston Scientific
Corporation, C.R. Bard, Inc., Edwards Life Sciences, Guidant
Corporation, Heartport, Inc., St. Jude and Ethicon Endo-Surgery,
Inc., divisions of Johnson & Johnson, Inc., Medtronic Inc.,
and United States Surgical Corporation, a division of Tyco
International Ltd. These companies offer non-robotic surgical
tools and techniques involving hand held instruments and
manually controlled visualization or catheter based therapies
such as stenting (mechanical devices which hold a blocked or
occluded blood vessel open) and Percuaneous Transluminal
Coronary Angioplasty (often referred to as PTCA, which is the
introduction of a small balloon into a vessel to force open the
blocked or occluded vessel).

Direct competition with the Companys
products is relatively limited. The Companys AESOP product
is fairly unique with only a single competitor, Armstrong
Healthcare Ltd. Besides this single competitor, there is no
direct competition other than a person physically holding an
endoscope or the use of a static arm fixed positioner.

There are a limited number of companies that have
developed computer assisted and robotic surgical systems that
compete to varying degrees with the Companys ZEUS system.
These include EndoVia Medical, Inc. (formerly Brock Rogers
Surgical, Inc.) and Intuitive Surgical, Inc. Several other
companies produce computer assisted and robotic surgical devices
that do not directly compete with the potential surgical
procedures for ZEUS. These include Integrated Surgical Systems,
Inc., Johns Hopkins University Engineering Research Consortium,
Maquet AG, MicroDexterity Systems, Inc, Ross-Hime Designs, Inc
and Stereotaxis, Inc.

The Companys SOCRATES system is unique in
its ability to remotely control a robotic arm. There are
numerous video conferencing products and companies which could
provide remote audio and video feeds from the OR, as well as
telestration capabilities.

Marketing

The Companys products are sold throughout
the world. Orders are shipped as they are received and,
therefore, no material backlog has existed to date. For the year
ended December 31, 2002, no single customer accounted for
more than 10% of revenue. As of December 31, 2002, two
customers each accounted for 14% of accounts receivable and two
other customers accounted for 11% and 10% of accounts
receivable, respectively. For the year ended December 31,
2001, the Company had one distributor, SIC System SRL of Italy,
which accounted for approximately 6% of the revenue for the year
and 17% of the accounts receivable balance. For the year ended
December 31, 2000, the Company had one distributor, Kino
Corporation of Japan, which accounted for approximately 21% of
the revenue for the year and 18% of accounts receivable and a
second customer, Endoscopic Technologies, Inc., that accounted
for approximately 10% of the revenue for the year and 15% of
accounts receivable.

Should the Company cease to use current
distributors to distribute products throughout the world, it
would have to identify new distributors to service these
markets. While this may cause a delay in revenues in the short
term, in the long term, the Company believes that it would be
possible to secure new distributors.

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In the United States, the Company sells directly
to hospitals through an employee based sales organization. In
Western Europe, the Company also has an employee based sales
organization, which is principally focused on sales in France
and Germany. The Company has co-marketed the ZEUS product line
with SIC System, SRL in Italy and Medtronic, Inc. in Europe, the
Middle East and Africa. The Companys agreement with
Medtronic expired on December 31, 2001. The Company
continues to market the ZEUS product line in Europe, the Middle
East and Africa using a combination of direct sales and other
third party distributors. Throughout the rest of the world, the
Company uses a combination of direct sales and independent
distributor organizations including Kino Corporation and 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.

In November 2001, the Company entered into a
HERMES alliance agreement with Smith and Nephew Endoscopy, and,
in February 2002, with Karl Storz Endoscopy America. Both
Smith & Nephew and Karl Storz are leading manufacturers
of endoscopic medical equipment. These agreements define a
collaboration between the Company and each of these two medical
device companies to create HERMES-Ready interfaces for 40
additional medical device models.

Research and Development

The Companys research and development
function is focused on the development of new procedures, new
medical products and improvements to existing products. In
addition, research and development expense reflects the
Companys efforts to obtain additional 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 $10,903,000 (45% of
revenue), $12,034,000 (47% of revenue), and $11,564,000 (53% of
revenue) for the years ended December 2002, 2001 and 2000,
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. In July 2000, the FDA notified the Company that
robotic surgical systems would be reviewed and cleared for
market under the 510(k) premarket notification pathway that is
currently applied to most medical devices, including the
Companys AESOP, HERMES, SOCRATES and ZEUS products. The
Company currently has 15 premarket notifications completed as
listed on the FDA web-site (www.accessdata.fda.gov). ZEUS
follows the 510(k) approval process, however, clearance for some
indications for use required clinical studies. Some future
indications may also require clinical studies.

The Company is now enrolling patients in a
FDA-approved multi-center, non-randomized, controlled trial for
coronary artery bypass grafting. This study, which will
eventually involve several ZEUS sites, is a pivotal study
required for FDA market clearance. The Company anticipates
continuing this study throughout 2003.

Internal Mammary Artery
Harvesting:The Company received FDA
approval to conduct a clinical trial at six sites using the ZEUS
system to harvest the left internal mammary artery, a procedure
that is part of a standard coronary artery bypass grafting
surgery. The Company initiated this study in February 2001,
completed the study in September 2002, and submitted a 510(k)
application for non-intracardiac thoracoscopic clearance in
November 2002. The Company received some minor questions from
FDA relative to the submission, which were answered and
submitted back to the Agency. The Company believes that it will
receive FDA clearance of the 510(k) submission in the second
quarter of 2003.

The Company has been very active in clinical
research in the area of general laparoscopic surgery. The FDA
has granted the Company IDE approval for a study on laparoscopic
cholecystectomy (a procedure to remove the gall bladder) and
laparoscopic nissen fundoplication (a procedure to correct acid
reflux disease).

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The Company sponsored randomized, controlled
trials in the United States and Mexico for both of these
procedures. The Company submitted a 510(k) application in April
2002 and received FDA clearance in September 2002.


In addition to these trials, the Company is
currently conducting feasibility studies in Mitral valve
replacement and repair.

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, 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 record keeping 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
a single agency. The Companys AESOP, HERMES and ZEUS
products, are approved for CE-marking, enabling marketing of
these devices throughout the EEU countries. In addition, these
products are also approved in Canada, Middle East (Egypt, Saudi
Arabia, and Israel), Korea, Taiwan, Singapore, Japan (clinical
studies), and Mexico. AESOP is also approved in Australia.

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 24 issued United
States patents, 7 foreign patents and has 75 domestic and
foreign patent applications pending disclosing concepts related
to medical devices and methods, medical robotics and speech
recognition applications. The Company has filed corresponding
international patent applications on certain of its key United
States patents. These patents, which were issued for terms of
between 17 years from the date of issuance and
20 years from the date of filing, begin expiring in May
2013.

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

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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 MIS procedures
that do not require the use of robotics or speech recognition
tools, aspects of which are patented or pending patents.


The Company is involved in substantial litigation
regarding patents and other intellectual property rights (See
Note 12). Litigation, which could ultimately result in
substantial cost to and diversion of effort by the Company, has
been necessary and may continue to be necessary to enforce
patents issued or licensed to the 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 such 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 believes that it has been vigilant in
reviewing the patents of others with regard to the
Companys products. However, from time to time, the Company
has been and may continue to be subject to claims of, and legal
actions alleging, infringement by the Company of the patent
rights of others. For further discussion of the Companys
current or threatened litigation see the description below in
the section entitled Litigation Part I, Item 1.

Product Liability and Insurance

Historically, the medical device industry has
been subject to product 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 product liability
insurance coverage, which management believes are prudent.

Employees

As of December 31, 2002, the Company had 184
full-time employees including 79 employees in sales and
marketing, 53 employees in research and development, 28
employees in production and 24 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 $6,360,000 (26% of revenue),
$10,273,000 (40% of revenue) and $9,290,000 (43% of revenue) in
2002, 2001 and 2000, 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.

Recent Developments

On March 7, 2003, the Company entered into
an Agreement and Plan of Merger with Intuitive Surgical, Inc. At
the effective time of the merger, Intuitive Merger Corporation,
formerly Iron Acquisition corporation, a newly formed subsidiary
of Intuitive Surgical, Inc., will be merged with and into
Computer Motion, Inc., with Computer Motion, Inc. surviving the
merger and continuing as a wholly owned subsidiary of Intuitive
Surgical, Inc. Upon completion of the merger, each share of
Computer Motion common stock will be converted into the right to
receive a fraction of a share of Intuitive Surgical common
stock. The fraction of a share of Intuitive Surgical common
stock to be issued with respect to each share of Computer Motion

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common stock will be determined by a formula
described in the merger agreement. Based on the capitalization
of Intuitive Surgical and Computer Motion and the market price
of Computer Motion common stock as of the date of this report
and assuming that the merger is completed on June 30, 2003,
we estimate that the exchange ratio will be approximately 0.52.
The exchange ratio will be adjusted proportionately in the event
that the proposed reverse split of Intuitive Surgicals
common stock is approved by Intuitive Surgicals
stockholders and implemented by Intuitive Surgicals board
of directors.


The final exchange ratio will be calculated based
on the total number of fully diluted shares outstanding for
Intuitive Surgical and Computer Motion immediately prior to the
effective time of the merger. The number of Computer
Motions fully diluted shares will vary based on the number
of shares of Computer Motion common stock into which Computer
Motions Series D convertible preferred stock will be
convertible and the number of shares of Computer Motion common
stock which may be issued to pay accrued dividends on the
Series D convertible preferred stock upon conversion. All
shares of Computer Motion Series D convertible preferred
stock will convert into shares of Computer Motion common stock
immediately prior to the effective time of the merger. Under the
terms of the Series D convertible preferred stock, in the
event that the average of the closing bid prices of Computer
Motions common stock for the 20 consecutive trading days
ending 15 days prior to the Computer Motion special meeting
is below $1.86 per share, the conversion ratio for Computer
Motions Series D convertible preferred stock could
increase. As a result, the exchange ratio in the merger may
decrease and, therefore, Computer Motion common stockholders
would receive a lesser number of Intuitive Surgical shares, and
Computer Motion preferred stockholders would receive a greater
number of Intuitive Surgical shares, in the merger. Stockholders
may visit Intuitive Surgicals website,
www.intuitivesurgical.com, or Computer Motions website,
www.computermotion.com, for announcements regarding the exchange
ratio. Computer Motion stockholders will receive cash in lieu of
any fractional shares of Intuitive Surgical common stock.

In connection with the proposed merger, Computer
Motion and Intuitive Surgical have entered into a Loan and
Security Agreement, under which Intuitive Surgical has agreed to
provide a short-term secured bridge loan facility of up to
$7.3 million. The loan will terminate and all outstanding
amounts will become due and payable 120 days following
termination of the merger agreement (the Maturity
Date). Interest on the loan will accrue at a rate of 8%
per annum and will be payable on the Maturity Date.

Additionally, pursuant to the merger agreement,
Computer Motion and Intuitive Surgical filed stipulations on
March 10, 2003 to immediately stay all pending litigation
proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or
subject to the cases being dismissed upon consummation of the
transaction contemplated by the merger agreement.

On March 6, 2003, the Company entered into a
Stock Exchange Agreement (the Exchange Agreement)
with all of the holders of outstanding shares of Series C-1
Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock pursuant to which such holders agreed to
exchange their Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and
Series D-2 Convertible Preferred Stock. The shares of the
Series D Convertible Preferred Stock will convert into
shares of common stock immediately prior to the consummation of
the merger described above. Pursuant to the terms of the
Exchange Agreement, in the event the Company does not consummate
the merger by September 30, 2003, the Company will file its
Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible
Preferred Stock with the Secretary of State of Delaware, and,
holders of outstanding shares of Series D-1 Convertible
Preferred Stock and Series D-2 Convertible Preferred Stock
will have the right to exchange such Series D Convertible
Preferred Stock for a like number of Series E Convertible
Preferred Stock. As an inducement to the holders of shares of
Series C Convertible Preferred Stock to enter into the
Exchange Agreement, the Company has agreed to lower the exercise
price of all outstanding Series C-1 warrants and
Series C-2 warrants to $1.50 per share, provided that such
holders exercise such warrants prior to 10 days following
the mailing of a proxy statement relating to the Companys
meeting of stockholders to approve the merger. Please see
Item 5 Market for Registrants Common Equity and
Related Stockholder Matters.

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On February 13, 2003, the Company entered
into a Loan and Security Agreement with Agility Capital, LLC,
for a short-term secured bridge loan in the aggregate principal
amount of $2,300,000. The proceeds of the bridge loan were used
to provide funds for the issuance of a letter of credit to
support the issuance of a bond as required by the District Court
of Delaware in response to litigation currently pending. The
bridge loan is evidenced by a Secured Promissory Note that bears
interest at a rate of 9% per annum, is secured by all of the
Companys assets and is payable in full on
November 12, 2003. In connection with the bridge loan, the
Company issued to Agility Capital warrants to purchase up to an
aggregate of 520,000 shares of common stock at a purchase price
of $0.97 per share. The Company is in the process of registering
the resale of the shares on its registration statement of
Form S-3 with the Securities and Exchange Commission.

Risk Factors That May Affect Future
Results

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

The Company has a history of losses, and
expects to incur losses in the future so it may never achieve
profitability.

From the Companys formation, it has
incurred significant losses. For the three years ended
December 31, 2002, 2001, and 2000 the Company has incurred
net losses of $21,151,000, $16,413,000 and $16,349,000,
respectively. In addition, the Company has incurred net losses
from operations since inception and as of December 31, 2002
has an accumulated deficit of $116,674,000. The Company expects
to incur additional losses as it continues spending for research
and development efforts, clinical trials, manufacturing capacity
and sales force expansion. As a result, the Company will need to
generate significant revenues to achieve and maintain
profitability. The Company cannot assure its stockholders that
it will ever achieve significant commercial revenues,
particularly from sales of its ZEUS product line, which is still
under development and awaiting additional FDA clearances for
certain significant applications and procedures, or that the
Company will become profitable. It is possible that the Company
may encounter substantial delays or incur unexpected expenses
related to the clinical trials, market introduction and
acceptance of the ZEUS platform, or any future products. If the
time required to generate significant revenues and achieve
profitability is longer than anticipated, the Company may not be
able to continue its operations.

Since the Companys operating
expenditures currently exceed its revenues, any failure to raise
additional capital or generate required working capital could
reduce the Companys ability to compete and prevent it from
taking advantage of market opportunities.

The Companys operations to date have
consumed substantial amounts of cash, and it expects its capital
and operating expenditures will exceed revenues for at least the
next year. The Company believes it will require substantial
working capital to fund its operations for the current year and
beyond. Management is in the process of pursuing financial
arrangements to support operations through and after
December 31, 2003. Management believes funding may be
obtained from the following sources: current cash balances, the
proceeds from the exercise of warrants, the issuance of
additional debt or equity securities, funding from strategic
partners and/or sale of assets. The Company cannot assure its
stockholders that additional capital will be available on terms
favorable to it, or at all. The various elements of the
Companys business and growth strategies, including its
introduction of new products, the expansion of its marketing and
distribution activities, and obtaining regulatory approval or
market acceptance will require additional capital. If adequate
funds are not available or are not available on acceptable
terms, the Companys ability to fund those business
activities essential to its ability to operate profitably,
including further research and development, clinical trials, and
sales and marketing activities, would be significantly limited.

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Failure to complete the merger with
Intuitive Surgical could have an adverse impact on the Company
and its stock price

Since entering into the merger agreement on
March 7, 2003, the Company has made planning and operations
decisions on the basis that the merger will be completed. These
planning and operations decisions may have been different had
the Company not entered into the merger agreement. For example,
if the Company had not entered into the merger agreement, it may
have pursued a debt or equity financing transaction in order to
assure access to sufficient working capital as an independent
company, rather than rely on the availability of Intuitive
Surgicals cash assuming the merger will be completed.
Moreover, the merger agreement contains restrictions on the
Companys incurrence of debt and issuance of equity
securities while the merger is pending. If the merger is not
completed, not only will the Company not have the benefit of
Intuitive Surgicals cash or have obtained other financing,
but the Company also will have incurred a significant amount of
non-operating expenses associated with the merger that it
otherwise would not have incurred. Consequently, if the merger
is not completed, the Companys financial condition likely
will be worse than it would have been had it never entered into
the merger agreement.

If the Company and Intuitive Surgical fail to
complete the merger, the Company will face the difficulties of
competing with limited cash resources and will need to attempt
to raise additional debt or equity capital. Such financing may
be available only on terms materially adverse to the Company,
and may not be available at all.

Additionally, if the merger is not completed, the
Companys stock would no longer be influenced by the
exchange ratio established by the merger agreement, which could
negatively impact the Companys current market valuation
and stock price.

The Company has not obtained the consent of
Arthur Andersen LLP to be named in this Form 10-K as having
audited the Companys financial statements. This will limit
your ability to assert claims against Arthur Andersen
LLP.

After reasonable efforts, the Company has been
unable to obtain the consent of Arthur Andersen LLP to the
incorporation into the registration statement of their report
with respect to the consolidated financial statements of the
Company for the years ended December 31, 2001 and
December 31, 2000 which appear in its Annual Report on
Form 10-K for the year ended December 31, 2002. Under
these circumstances, Rule 437(a) under the Securities Act
of 1933 permits the registration statement to be filed without a
written consent from Arthur Andersen. The absence of such
consent may limit your recovery on certain claims. In
particular, and without limitation, you will not be able to
assert claims against Arthur Andersen under Section 11 of
the Securities Act of 1933 for any untrue statement of a
material fact contained in the consolidated financial statements
of the Company for the years ended December 31, 2001 and
December 31, 2000 or any omission to state a material fact
required to be stated therein which appear in the Companys
Annual Report on Form 10-K for the year ended
December 31, 2002.

The conviction of Arthur Andersen LLP on
obstruction of justice charges may adversely affect Arthur
Andersens ability to satisfy claims arising from the
provision of auditing services to the Company and may impede the
Companys access to capital markets.

Arthur Andersen LLP audited the Companys
financial statements included in this Form 10-K for the
years ended December 31, 2001 and 2000. On March 14,
2002, an indictment was unsealed charging Arthur Andersen LLP
with federal obstruction of justice arising from the
governments investigation of Enron Corp. On June 15,
2002, Arthur Andersen LLP was convicted of these charges. The
impact of this conviction on Arthur Andersen LLPs
financial condition may adversely affect the ability of Arthur
Andersen LLP to satisfy any claims arising from its provision of
auditing services to the Company.

Should the Company seek to access the public
capital markets, SEC rules will require the Company to include
or incorporate by reference in any prospectus three years of
audited financial statements. The SECs current rules would
require the Company to present audited financial statements for
one or more fiscal years audited by Arthur Andersen LLP and use
reasonable efforts to obtain its consent until the audited
financial

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statements for the fiscal year ending
December 31, 2004 become available. If prior to that time
the SEC ceases accepting financial statements audited by Arthur
Andersen LLP, it is possible that the available audited
financial statements for the years ended December 31, 2001
and 2000 audited by Arthur Andersen LLP might not satisfy the
SECs requirements. In that case, the Company would be
unable to access the public capital markets unless an
independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. Any delay
or inability to access the public capital markets caused by
these circumstances could have a material adverse effect on the
combined companys business, profitability and growth
prospects.


If the Companys products do not
achieve market acceptance, the Company will not be able to
generate the revenue necessary to support its
business.

The Company anticipates that ZEUS will comprise a
substantial majority of its sales in the future and its future
success therefore depends on the successful development,
commercialization and market acceptance of this product. Even if
the Company is successful in obtaining the necessary regulatory
clearances or approvals for ZEUS, its successful
commercialization will depend upon the Companys ability to
demonstrate the clinical safety and effectiveness, ease-of-use,
reliability and cost-effectiveness of this product in a clinical
setting. The Company cannot assure its investors that the FDA
will allow it to conduct further 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 the Company may encounter problems in
clinical testing that cause a delay in or prohibits
commercialization of ZEUS. Moreover, the clinical trials may
identify significant technical or other obstacles to overcome
prior to the commercial deployment of ZEUS, resulting in
significant additional product development expense and delays.
Even if the safety and effectiveness of procedures using ZEUS
are established, surgeons may elect not to recommend the use of
the product for any number of reasons. Broad use of the
Companys 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. Successful commercialization of the
Companys products will also require that the Company
satisfactorily address the needs of various decision makers in
the hospitals that constitute the target market for its products
and to address potential resistance to change in existing
surgical methods. If the Company is unable to gain market
acceptance of its products, the Company will not be able to sell
enough of its products to be profitable, and the Company may be
required to obtain additional funding to develop and bring to
market alternative products.

If the Company does not obtain and maintain
necessary domestic regulatory approvals, the Company will not be
able to market and sell its products in the United
States.

The Companys products in the United States
are regulated as medical devices by the FDA. The FDA strictly
prohibits the marketing of FDA-cleared or approved medical
devices for unapproved uses. Failure to receive or delays in
receipt of FDA clearances or approvals, including any resulting
need for additional clinical trials or data as a prerequisite to
approval or clearance, or any FDA conditions that limit the
Companys ability to market its products for particular
uses or indications, could impair the Companys ability to
effectively develop a market for its products and impair its
ability to operate profitably in the future.

The Companys operations are subject to the
FDAs Quality System Regulation (a federal regulation
governing medical devices) and ISO-9001 (a global standard for
quality systems) and similar regulations in other countries,
including EN-46001 Standards (the European standard for quality
systems), regarding the design, manufacture, testing, labeling,
record keeping and storage of devices. Ongoing compliance with
FDAs Quality System Regulation requirements and other
applicable regulatory requirements will be monitored through
periodic inspection by federal and state agencies, including the
FDA, and comparable agencies in other countries. The
Companys manufacturing processes are subject to stringent
federal, state and local regulations governing the use,
generation, manufacture, storage, handling and disposal of
certain materials and wastes. Failure to comply with applicable
regulatory requirements can result in, among other things,
suspensions or withdrawals of approvals, product seizures,
injunctions, recalls of products, operating restrictions, and
civil fines and criminal prosecution. Delays or failure to
receive approvals or clearances for the

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Companys current submissions, or loss of
previously received approvals or clearances, would materially
adversely affect the marketing and sales of its products and
impair its ability to operate profitably in the future.


The Companys products are subject to
various international regulatory processes and approval
requirements. If the Company does not maintain the necessary
international regulatory approvals, the Company will not be able
to market and sell its products in foreign
countries.

To be able to market and sell the Companys
products in other countries, it must obtain regulatory approvals
and comply with the regulations of those countries. For
instance, the European Union requires that manufacturers of
medical products obtain the right to affix the CE mark to their
products before selling them in member countries of the European
Union. The CE mark is an international symbol of adherence to
quality assurance standards and compliance with applicable
European medical device directives. In order to obtain the right
to affix the CE mark to products, a manufacturer must obtain
certification that its processes meet certain European quality
standards. The Company has obtained the CE mark for all of its
products, which means that these products may currently be sold
in all of the member countries of the European Union.

If the Company modifies existing products or
develops new products in the future, including new instruments,
the Company will need to apply for permission to affix the CE
mark to such products. In addition, the Company will be subject
to annual regulatory audits in order to maintain the CE mark
permissions it has already obtained. If the Company is unable to
maintain permission to affix the CE mark to its products, the
Company will no longer be able to sell its products in member
countries of the European Union.

International sales of the Companys
products account for a significant portion of its revenues and
the Companys growth may be limited if the Company is
unable to successfully manage these international
activities.

The Companys business currently depends in
large part on its sales activities in Europe and Asia, and the
Company intends to expand its presence into additional foreign
markets. Sales to markets outside of the United States accounted
for approximately 26% of the Companys sales for the year
ended December 31, 2002. The Company is subject to a number
of challenges that relate to its international business
activities. These challenges include:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the risks associated with foreign currency
    exchange rate fluctuation;                                                                      
|
| |  | failure of local laws to provide the same degree
    of protection against infringement of the Companys
    intellectual property;            
|
| |  | certain laws and business practices that could
    favor local competitors, which could slow the Companys
    growth in international markets;
|
| |  | building an organization capable of supporting
    geographically dispersed operations; and                                                    
|
| |  | the expense of establishing facilities and
    operations in new foreign markets.                                                              

Currently, the majority of the Companys
international sales are denominated in U.S. dollars. As a
result, an increase in the value of the U.S. dollar relative to
foreign currencies could make the Companys products less
competitive in international markets. If the Company is unable
to meet and overcome these challenges, its international
operations may not be successful, which would limit the growth
of the Companys business.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company may never sell enough products
    to be profitable because the Companys customers may choose
    to purchase its competitors products or may not accept the
    Companys products.

The Minimally Invasive Surgery (MIS)
market has been, and will likely continue to be, highly
competitive. Many competitors in this market have significantly
greater financial resources and experience than the Company. In
addition, some of our competitors, including Intuitive Surgical,
have been, and may continue to be able to market their products
sooner than the Company if they are able to achieve regulatory
approval before the Company. Many medical conditions that can be
treated using the Companys products can

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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 the Companys products and could
render the Companys products obsolete or unmarketable. As
a result, the Company cannot be certain that physicians will use
the Companys products to replace or supplement established
treatments or that its products will be competitive with current
or future technologies.




| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If surgeons or institutions are unable to
    obtain reimbursement from third-party payors for procedures
    using the Companys products, or if reimbursement is
    insufficient to cover the costs of purchasing the Companys
    products, the Company be unable to generate sufficient sales to
    support its business.

In the United States, the Companys products
are primarily acquired by medical institutions that 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. Third-party
payors are increasingly scrutinizing whether to cover new
products and, if so, the level of reimbursement. There can be no
assurance that third-party reimbursement and coverage for the
Companys products will be available or adequate, that
current reimbursement amounts will not be decreased in the
future, or that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise affect the
demand for the Companys products or the Companys
ability to sell its products on a profitable basis, particularly
if the Companys products are more expensive than competing
surgical or other procedures. If third-party payor coverage or
reimbursement is not available or inadequate, purchasers of the
Companys products would lose their ability to pay for the
Companys products, and the Companys ability to make
future sales and collect on outstanding accounts would be
significantly impaired, which would limit the Companys
ability to operate profitably

If the Company is unable to protect the
intellectual property contained in its products from use by
third parties, the Companys ability to compete in the
market will be harmed.

The Companys success depends, in part, on
its ability to obtain and maintain patent protection for its
products by filing United States and foreign patent applications
related to its technology, inventions and improvements. However,
there can be no assurance that third parties will not seek to
assert that the Companys devices and systems infringe
their patents or seek to expand their patent claims to cover
aspects of the Companys technology. As a result, there can
be no assurance that the Company will not become subject to
future patent infringement claims or litigation in a court of
law, interference proceedings, or opposition to a patent granted
in a foreign jurisdiction. The defense and prosecution of such
intellectual property claims are costly, time-consuming, divert
the attention of management and technical personnel and could
result in substantial cost and uncertainty regarding the
Companys future viability. Future litigation or regulatory
proceedings, which could result in substantial cost and
uncertainty, may also be necessary to enforce the Companys
patent or other intellectual property rights or to determine the
scope and validity of other parties proprietary rights.
Any public announcements related to such litigation or
regulatory proceedings initiated by the Company, or initiated or
threatened against the Company by its competitors, could
adversely affect the price of the Companys stock.

The Company also relies upon trade secrets,
technical know-how and continuing technological innovation to
develop and maintain its competitive position, and the Company
typically requires its employees, consultants and advisors to
execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory
relationships. There can be no assurance, however, that these
agreements will not be breached or that the Company will have
adequate remedies for any breach. Failure to protect the
Companys intellectual property would limit its ability to
produce and/or market its products in the future and would
likely adversely affect the Companys revenues generated by
the sale of such products.

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The Company is involved in intellectual
property litigation with Intuitive Surgical and Brookhill-Wilk
that may hurt the Companys competitive position, may be
costly to the Company and may prevent the Company from selling
its products.

On May 10, 2000, the Company filed a lawsuit
in United States District Court alleging that Intuitive
Surgicals da Vinci surgical robot system infringes on its
United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664 and, 5,855,583. Subsequently,
Computer Motions complaint was amended to add allegations
that Intuitives da Vinci surgical robot infringed three
additional Computer Motion patents United States Patent Nos.
6,244,809, 6,102,850 and 6,063,095. These patents concern
methods and devices for conducting various aspects of robotic
surgery. Intuitive has served an Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway.
The parties have filed cross motions for summary judgment on the
issue of patent infringement relating to the 664,
809, and 850 patents. The Court recently granted
Intuitives motion for summary judgment of non-infringement
relating to the 850 patent. The Court also recently
granted our motion for partial summary judgment relating to the
809 patent. The Court has not ruled on any of the
remaining motions at this time. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on
March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the
merger agreement is terminated, or subject to this case being
dismissed upon consummation of the transactions contemplated by
the merger agreement.

On or about December 7 and 8, 2000, the United
States Patent and Trademark Office (USPTO) granted three of
Intuitives petitions for a declaration of an interference
relating to the Companys 5,878,193, 5,907,664, and
5,855,583 patents. On March 30, 2002, the three judge panel
of the Board of Patent Interferences issued decision orders on
the parties preliminary motions. The Board granted the
Companys motion on Interference No. 104,643 and
issued an order for Intuitive to show cause why judgment should
not be entered against Intuitive on this interference. The Board
denied the Companys motion on the Interference
No. 104,644 and entered judgment against the Company. The
Board denied the Companys motions on the Interference
No. 104,645, deferred decision on two of Intuitives
motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitives motions. The
Boards decision on Interference No. 104,645
invalidated some of the parties claims, affirmed some of
Intuitives claims and provided for further proceedings
related to two of our claims and is therefore not final. On
July 25, 2002, Computer Motion filed a civil action seeking
review of the two adverse decisions in the United States
District Court for the District of California. Pursuant to the
merger agreement with Intuitive, Computer Motion and Intuitive
filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being
lifted if the merger agreement is terminated, or subject to this
case being dismissed upon consummation of the transactions
contemplated by the merger agreement.

On February 21, 2001, Brookhill-Wilk filed
suit against the Company alleging that its ZEUS surgical system
infringed upon Brookhill-Wilks United States Patent Nos.
5,217,003 and 5,368,015. Brookhill-Wilks complaint seeks
damages, attorneys fees and increased damages alleging
willful patent infringement. On March 21, 2001, the Company
served its Answer and Counterclaim alleging non-infringement of
each patent-in-suit, patent invalidity and unenforceability. On
November 8, 2001, the United States District Court for the
Southern District of New York in the co-pending Brookhill-Wilk
v. Intuitive Surgical, Inc., Civil Action No. 00-CV-6599
(NRB), issued an order interpreting the claims of
Brookhill-Wilks Patent No. 5,217,003 in a way that
the Company believes excludes current applications of the
Companys ZEUS surgical system. In light of this decision,
on November 13, 2001, the parties to Brookhill Wilk v.
Computer Motion, Inc. agreed to dismiss the case without
prejudice. On March 25, 2002, Judge Alvin K. Hellerstein
dismissed the case without prejudice.

On March 30, 2001, Intuitive and IBM
Corporation filed suit alleging that the Companys AESOP,
ZEUS and HERMES products infringe United States Patent
No. 6,201,984, which was issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent
injunction, and costs and attorneys fees. The claims are
directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims
are limited to a surgical system employing voice recognition for
control of a surgical robot and literally read on the
Companys current AESOP product and the Companys

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ZEUS and HERMES products to the extent they are
used with AESOP. A jury trial has been held on the issues of
patent invalidity due to lack of enablement and failure to
disclose the best mode in addition to damages. The
Companys defense of unenforceability due to prosecution
laches was tried before the District Court Judge. The jury
returned a verdict finding IBMs United States Patent
No. 6,201,984 valid, and finding Intuitive was damaged in
an amount of $4.4 million. At December 31, 2002, the
Company recorded a $4.4 million litigation provision for
this related jury verdict that was recorded within the
litigation provision within the accompanying consolidated
statements of operations and comprehensive income (loss). In
addition, the litigation provision included in the accompanying
consolidated statements of operations and comprehensive income
(loss) includes legal expenses incurred during the three years
ended December 31, 2002. Prior to the jurys verdict,
the court ruled that the Company had not willfully
infringed the patent. On December 10, 2002, the Court
rendered an adverse decision on our prosecution laches defense
and on December 11, 2002, issued a judgment in
Intuitives and IBMs favor based upon the earlier
jury verdict and the Courts December 10, 2002 ruling.
The case has entered the post-trial phase during which we will
be seeking judicial review of the jurys verdict and the
Courts December 10, 2002 ruling. Pursuant to the
merger agreement with Intuitive, Computer Motion and Intuitive
filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being
lifted if the merger agreement is terminated, or subject to this
case being dismissed upon consummation of the transactions
contemplated by the merger agreement.


The Company believes that all of its major
product lines could be affected by this litigation. The patents
subject to this litigation are an integral part of the
technology incorporated in the Companys AESOP, ZEUS and
HERMES product lines which together accounted for approximately
76% of its revenues for the year ended December 31, 2002.
If the stay is lifted and the Company loses the suit brought by
Intuitive and IBM or loses any patent infringement suit refiled
by Brookhill-Wilk, the Company may be prevented from selling its
products as currently configured without first obtaining a
license to the disputed technology from the successful party or
modifying the product. Obtaining a license could be expensive,
or could require that the Company license to the successful
party some of its own proprietary technology, either of which
result could seriously harm the Companys business. In the
event that a successful party is unwilling to grant the Company
a license, the Company will be required to stop selling its
products that are found to infringe the successful partys
patents unless the Company can redesign them so they do not
infringe these patents, which the Company may be unable to do.
Whether or not the Company is successful in these lawsuits in
the event that the stay is lifted, the litigation could consume
substantial amounts of the Companys financial and
managerial resources. Further, because of the substantial amount
of discovery often involved in connection with this type of
litigation, there is a risk that some of the Companys
confidential information could be compromised by disclosure
during the discovery process.

Because the Companys industry is
subject to rapid technological change and new product
development, the Companys future success will depend upon
its ability to expand the applications of the Companys
products.

The Companys success will depend to a
significant extent upon its ability to enhance and expand the
utility of its products so that they gain market acceptance.
Failure to develop or introduce new products or product
enhancements on a timely basis that achieve market acceptance
could have a material adverse effect on the Companys
business, financial condition and results of operations. In the
past, some of the Companys competitors have been able to
develop desirable product features (such as articulation of
certain instruments and three dimensional visualization of their
products) earlier than the Company has. The Companys
inability to rapidly develop these features may have led to
lower sales of some of the Companys products. In addition,
technological advances with other therapies could make such
therapies less expensive or more effective than using the
Companys products and could render its technology obsolete
or unmarketable. There can be no assurance that physicians will
use the Companys products to replace or supplement
established treatments or that the Companys products will
be competitive with current or future technologies.

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The Company may not be able to expand its
marketing distribution activities in order to market its
products competitively.

The Company anticipates significantly increasing
the number of sales personnel to more fully cover its target
markets, particularly as the Company expands its product
offerings. It is possible the Company will be unable to compete
effectively in attracting, motivating and retaining qualified
sales personnel. Additionally, the Company currently intends to
market and sell its products outside the United States and
Europe, principally through distributors. In order to accomplish
this, the Company will be required to expand its distributor
network. The Company may not be able to identify suitable
distributors or negotiate acceptable distribution agreements and
any such distribution agreements may not result in significant
sales. If the Company is unable to identify, attract, motivate
and retain qualified sales personnel, suitable distributors or
negotiate acceptable distribution agreements, the Company may
not be successful in expanding the market for its products
outside of the United States and Europe.

Concentration of ownership among the
Companys existing executive officers, directors and
principal stockholders may prevent new investors from
influencing significant corporate decisions.

The Companys current directors and
executive officers beneficially own approximately 24.84% of its
outstanding common stock. These stockholders, acting together,
have the ability to significantly influence the election of the
Companys directors and the outcomes of other stockholder
actions and, as a result, direct the operation of its business,
including delaying or preventing a proposed acquisition of the
Company.

If the Company loses its key personnel or
is unable to attract and retain additional personnel, the
Companys ability to compete will be harmed.

The Companys future business and operating
results depend in significant part on its key management,
scientific, technical and sales personnel, many of whom would be
difficult to replace, and future success will depend partially
upon the Companys 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 the Company may
have difficulty attracting or retaining such personnel. In
addition, the Company does not have employment agreements with
the majority of its key personnel and also does not maintain
life insurance on any of its employees that may make it more
difficult to retain its key personnel in the future.

The Companys future operating results
may fall below securities analysts or investors
expectations, which could cause the Companys stock price
to decline and diminish the value of its investors
holdings.

The Companys results of operations may vary
significantly from quarter to quarter depending upon numerous
factors, including but not limited to, the following:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | delays associated with the FDA and other
    regulatory clearance and approval processes;         
|
| |  | healthcare reimbursement policies;                                                                
|
| |  | timing and results of clinical trials;                                                            
|
| |  | demand for its products;                                                                          
|
| |  | changes in pricing policies by the Company or its
    competitors;                                
|
| |  | the number, timing and significance of its
    competitors product enhancements and new products;
|
| |  | product quality issues; and                                                                       
|
| |  | component availability and supplier delivery
    performance.                                     

In addition, the Companys operating results
in any particular period may not be a reliable indication of its
future performance. It is likely that in some future quarters,
the Companys operating results will be below

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the expectations of securities analysts or
investors. If this occurs, the price of the Companys
common stock, and the value of its investors holdings,
will likely decline.


The Company may incur substantial costs
defending securities class action litigation due to its stock
price volatility.

The market price of the Companys common
stock is likely to be volatile and may be affected by a number
of factors, including but not limited to, the following:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated decisions by the FDA with
    respect to approvals or clearances of its competitors
    products;
|
| |  | actual or anticipated fluctuations in its
    operating results;                                                        
|
| |  | announcements of technological innovations;                                                                             
|
| |  | new commercial products announced or introduced
    by the Company or its competitors;                                  
|
| |  | changes in third party reimbursement policies;                                                                          
|
| |  | developments concerning the Companys or its
    competitors proprietary rights;                                       
|
| |  | conditions and trends in the medical device
    industry;                                                               
|
| |  | governmental regulation;                                                                                                
|
| |  | changes in financial estimates by securities
    analysts; and                                                          
|
| |  | general stock market conditions.                                                                                        

Securities class action litigation has often been
brought against companies when the market price of their
securities declines. The Company could be especially prone to
such risk because technology companies have experienced greater
than average stock price volatility in recent years. If the
Company were subject to securities litigation, the Company would
incur substantial costs and divert managements attention
defending any such claims.

The Companys reliance on sole or
single source suppliers could harm its ability to meet demand
for the Companys products in a timely manner or within its
projected budget.

The Company relies on independent contract
manufacturers, some of which are single source suppliers, for
the manufacture of the principal components of its products. In
some instances, the Company relies on companies that are sole
suppliers of key components of its products. If one of these
sole suppliers goes out of business, the Company could face
significant production delays until an alternate supplier is
found, or until the product could be redesigned and revalidated
to accommodate a new suppliers replacement component. In
addition, the Company generally submits purchase orders based
upon its suppliers current price lists. Since the Company
generally does not have written contracts for future purchase
orders with its suppliers, these suppliers may increase the cost
of the parts the Company purchases in the future.

The Companys manufacturing experience to
date has been focused primarily on assembling components
produced by third-party manufacturers. In scaling up
manufacturing of new products, the Company may encounter
difficulties involving quality control and assurance, component
availability, adequacy of control policies and procedures, lack
of qualified personnel and compliance with the FDAs
Quality System Regulations requirements. The Company may elect
to internally manufacture components currently provided by third
parties or to implement new production processes. The Company
cannot assure its stockholders 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. If necessary, this expansion will require the
commitment of capital resources for facilities, tooling and
equipment and for leasehold improvements. Further, the
Companys delay or inability to expand its manufacturing
capacity or to obtain the commitment of such resources could
result in its inability to meet demand for its products, which
could harm the Companys ability to generate revenues, lead
to customer dissatisfaction and damage its reputation.

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The use of the Companys products
could result in product liability claims that could be expensive
and harm its business.

As a medical device manufacturer, the Company
faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products
results in personal injury or death. The Company also faces the
possibility that defects in the design or manufacture of its
products might necessitate a product recall. It is possible that
the Company will experience losses due to product liability
claims or recalls in the future. The Company currently maintains
product liability insurance with coverage limits of $5,000,000,
but future claims may exceed these coverage limits. The Company
may also require increased product liability coverage as
additional potential products are successfully commercialized.
Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. While
the Company has not had any material product liability claims to
date, its defense of any future product liability claim,
regardless of its merit or eventual outcome, would divert
managements attention and could result in significant
legal costs. In addition, a product liability claim or any
product recalls could also harm its reputation or result in a
decline in revenues.

The Companys continued growth will
significantly strain its resources and, if the Company fails to
manage this growth, its ability to market, sell and develop its
products may be harmed.

The Companys growth will continue to place
significant demands on its management and resources. In order to
compete effectively against current and future competitors,
prepare products for clinical trials and develop future
products, the Company believes it must continue to expand its
operations, particularly in the areas of research and
development and sales and marketing. It is likely that the
Company will be required to implement additional operating and
financial controls, hire and train additional personnel, install
additional reporting and management information systems and
expand its physical operations. The Companys future
success will depend, in part, on its ability to manage future
growth and the Company cannot assure its investors that it will
be successful in doing so.

Future sales of the Companys common
stock could depress the market price of its common
stock.

Future sales of the Companys common stock
could depress the market price of its common stock. On
March 12, 2003, the Company filed a registration statement
on Form S-3 covering the resale of 520,000 shares of its
common stock issuable upon exercise of warrants. This
registration statement has not been declared effective. On
December 13, 2002, the Company filed a registration
statement on Form S-3 (File No. 333-101830) covering
the resale of up to an aggregate of 16,931,365 shares of
its common stock issuable upon conversion of the Companys
Series C Convertible Preferred Stock, as payment of
dividends on the Series C Convertible Preferred Stock, as a
conversion premium on the Series C Convertible Preferred Stock
and upon exercise of certain warrants. This registration
statement was declared effective on December 23, 2002. On
February 28, 2002 the Company filed a registration
statement on Form S-3 (File No. 333-83552) covering
the resale of 5,075,771 shares of its common stock by
certain selling stockholders. In addition, on or prior to
February 13, 2002, the Company issued 2,911,039 shares
of common stock upon conversion of all the shares of its
Series B Convertible Preferred Stock. The Company filed a
registration statement on Form S-3 (File
No. 333-58962) covering the shares of common stock issued
to holders upon the conversion of the Series B Convertible
Preferred Stock and issuable upon exercise of certain warrants
issued to the former holder of its Series B Convertible
Preferred Stock. The Securities Exchange Commission declared
this registration statement effective on September 24,
2001. In the future, the Company may issue additional options,
warrants or other derivative securities convertible into its
common stock. The public sale of the Companys common stock
by the selling stockholders who control large blocks of its
common stock could depress the market price of its common stock.

Failure to satisfy NASDAQ National Market
listing requirements may result in the Companys stock
being delisted from the NASDAQ National Market and being subject
to restrictions on penny stock.

The Companys common stock is currently
listed on the Nasdaq National Market under the symbol
RBOT. For continued inclusion on the Nasdaq National
Market, the Company must maintain, among other

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requirements, $10.0 million in
stockholders equity, a minimum bid price of $1.00 per
share, and a market value of its public float of at least
$5.0 million. On December 31, 2002, the Companys
stockholders equity was $5.7 million, leaving the
company non-compliant with the new minimum stockholders
equity standard on the Nasdaq National Market. In the event that
the Company fails to maintain the minimum stockholders
equity standard or other listing standards on a continuous
basis, the Companys common stock may be removed from
listing on the Nasdaq National Market. If the Companys
common stock is delisted from the Nasdaq National Market, and
the Company is not able to list the shares on the Nasdaq Small
Cap Market or another exchange, trading of its common stock, if
any, would be conducted in the over-the-counter market in the
so-called pink sheets or, if available, the
NASDAQs Electronic Bulletin Board. As a
result, stockholders could find it more difficult to dispose of,
or to obtain accurate quotations as to the value of the
Companys common stock, and the trading price per share
could decline.


If the Companys shares are not listed on
any exchange or on the Nasdaq National Market, they are also
subject to the regulations regarding trading in penny
stocks, which are those securities trading for less than
$5.00 per share. The following is a list of the restrictions on
the sale of penny stocks:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Prior to the sale of penny stock by a
    broker-dealer to a new purchaser, the broker-dealer must
    determine whether the purchaser is suitable to invest in penny
    stocks. To make that determination, a broker-dealer must obtain,
    from a prospective investor, information regarding the
    purchasers financial condition and investment experience
    and objectives. Subsequently, the broker-dealer must deliver to
    the purchaser a written statement setting forth the basis of the
    suitability finding. A broker-dealer must obtain from the
    purchaser a written agreement to purchase the securities. This
    agreement must be obtained for every purchase until the
    purchaser becomes an established customer.
|
| |  | The Exchange Act requires that prior to effecting
    any transaction in any penny stock, a broker-dealer must provide
    the purchaser with a risk disclosure document that
    contains, among other things, a description of the penny stock
    market and how it functions and the risks associated with such
    investment. These disclosure rules are applicable to both
    purchases and sales by investors.                                                                                                                                                                                                                                                                                                                                 

A dealer that sells penny stock must send to the
purchaser, within ten days after the end of each calendar month,
a written account statement including prescribed information
relating to the security. As a result of a failure to maintain
the trading of the Companys stock on the Nasdaq National
Market and the rules regarding penny stock transactions, the
investors ability to sell to a third party may be limited.
The Company makes no guarantee that its current market makers
will continue to make a market in its securities, or that any
market for its securities will continue.

Available Information

The Companys annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act are available free of charge on the
Companys web site at www.computermotion.com.




Item
2.     Properties

The Company leases approximately
45,000 square feet of office and manufacturing space in an
office park in Goleta, California, approximately
1,100 square feet of office space in Shanghai, China,
approximately 850 square feet of office space in Beijing,
China and approximately 1,300 square feet of office space
in Strasbourg, France. As of December 31, 2002, the Company
had the following aggregate minimum lease payments for certain
facilities: 2003-$1,032,000, 2004- $1,013,000, 2005-$766,000,
2006-$751,000 and thereafter $273,000.




Item 3.     Legal
Proceedings

On May 10, 2000, the Company filed a lawsuit
in United States District Court alleging that Intuitive
Surgicals da Vinci surgical robot system infringes on
its United States Patent Nos. 5,524,180, 5,878,193,

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5,762,458, 6,001,108, 5,815,640, 5,907,664 and
5,855,583. Subsequently, Computer Motions complaint was
amended to add allegations that Intuitives da Vinci
surgical robot infringed three additional Computer Motion
patents United States Patent Nos. 6,244,809, 6,102,850 and
6,063,095. These patents concern methods and devices for
conducting various aspects of robotic surgery. Intuitive has
served an Answer and Counterclaim alleging non-infringement of
each patent-in-suit, patent invalidity and unenforceability.
Discovery is still underway. The parties have filed cross
motions for partial summary judgment on the issue of patent
infringement relating to the 664, 809, and
850 patents. The Court recently granted
Intuitives motion for summary judgment of non-infringement
relating to the 850 patent. The Court also recently
granted our motion for summary judgment relating to the
809 patent. The Court has not ruled on any of the
remaining motions at this time. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on
March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the
merger agreement is terminated, or subject to this case being
dismissed upon consummation of the transactions contemplated by
the merger agreement.


On or about December 7 and 8, 2000, the
United States Patent and Trademark Office (USPTO) granted
three of Intuitives petitions for a declaration of an
interference relating to the Companys 5,878,193,
5,907,664, and 5,855,583 patents. On March 30, 2002,
the three judge panel of the Board of Patent Interferences
issued decision orders on the parties preliminary motions.
The Board granted the Companys motion on Interference
No. 104,643 and issued an order for Intuitive to show cause
why judgment should not be entered against Intuitive on this
interference. The Board denied the Companys motion on the
Interference No. 104,644 and entered judgment against the
Company. The Board denied the Companys motions on the
Interference No. 104,645, deferred decision on two of
Intuitives motions, and granted-in-part, denied-in-part
and deferred-in-part on one of Intuitives motions. The
Boards decision on Interference No. 104,645
invalidated some of the parties claims, affirmed some of
Intuitives claims and provided for further proceedings
related to two of our claims and is therefore not final. On
July 25, 2002, Computer Motion filed a civil action seeking
review of the two adverse decisions in the United States
District Court for the District of California.

Pursuant to the merger agreement with Intuitive,
Computer Motion and Intuitive filed on March 10, 2003,
stipulations to stay this litigation until August 31, 2003,
subject to the stay being lifted if the merger agreement is
terminated, or subject to this case being dismissed upon
consummation of the transactions contemplated by the merger
agreement.

On February 21, 2001, Brookhill-Wilk filed
suit against the Company alleging that its ZEUS surgical system
infringed upon Brookhill-Wilks United States Patent
Nos. 5,217,003 and 5,368,015. Brookhill-Wilks
complaint seeks damages, attorneys fees and increased
damages alleging willful patent infringement. On March 21,
2001, the Company served its Answer and Counterclaim alleging
non-infringement of each patent-in-suit, patent invalidity and
unenforceability. On November 8, 2001, the United States
District Court for the Southern District of New York in the
co-pending Brookhill-Wilk v. Intuitive Surgical, Inc.,
Civil Action No. 00-CV-6599 (NRB), issued an order
interpreting the claims of Brookhill-Wilks Patent
No. 5,217,003 in a way that the Company believes excludes
current applications of the Companys ZEUS surgical system.
In light of this decision, on November 13, 2001, the
parties to Brookhill Wilk v. Computer Motion, Inc. agreed to
dismiss the case without prejudice. On March 25, 2002,
Judge Alvin K. Hellerstein dismissed the case without
prejudice.

On March 30, 2001, Intuitive and IBM
Corporation filed suit alleging that the Companys AESOP,
ZEUS and HERMES products infringe United States Patent
No. 6,201,984, which was issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent
injunction, and costs and attorneys fees. The claims are
directed to a surgical system employing voice recognition for
control of a surgical instrument. Each of the asserted claims
are limited to a surgical system employing voice recognition for
control of a surgical robot and literally read on the
Companys current AESOP product and the Companys ZEUS
and HERMES products to the extent they are used with AESOP. A
jury trial has been held on the issues of patent invalidity due
to lack of enablement and failure to disclose the best mode in
addition to damages. The Companys defense of
unenforceability due to prosecution laches was tried before the
District Court Judge. The jury returned a verdict finding
IBMs United States Patent No. 6,201,984 valid, and
finding

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Intuitive was damaged in an amount of
$4.4 million. Prior to the jurys verdict, the court
ruled that the Company had not willfully infringed
the patent. On December 10, 2002, the Court rendered an
adverse decision on our prosecution laches defense and on
December 11, 2002, issued a judgment in Intuitives
and IBMs favor based upon the earlier jury verdict and the
Courts December 10, 2002 ruling. The case has entered
the post-trial phase during which we will be seeking judicial
review of the jurys verdict and the Courts
December 10, 2002 ruling. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on
March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the
merger agreement is terminated, or subject to this case being
dismissed upon consummation of the transactions contemplated by
the merger agreement.


The Company believes that all of its major
product lines could be affected by this litigation. The patents
subject to this litigation are an integral part of the
technology incorporated in the Companys AESOP, ZEUS and
HERMES product lines which together accounted for approximately
76% of its revenues for the year ended December 31, 2002.
If the stay is lifted and the Company loses the suit brought by
Intuitive and IBM or loses any patent infringement suit refiled
by Brookhill-Wilk, the Company may be prevented from selling its
products as currently configured without first obtaining a
license to the disputed technology from the successful party or
modifying the product. Obtaining a license could be expensive,
or could require that the Company license to the successful
party some of its own proprietary technology, either of which
result could seriously harm the Companys business. In the
event that a successful party is unwilling to grant the Company
a license, the Company will be required to stop selling its
products that are found to infringe the successful partys
patents unless the Company can redesign them so they do not
infringe these patents, which the Company may be unable to do.
Whether or not the Company is successful in these lawsuits, the
litigation could consume substantial amounts of the
Companys financial and managerial resources. Further,
because of the substantial amount of discovery often involved in
connection with this type of litigation, there is a risk that
some of the Companys confidential information could be
compromised by disclosure during the discovery process.




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

No matters were submitted to a vote of the
Companys stockholders during the quarter ended
December 31, 2002.




Item 5.     Market
for Registrants Common Equity and Related Stockholder
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 2002 and 2001 are set forth below:

|                             |  |      |      |     |  |   |      | 
|---------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                             |  | High |      | Low
|Year Ended December 31, 2002 |  |      |      |    
|                             |  |      |      |    
|Fourth Quarter               |  | $    | 1.72 |     |  | $ | 0.70 | 
|Third Quarter                |  | $    | 2.40 |     |  | $ | 0.53 | 
|Second Quarter               |  | $    | 4.10 |     |  | $ | 0.67 | 
|First Quarter                |  | $    | 6.25 |     |  | $ | 3.65 | 

|                             |  |      |      |     |  |   |      | 
|---------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                             |  | High |      | Low
|Year Ended December 31, 2001 |  |      |      |    
|                             |  |      |      |    
|Fourth Quarter               |  | $    | 4.61 |     |  | $ | 3.06 | 
|Third Quarter                |  | $    | 4.80 |     |  | $ | 3.02 | 
|Second Quarter               |  | $    | 5.65 |     |  | $ | 2.88 | 
|First Quarter                |  | $    | 6.50 |     |  | $ | 3.66 | 

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

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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 14, 2003, there were
approximately 7,500 stockholders of record.

On October 31, 2002, the Company entered
into a Series C Convertible Preferred Stock Purchase
Agreement with certain institutional and accredited investors,
including Robert W. Duggan, the Companys Chairman and
Chief Executive Officer, whereby the Company agreed to issue and
sell 8,797 shares of Series C Convertible Preferred
Stock, including 7,726 shares of Series C-1
Convertible Preferred Stock and 1,071 shares of
Series C-2 Convertible Preferred Stock, for the aggregate
consideration of approximately $12,315,400. The rights,
preferences and privileges of the Series C-1 and
Series C-2 Preferred Stock are identical except that the
Company has the option to pay dividends on the Series C-1
Preferred Stock in either cash or shares of the Companys
common stock, but must pay the dividends on the Series C-2
Preferred Stock in cash. As part of the financing, the Company
agreed to issue one series of warrants to purchase an aggregate
of 1,759,345 shares of Computer Motion common stock at an
initial exercise price of $1.80 per share and another series of
warrants to purchase 1,759,345 shares of Computer
Motions common stock at an initial exercise price of $2.20
per share.

Of the 7,726 shares of Series C-1
Convertible Preferred Stock, the Company sold 6,298 shares
on October 31, 2002, and, subject to and following receipt
of stockholder approval, agreed to sell approximately
1,428 shares of Series C-1 Convertible Preferred Stock
to Robert Duggan or his designees. On January 27, 2003, the
Companys stockholders approved the purchase and sale of
such shares for an aggregate consideration of approximately
$1,999,2000, approximately $999,600 of which was paid on
January 27, 2003, through the cancellation of outstanding
principal and accrued and unpaid interest on a promissory note
executed by Mr. Duggan in favor of the Company in September
2002, and the other $999,600 of which was paid in cash and some
remaining interest on the promissory note by Mr. Duggan and
his designees on March 4, 2003. Of the 1,428 shares of
Series C Preferred Stock Mr. Duggan acquired
1,078 shares and Mr. Duggans designees acquired
350 shares.

On November 19, 2002, the Company closed the
sale of the 1,071 shares of Series C-2 Preferred Stock
in consideration of cash in the amount of $1,499,000.

At December 31, 2002, the fair value of the
warrants issued, exclusive of the warrants allocated to the
1,428 shares of Series C Convertible Preferred Stock
acquired by Mr. Duggan and his designees subsequent to
December 31, 2002, was $2,507,000. The fair value of the
beneficial conversion feature of the shares of Series C
Convertible Preferred Stock as of December 31, 2002, was
$3,244,000. At December 31, 2002, the accrued dividends
payable were $179,000.

On March 6, 2003, all holders of
Series C Convertible Preferred Stock agreed to exchange
their shares for newly issued shares of Series D
Convertible Preferred Stock. The terms of the Series D
Convertible Preferred Stock eliminated certain provisions that
were contained in the terms of the Series C Convertible
Preferred Stock that could have restricted the ability of the
Company to enter into the merger agreement with Intuitive
Surgical.

In February 2002, the Company raised net proceeds
of approximately $10,528,000 through the sale of
2,828,865 shares of common stock and the issuance of
approximately 1,697,319 warrants to purchase common stock
at $5.00 per share, with certain institutional and accredited
investors, including Robert W. Duggan, the Companys Chief
Executive Officer and Chairman. The fair market value of these
warrants was determined to

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be $3,590,000 under the Black-Scholes valuation
model and was recognized as a direct cost of raising capital. In
February $1,395,000 in accounts payable from certain vendors was
exchanged for 328,689 shares of common stock. The proceeds
from the sale of the Companys common stock were used to
retire approximately $2,359,000 (including the note payable to
Mr. Duggan) in debt and the remainder of the proceeds were
used to fund working capital needs.


On March 30, 2001, the Company entered into
an Equity Line Financing Agreement with Societe Generale, under
which the Company was entitled to issue and sell, from time to
time, shares of the Companys common stock to Societe
Generale. In connection with the Equity Line Financing
Agreement, the Company filed a Registration Statement on
Form S-2 (File No. 333-65952) covering the shares of
the Companys common stock to be issued upon delivery of
draw down notices. The parties terminated the Equity Line
Financing Agreement on February 12, 2002. Prior to
termination of the equity line, the Company raised $508,000 by
issuing 111,615 shares to Societe Generale. The Company
used these proceeds to fund working capital needs for clinical
trials, research and development, and sales and marketing
programs and for other general operating requirements.

On February 16, 2001, the Company entered
into a Securities Purchase Agreement with certain institutional
and accredited investors. Under the terms of the Securities
Purchase Agreement, the Company sold a total of
10,024 shares of the Companys Series B
Convertible Preferred Stock and warrants to purchase
557,932 shares of the Companys common stock, for the
total consideration of $10,024,000. In connection with this
transaction, the Company filed Registration Statements on
Form S-3 and Form S-2 (File Nos. 333-58962 and
333-65952 respectively) covering the shares of the
Companys common stock, which were issued upon conversion
of the shares of Series B Convertible Preferred Stock and
will be issued upon exercise of the warrants. The Company used
the proceeds from the sale of its Series B Convertible
Preferred Stock to retire approximately $3 million in debt
and the remainder will be used to fund working capital needs due
to investments in clinical trials, research and development, and
sales and marketing programs and for other general operating
requirements.




PART II






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated financial
data should be read in conjunction with the consolidated
financial statements, related notes, and other financial
information included herein. The selected data in this section
is not intended to replace the consolidated financial statements.

|                                               |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  |                                     
|                                               |  | Years Ending December 31,           
|                                               |  |                                     
|                                               |  | 2002                                 |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                               |  |                                      |         |      |  |      |         |      |  |     
|                                               |  |                                     
|                                               |  | (in thousands except per share data)
|Revenue                                        |  | $                                    | 24,111  |      |  | $    | 25,531  |      |  | $    | 21,732  |   |  | $ | 18,058  |   |  | $ | 10,586  |  
|Net loss                                       |  | $                                    | (21,151 | )    |  | $    | (16,413 | )    |  | $    | (16,349 | ) |  | $ | (13,375 | ) |  | $ | (11,545 | )
|Net loss per share                             |  | $                                    | (1.93   | )    |  | $    | (1.98   | )    |  | $    | (1.90   | ) |  | $ | (1.57   | ) |  | $ | (1.45   | )
|Weighted average common shares
    outstanding |  |                                      | 16,665  |      |  |      | 10,276  |      |  |      | 9,309   |   |  |   | 8,503   |   |  |   | 7,959   |  
|Total assets                                   |  | $                                    | 21,850  |      |  | $    | 21,186  |      |  | $    | 23,089  |   |  | $ | 23,361  |   |  | $ | 30,444  |  

26



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This discussion contains forward-looking
statements that involve risks and uncertainties. The
Companys actual results may differ materially due to
factors that include, but are not limited to, the risks
discussed in Item 1 above under the heading Risk
Factors.

Managements Discussion and Analysis of
Financial Condition and Results of Operations

The Company develops and markets proprietary
robotic and computerized surgical systems that are intended to
enhance a surgeons performance and centralize and simplify
a surgeons control of the operating room (OR).
The Company believes that its products will provide surgeons
with the precision and dexterity necessary to perform complex,
MIS procedures, as well as enable surgeons to control critical
devices in the OR through simple verbal commands. The Company
believes that its products will broaden the scope and increase
the effectiveness of MIS, improve patient outcomes, and create a
safer, more efficient and cost effective OR. On March 7,
2003, the Company entered into a merger agreement with Intuitive
Surgical, Inc., pursuant to which the Company will become a
wholly owned subsidiary of Intuitive Surgical upon completion of
the merger, which is subject to stockholder approval and other
closing conditions.

The Companys AESOP Robotic Endoscope
Positioning System allows direct surgeon control of the
endoscope through simple verbal commands, eliminating the need
for a member of a surgical staff to manually control the camera,
while providing a more stable and sustainable endoscopic image.

The Companys ZEUS Robotic Surgical System
is comprised of three surgeon-controlled robotic arms, one of
which positions the endoscope and two of which manipulate
surgical instruments. The Company believes that ZEUS will
improve a surgeons dexterity and precision and enhance
visualization of, and access to, confined operative sites.

The Companys HERMES Control Center is
designed to enable a surgeon to directly control multiple OR
devices, including various laparoscopic, arthroscopic and video
devices, as well as the Companys robotic devices, through
simple verbal commands.

The Companys SOCRATES Telementoring System
enables remote access to HERMES networked devices via
proprietary software and standard teleconferencing components.

Recurring revenue represents sales to ongoing
customer for supplies, disposable drapes, instruments,
accessories, services and extended warranty arrangements.

Development revenue comes from the following
three sources: (i), fees paid by customers for the use of
prototype product to perform limited, experimental procedures on
animals, including minimally invasive coronary artery bypass
grafts, anastomosis of the small bowel, and procedures involving
the bile duct, urethral and iliac artery; (ii) fees paid in
conjunction with the delivery of a tele-surgical system
including technical and clinical support provided by the
Company, in order to perform experimental surgeries in a
laboratory setting, as well as possible clinical cases; and
(iii) fees paid in conjunction with assisting other medical
companies to prepare their private label medical devices to be
compatible with the HERMES operating room control system.

The Company applies the provisions of Staff
Accounting Bulleting No. 101 (SAB 101) when
recognizing revenue. SAB 101 states that revenue generally
is realized or realizable and earned when all of the following
criteria are met: a) persuasive evidence of an arrangement
exists, b) delivery has occurred or the services have been
rendered, c) the sellers price to the buyer is fixed
or determinable, and d) collectibility is reasonably
assured.

The Company recognizes revenue from the sale of
products to end-users, including supplies and accessories, once
shipment has occurred and all of the conditions of SAB 101
(items (a): through (d): as identified above) have
been met (the Companys general terms are FOB shipping
point; in those few cases where the customers terms are FOB
their plant, revenue is not recognized until the Company
receives a signed delivery and acceptance certificate). Revenue
is recognized from the performance of services as the services
are performed.

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The Company recognizes revenue from the sale of
products to distributors, including supplies and accessories,
once shipment has occurred, (as the Companys general terms
are FOB shipping point), and all of the conditions of
SAB 101 have been met. The Companys distributors do
not have rights of return or cancellation. Revenue from
distributors, which do not meet all of the requirements of
SAB 101, are deferred and recognized upon the sale of the
product to the end user.

Revenues from product sales to financing
institutions are not recognized by the Company until a purchase
order is received, the product has been shipped and the funding
by the financing institution has been approved.

The Company defers revenue from the sale of
extended warranties, product upgrades and other contractual
items and recognizes them over the life of the contract or upon
shipment to the customer, as applicable.

Shipments of products to be used for
demonstration purposes or prototype products used in development
programs are included in the property and equipment balance in
the accompanying consolidated balance sheets.

The Company has sustained significant losses
since inception and expects to continue to incur losses due to
research and development efforts, costs associated with
obtaining regulatory approvals and clearances, continued
marketing expenditures to increase sales and other costs
associated with the Companys anticipated growth.
Furthermore, the Company anticipates that its operating results
may fluctuate significantly from quarter to quarter in the
future, depending on a number of factors, many of which are
outside the Companys control. These factors include timing
and results of clinical trials, delays associated with FDA and
other clearance processes, changes in pricing policy by the
Company or its competitors, changes in the financial condition
of its customers, the number, timing and significance of product
enhancements and new products by the Company and its
competitors, health care reimbursement policies and product
quality issues.



| |                             
| | ----------------------------
| | Critical Accounting Policies

Accounting policies are integral to understanding
this MD&A. The consolidated financial statements of the
Company are prepared in conformity with accounting principles
generally accepted in the United States, which requires the use
of estimates, judgments, and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the periods presented. The Companys
accounting policies are described in Note 2 to the
consolidated financial statements. Critical accounting estimates
are described in this section. An accounting estimate is
considered critical if: the estimate requires management to make
assumptions about matters that were highly uncertain at the time
the estimate was made; different estimates reasonably could have
been used; or if changes in the estimate that would have a
material impact on the Corporations financial condition or
results of operations are reasonably likely to occur from period
to period. Management believes that the accounting estimates
employed are appropriate and resulting balances are reasonable;
however, actual results could differ from the original
estimates, requiring adjustments to these balances in future
periods. The Company has discussed the development, selection
and disclosures of these critical accounting estimates with the
Audit Committee of the Companys Board of Directors, and
the Audit Committee has reviewed the Companys disclosures
relating to these estimates.

Management believes the following critical
accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of its
consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes product revenue, net of
discounts, returns, and rebates in accordance with Statement of
Financial Accounting Standards (SFAS) 48,
Revenue Recognition When the Right of Return Exists,
and Staff Accounting Bulletin (SAB) No. 101. As
required by these standards, revenue is recorded when persuasive
evidence of a sales arrangement exists, delivery has occurred,
the buyers price is fixed or determinable, contractual
obligations have been satisfied, and collectibility is
reasonably assured. These requirements are met, and sales and
related cost of sales are recognized primarily upon the shipment
of

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products, or in the case of consignment
inventories, upon the notification of usage by the customer. The
Company records at the time of sale an allowance for estimated
returns, based on historical experience, recent gross sales
levels and any notification of pending returns. Should the
actual returns differ from those estimated by the Company,
additional adjustments to revenue and cost of sales may be
required.




| |                    
| | -------------------
| | Accounts Receivable

The Company markets its products to a diverse
customer base, principally throughout the United States, Canada
and Western Europe. The Company grants credit terms in the
normal course of business to its customers, primarily hospitals,
doctors and distributors. The Company performs ongoing credit
evaluations of its customers and adjusts credit limits based
upon payment history and the customers current credit
worthiness, as determined through review of their current credit
information. The Company continuously monitors collections and
payments from customers and maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
some of its customers to make required payments. Estimated
losses are based on historical experience and any specifically
identified customer collection issues. If the financial
condition of the Companys customers, or the economy as
whole, were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
These adjustments would be included in selling, general and
administrative expenses.



| |            
| | -----------
| | Inventories

The Company values its inventory at the lower of
cost, based on the first-in first-out (FIFO) cost
method, or the current estimated market value of the inventory.
The Company writes down its inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the
cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual
future demand or market conditions differ from those projected
by management, additional inventory valuation adjustments may be
required. These adjustments would be included in cost of goods
sold.



| |                                    
| | -----------------------------------
| | Warranties and Related
    Reserves

The Company provides an accrual for the estimated
cost of product warranties and product liability claims at the
time revenue is recognized. Such accruals are based on
estimates, which are based on relevant factors such as
historical experience, the warranty period, estimated costs,
levels of insurance and insurance retentions, identified product
quality issues, if any, and, to a limited extent, information
developed by the insurance company using actuarial techniques.
These accruals are analyzed periodically for adequacy. While the
Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the
quality of its component suppliers, the warranty obligation is
affected by reported rates of product problems and costs
incurred in correcting product problems. Should actual reported
problem rates or the resulting costs differ from the
Companys estimates, adjustments to the estimated warranty
liability may be required. These adjustments would be included
in selling, general and administrative expenses.

Results of Operations



| |                                                                             
| | ----------------------------------------------------------------------------
| | For the Year Ended December 31, 2002
    Compared to the Year Ended December

|         | 
|-------- | 
|31, 2001 | 

Revenue.Revenue
decreased $1,420,000, or 6%, to $24,111,000 in 2002 from
$25,531,000 in 2001. ZEUS revenues decreased $2,099,000, or 23%,
due to a decrease in the number of units shipped which the
Company believes was due, in part, to FDA approval coming later
in the year than anticipated. AESOP revenues decreased
$1,875,000, or 23%, due to fewer units shipped. HERMES revenue
increased $628,000, or 15%, due primarily to increased demand
from the Companys new OEM partner, Smith and Nephew.
SOCRATES revenue increased $330,000, or 40%, over its
initial year as it continued to gain market acceptance.
Development revenue decreased $765,000 due to the expiration of
prior years development agreements. Grant revenue
increased $406,000, or 923%, as a result of a 3-year NIST grant
the Company received in the fourth quarter of 2001. Recurring
revenues increased $1,955,000, or 85%, as the installed base of
robotic systems increased leading to more demand for parts,
accessories, supplies and service.

29



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Revenues outside of the United States decreased
$3,913,000, or 38%. Sales to Asia and Europe and the Middle East
decreased by $695,000 and $4,916,000, respectively. This was
partially offset by an increase in sales to Canada and South
America of $1,698,000.

Gross Profit.Gross
profit decreased $693,000, or 5%, to $14,251,000 in 2002 from
$14,944,000 in 2001. Gross margin remained constant at 59% from
year to year. The decrease in gross profit was a direct result
of lower revenues.

Selling, General and
Administrative.Selling, general and
administrative expenses decreased $139,000, or 1%, to
$17,895,000 in 2002 from $18,034,000 in 2001. The decrease was
attributable to a smaller sales force early in 2002, which was
not reorganized until later in the year.

Research and
Development.Research and development
expenses decreased $1,131,000, or 9%, to $10,903,000 in 2002
from $12,034,000 in 2001. The decrease was due primarily to the
increased spending of $2,380,000 for the acceleration of
clinical trials in the last six months of 2001. This expense
increase more than offsets the transfer of the clinical
development specialists from research and development expense to
a selling expense in the second quarter of 2001, as well as,
decreased spending over prior years for initial patent filings
and professional fees.

Other
Income/(Expense).Other expense was
$53,000 in 2002 compared to $21,000 in 2001. In 2002, other
expense included interest income on short-term deposits of
$62,000, interest expense of $63,000 from debt used to finance
ongoing operations, along with $30,000 of foreign currency
transactions loss and $22,000 of miscellaneous other expenses.

Income Taxes.Minimal provisions for state income taxes have been recorded on
the Companys pre-tax losses to date. At December 31,
2002, the Company had federal and state net operating loss
carryforwards of approximately $78,718,000 and $14,074,000
respectively, which are available to offset future federal and
state taxable income. Federal carryforwards expire between
fifteen and twenty years after the year of loss and state
carryforwards expire between five and ten years after the year
of loss. The Company has provided a full valuation allowance on
the deferred income tax asset because of the uncertainty
regarding its realization.

Revenue (Quarterly
Analysis).Revenue and units shipped
by quarter for the year ended December 31, 2002 is shown in
the attached table:

|                                            |  |                                                    |       |          |  |          |       |          |  |          |       |  |  |   |       |  |  |   |       | 
|------------------------------------------- |  | -------------------------------------------------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                            |  |                                                   
|                                            |  | Revenue by Product Line for the Three Months Ended
|                                            |  |                                                   
|                                            |  | Dec. 31,                                           |       | Sep. 30, |  | Jun. 30, |       | Mar. 31, |  | Dec. 31,
|                                            |  | 2002                                               |       | 2002     |  | 2002     |       | 2002     |  | 2001    
|                                            |  |                                                    |       |          |  |          |       |          |  |         
|                                            |  |                                                   
|                                            |  | (Amounts in thousands)                            
|ZEUS surgical systems                       |  | $                                                  | 3,159 |          |  | $        | 601   |          |  | $        | 983   |  |  | $ | 2,384 |  |  | $ | 3,741 | 
|AESOP surgical systems                      |  |                                                    | 2,175 |          |  |          | 1,455 |          |  |          | 1,860 |  |  |   | 932   |  |  |   | 2,560 | 
|SOCRATES telementoring systems              |  |                                                    | 338   |          |  |          | 96    |          |  |          | 408   |  |  |   | 320   |  |  |   | 384   | 
|HERMES (systems, development, and supplies) |  |                                                    | 1,681 |          |  |          | 1,230 |          |  |          | 685   |  |  |   | 1,111 |  |  |   | 1,163 | 
|Grant revenue                               |  |                                                    | 128   |          |  |          | 132   |          |  |          | 101   |  |  |   | 88    |  |  |   |      | 
|Development revenue                         |  |                                                    |      |          |  |          |      |          |  |          | 184   |  |  |   |       |  |  |   |       | 
|Recurring revenue                           |  |                                                    | 1,341 |          |  |          | 1,020 |          |  |          | 1,027 |  |  |   | 856   |  |  |   | 622   | 
|                                            |  |                                                    |       |          |  |          |       |          |  |          |       |  |  |   |       |  |  |   |       | 
|                                            |  | $                                                  | 8,822 |          |  | $        | 4,534 |          |  | $        | 5,064 |  |  | $ | 5,691 |  |  | $ | 8,654 | 

|                               |  |                                                       |    |          |  |          |    |          |  |          |    |  |  |  |    |  |  |  |    | 
|------------------------------ |  | ----------------------------------------------------- | -- | -------- |  | -------- | -- | -------- |  | -------- | -- |  |  |  | -- |  |  |  | -- | 
|                               |  |                                                      
|                               |  | Units Sold by Product Line for the Three Months Ended
|                               |  |                                                      
|                               |  | Dec. 31,                                              |    | Sep. 30, |  | Jun. 30, |    | Mar. 31, |  | Dec. 31,
|                               |  | 2002                                                  |    | 2002     |  | 2002     |    | 2002     |  | 2001    
|                               |  |                                                       |    |          |  |          |    |          |  |         
|ZEUS surgical systems          |  |                                                       | 4  |          |  |          | 1  |          |  |          | 1  |  |  |  | 4  |  |  |  | 5  | 
|ZEUS surgical systems upgrades |  |                                                       | 3  |          |  |          | 2  |          |  |          | 3  |  |  |  | 3  |  |  |  | 3  | 
|AESOP surgical systems         |  |                                                       | 31 |          |  |          | 22 |          |  |          | 26 |  |  |  | 14 |  |  |  | 38 | 
|SOCRATES telementoring systems |  |                                                       | 4  |          |  |          | 1  |          |  |          | 5  |  |  |  | 4  |  |  |  | 4  | 

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The Company does not believe that there are
material seasonal trends. Since the first quarter of 1998, the
Company has had quarter over quarter increases in revenues in
all but five quarters. The Company is penetrating only a small
fraction of the total potential market for its products.
Although many medical conditions that can be treated using the
Companys products can also be treated by pharmaceuticals
and other medical devices, the Company does not believe that it
encounters direct competition for its AESOP, HERMES or SOCRATES
products. The Company believes that it has only one direct
competitor for its ZEUS product. Because its AESOP, HERMES,
SOCRATES and ZEUS products are comprised of relatively new
technologies, and because the current customer profiles are made
up of early adopters that share the Companys pioneering
vision for these new technologies, the Company does not believe
that there is any statistical significance to its quarterly
increase or decrease variations in business levels. The
challenges the Company faces in its attempt to increase market
share today involve market acceptance and adoption of these new
technologies. The Company believes that statistical significance
in any increases or decreases will not occur until its products
receive larger mass-market acceptance and adoption. In addition,
the Company believes that the sales cycles for capital medical
equipment is approximately three to six months, especially for
innovative technology like the Companys AESOP, HERMES,
SOCRATES and ZEUS products. Thus, sales in the fourth quarter
originate in the third quarter, and sales in the first quarter
originate in the fourth quarter of the prior year. The Company
also believes that prospecting for new sales tends to fall off
in the fourth quarter since its sales focus is on closing sales
for the current calendar year and because there are fewer
working days available due to the holiday season.

The analysis of the Companys quarterly
revenue changes is as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue for the quarter ended March 31, 2002
    compared to the quarter ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Revenue decreased $2,963,000, or 34%, to
    $5,691,000 for the quarter ended March 31, 2002 from
    $8,654,000 for the quarter ended December 31, 2001. ZEUS
    revenue of $2,384,000 for the quarter decreased $1,357,000 over
    the prior quarter due to fewer units being shipped. AESOP
    revenue of $932,000 for the quarter decreased $1,628,000 from
    the prior quarter due to fewer units being shipped. HERMES
    revenue of $1,111,000 for the quarter decreased $52,000 from the
    prior quarter due to decreased demand from the Companys
    HERMES alliance partner, Stryker Corporation. For the quarter
    ended March 31, 2002, the Company received approximately
    $88,000 of grant revenue from the 3-year NIST grant received
    late in 2001. Recurring revenue of $856,000 for the quarter
    increased $234,000 from the prior quarter as the Companys
    installed base of robotic systems continues to expand.                                                                                                                                                                                                                                
|
| | Revenue for the quarter ended June 30, 2002
    compared to the quarter ended March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Revenue decreased $627,000, or 11%, to $5,064,000
    for the quarter ended June 30, 2002 from $5,691,000 for the
    quarter ended March 31, 2002. Revenues increased in all of
    the Companys product lines, except for ZEUS and HERMES.
    ZEUS revenue of $983,000 for the quarter decreased $1,401,000
    from prior quarter as a result of fewer systems shipped. AESOP
    revenue of $1,860,000 for the quarter increased $928,000, or
    100%, from the prior quarter as a result of a greater number of
    systems shipped. HERMES revenue of $685,000 for the quarter
    decreased $426,000, or 38%, from prior quarter due to decreased
    demand from the Companys HERMES alliance partner, Stryker
    Corporation. SOCRATES revenue of $408,000 increased $88,000, or
    28% for the quarter as the product continued to gain market
    acceptance. Recurring revenue of $1,027,000 increased $171,000,
    or 20% for the quarter as the Companys installed base of
    robotic systems increased leading to greater demand for parts,
    accessories, supplies and service. Grant revenue of $101,000
    remained relatively constant from the prior quarter.
|
| | Revenue for the quarter ended September 30,
    2002 compared to the quarter ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Revenue decreased $530,000, or 10%, to $4,534,000
    for the quarter ended September 30, 2002 from $5,064,000
    for the quarter ended June 30, 2002. ZEUS revenue of
    $601,000 for the quarter decreased $382,000, or 39%, from the
    prior quarter as a result of a lower average selling price based
    on the same number of systems as well as fewer upgrades being
    shipped. AESOP revenue of $1,455,000 for the quarter decreased
    $405,000, or 22%, from the prior quarter primarily due to a
    decrease in the number of units shipped as well as a lower
    average selling price. HERMES revenue of $1,230,000 for the
    quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | increased $545,000, or 80%, over the prior
    quarter as one of the Companys HERMES alliance partners,
    Smith and Nephew, received their first production shipment of
    controllers. During the third quarter, Grant revenue of $132,000
    and recurring revenue of $1,020,000 remained relatively constant
    from the prior quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Revenue for the quarter ended December 31,
    2002 compared to the quarter ended September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Revenue increased $4,288,000, or 95%, to
    $8,822,000 for the quarter ended December 31, 2002 from
    $4,534,000 for the quarter ended September 30, 2002.
    Revenue for all of the Companys product lines increased
    from the prior quarter, with the exception of Grant revenue,
    which remained relatively constant. ZEUS revenue of $3,159,000
    for the quarter increased $2,558,000, or 426%, from the prior
    quarter due to increased demand resulting from the
    Companys FDA approval. AESOP revenue of $2,175,000 for the
    quarter increased $720,000, or 49%, from the prior quarter as
    increased demand resulted in 31 units shipped. HERMES revenue of
    $1,681,000 for the quarter increased $451,000, or 37%, from
    prior quarter due to an increase in demand from the
    Companys HERMES alliance partners. SOCRATES revenue of
    $338,000 for the quarter increased $242,000, or 252% from the
    prior quarter due to increased demand resulting in four systems
    shipped. Recurring revenues of $1,341,000 for the quarter
    increased $321,000, or 31%, from the prior quarter, as the
    installed base of robotic systems increased leading to more
    demand for parts, accessories, supplies and service.

For
the Year Ended December 31, 2001 Compared to the Year Ended
December 31, 2000

Revenue increased $3,799,000, or 17%, to
$25,531,000 in 2001 from $21,732,000 in 2000. Except for the
ZEUS product line and development fees, revenue increased on all
of the other Companys product lines over the prior year.
ZEUS revenues decreased $2,156,000, or 19%, due to
U.S. regulatory factors and the transition from MicroJoint
to MicroWrist. AESOP revenues increased $2,699,000, or 48%, due
to increased demand worldwide. HERMES revenue increased
$1,083,000, or 73%, due primarily to increased demand from the
Companys OEM partner, Stryker Corporation. SOCRATES
revenue was $832,000 for its initial year. Development revenues
decreased $201,000, or 20%, due to the expiration of prior
years development agreements. Recurring revenues increased
$1,542,000, or 68%, as the installed base of robotic systems
increased leading to more demand for parts, accessories,
supplies and service.

Gross Profit.Gross
profit increased $1,789,000, or 14%, to $14,944,000 in 2001 from
$13,155,000 in 2000. Gross margin decreased to 59% in 2001 from
61% in 2000. The decrease in gross margin was primarily due to a
shift in product mix with lower gross margins.

Selling, general and administrative expenses
increased $716,000, or 4%, to $18,034,000 in 2001 from
$17,318,000 in 2000. The increase was due mainly to the addition
of sales personnel and commission payments as the Company
expanded its worldwide sales, service and training capability,
and includes the transfer of the clinical development
specialists from research and development expense. Professional
fees increased related to the Companys patent infringement
litigation.

Research and development expenses increased
$470,000, or 4%, to $12,034,000 in 2001 from $11,564,000 in
2000. The increase was due mainly to increased spending of
$2,380,000 for the acceleration of clinical trials in the last
six months of 2001. This expense increase more than offsets the
transfer of the clinical development specialists from research
and development expense to a selling expense in the second
quarter of 2001, as well as, decreased spending over prior years
for initial patent filings and professional fees.

Other expense decreased to $21,000 in 2001 from
$118,000 in 2000. In 2001, other expense included interest
income on short-term deposits of $91,000, interest expense of
$114,000 from debt used to finance ongoing operations, along
with minor amounts on foreign currency transactions gains and
other expense.

Financial Condition

Since its inception, the Companys expenses
have exceeded its revenues, resulting in an accumulated deficit
of $116,674,000 as of December 31, 2002. Since its initial
public offering, the Company has primarily

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relied on proceeds from issuance of preferred and
common stock and bridge debt financing to fund its operations.
At December 31, 2002, the Companys current ratio
(current assets divided by current liabilities) was 1.125
to 1 versus 1.048 to 1 at December 31, 2001,
reflecting an increase in current assets of $502,000 and a
decrease in current liabilities of $621,000.


For the year ended December 31, 2002, the
Companys use of cash in operating activities of
$18,459,000 was primarily attributable to the net loss, which
was offset by depreciation, amortization and common stock issued
for services. In addition, working capital increased by
approximately $1,123,000 as a result of planned increases in
inventories and decreases in accounts payables. Inventory levels
increased as a result of actual revenue growth lower than
planned, and accounts payable decreased as a result of the
Companys efforts to keep its vendors current. Working
capital also increased as a result of increased collections of
accounts receivable and higher accrued expenses from increased
legal costs.

A significant amount of the Companys
revenues come from sales to foreign customers (26% in fiscal
year 2002). In addition, total revenues in the last four months
of 2002 were $11,621,000, or 48% of annual revenues, compared to
total revenues of $12,490,000, or 52% of annual revenues, in the
first eight months of 2002. Furthermore, 26% of the revenues
occurred within the last four weeks of the year. As a result of
these facts, accounts receivable of $6,786,000 represents 58% of
the last four months revenues at December 31, 2002.

Due to the significant percentage of revenues
recognized in the last four months of the year ended
December 31, 2002 and the 60 to 180 day payment terms,
foreign customers accounts receivable at December 31, 2002
comprised approximately 14% of revenue for the year ended
December 31, 2002. The existing pattern of substantial
receivable balances will remain for an indeterminate time due to
the following factors: (i) a substantial portion of the
revenues recognized are shipped in the last month of each
quarter and (ii) terms with foreign customers are expected
to remain at 60 to 180 days.

Cash outflow from purchases of plant and
equipment was $948,000 in 2002. The Company currently has no
material commitments for capital expenditures. For the year
ended December 31, 2002, net cash provided by financing
activities of $21,044,000 was primarily the result of equity
offerings during the course of the year.

The Companys operations to date have
consumed substantial amounts of cash, and the Company expects
its capital and operating expenditures may exceed revenues for
at least the next year. The Company raised additional funds
through the following transactions.

On March 7, 2003, the Company entered into
an Agreement and Plan of Merger with Intuitive Surgical, Inc. At
the effective time of the merger, Intuitive Merger Corporation,
Inc., formerly Iron Acquisition corporation, a newly formed
subsidiary of Intuitive Surgical, Inc., will be merged with and
into Computer Motion, Inc., with Computer Motion, Inc. surviving
the merger and continuing as a wholly owned subsidiary of
Intuitive Surgical, Inc. As a result of the merger, Computer
Motion common stockholders will be entitled to receive
approximately .52 shares of Intuitive Surgical common stock
for each share of Computer Motion common stock that they own,
subject to downward adjustment in the event that the average of
the closing bid prices of Computer Motion common stock for the
20 consecutive trading days ending 15 days prior to the
Computer Motion special meeting to approve the merger is below
$1.86 per share. Computer Motion preferred stockholders will be
entitled to receive approximately .52 shares of Intuitive
Surgical common stock for each share of Computer Motion common
stock into which the shares of Computer Motion preferred stock
that they own would have been convertible, subject to upward
adjustment in the event that the average of the closing bid
prices of Computer Motion common stock for the 20 consecutive
trading days ending 15 days prior to the Computer Motion
special meeting to approve the merger is below $1.86 per share.

In connection with the proposed merger, Computer
Motion and Intuitive Surgical have entered into a Loan and
Security Agreement, under which Intuitive Surgical has agreed to
provide a short-term secured bridge loan facility of up to
$7.3 million. The loan will terminate and all outstanding
amounts will become due and payable 120 days following
termination of the merger agreement (the Maturity
Date). Interest on the loan will accrue at a rate of 8%
per annum and will be payable on the Maturity Date.

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Additionally, pursuant to the merger agreement,
Computer Motion and Intuitive Surgical filed stipulations on
March 10, 2003 to immediately stay all pending litigation
proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or
subject to the cases being dismissed upon consummation of the
transaction contemplated by the merger agreement.

On February 13, 2003, the Company entered
into a Loan and Security Agreement with Agility Capital, LLC,
for a short-term secured bridge loan in the aggregate principal
amount of $2,300,000. The proceeds of the bridge loan were used
to provide funds for the issuance of a letter of credit to
support the issuance of a bond as required by the District Court
of Delaware in response to litigation currently pending. The
bridge loan is evidenced by a Secured Promissory Note that bears
interest at a rate of 9% per annum, is secured by all of the
Companys assets and is payable in full on
November 12, 2003. In connection with the bridge loan, the
Company issued to Agility Capital warrants to purchase up to an
aggregate of 520,000 shares of common stock at a purchase price
of $0.97 per share. The Company is in the process of registering
the resale of the shares on its registration statement of
Form S-3 with the Securities and Exchange Commission.

On October 31, 2002, the Company entered
into a Series C Convertible Preferred Stock Purchase
Agreement with certain institutional and accredited investors,
including Robert W. Duggan, the Companys Chairman and
Chief Executive Officer. Under the terms of the Series C
Stock Purchase Agreement, the Company sold a total of 7,370
shares of the Companys Series C Convertible Preferred
Stock, including 6,299 shares of Series C-1 Convertible
Preferred Stock and 1,071 shares of Series C-2 Convertible
Preferred Stock, and Series C-1 warrants to purchase an
aggregate of 1,473,745 shares of common stock at an initial
exercise price of $1.80 per share and Series C-2 warrants
to purchase an aggregate of 1,473,475 shares of common stock at
an initial exercise price of $2.20 per share and warrants to
purchase an aggregate of 290,306 shares of common stock at an
exercise price of $.001 per share for aggregate consideration of
$10,316,200. The $10,316,000 is exclusive of the $1,999,200
Robert W. Duggan investment made in January 2003. As part of the
$10,316,200 aggregate consideration, the Company received
$1,499,000 in cash for the purchase of 1,071,000 shares of
Series C-2 Convertible Preferred Stock for which the shares
were not issued as of December 31, 2002. These shares were
issued in January 2002 and at December 31, 2002, have been
shown as a stock subscription within the accompanying
consolidated statements of stockholders equity. At
December 31, 2002 the fair value of the warrants issued,
exclusive of Mr. Duggans investment, was $2,507,000.
In addition, the fair value of the beneficial conversion feature
at December 31, 2002 was determined to be $3,244,000. At
December 31, 2002, the accrued dividends payable were
$179,000. On March 6, 2003, all holders of Series C
convertible preferred stock agreed to exchange their shares for
newly issued shares of Series D convertible preferred
stock. The terms of the Series D Convertible Preferred
Stock eliminates certain provisions that were contained in the
terms of the Series C Convertible Preferred Stock that
could have restricted the ability of the Company to enter into
the merger agreement with Intuitive Surgical.

In February 2002, the holders of its
Series B Preferred Stock converted all of their remaining
shares into common stock of the Company. Approximately 2,520,000
common shares were issued in connection with the conversion. In
February 2002, the Company also terminated its equity line
agreement with Societe Generale. In connection with the
termination of the equity line agreement, the Company paid a
$135,000 settlement fee to Societe Generale.

In January 2002, the Company entered into a
secured, revolving line of credit with Bay View Funding. This
line of credit provided for borrowings up to $2,000,000 based on
eligible domestic trade receivables at a factoring fee of 2%
plus a financing fee of prime rate plus 3%, secured by all the
assets of the Company. The six-month term of this revolving line
of credit expired in July 2002 and was not renewed. In February
2002, the Company raised net proceeds of approximately
$10,528,000 through the sale of 2,828,865 shares of common stock
and the issuance of approximately 1,697,319 warrants to purchase
common stock at $5.00 per share, with certain institutional and
accredited investors, including Robert W. Duggan, the
Companys Chief Executive Officer and Chairman. The fair
market value of these warrants was determined to be $3,590,000
under the Black-Scholes valuation model and was recognized as a
direct cost of raising capital. In February $1,395,000 in
accounts payable from certain vendors was exchanged for 328,689
shares of common stock. The proceeds from the sale of the
Companys common stock were used to retire approximately
$2,359,000

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##### Table of Contents



(including the note payable to Mr. Duggan)
in debt and the remainder of the proceeds were used to fund
working capital needs.


The Company believes that while it will be unable
to fund its operations for the next twelve months with its
current cash, cash equivalents and proceeds available under the
working capital Line of Credit with Intuitive Surgical dated
March 6, 2003; management believes that it will be able to
obtain additional funding including proceeds available from the
exercise of the Companys Series C Warrants which will
enable the Company to continue its operations through
December 31, 2003. The Company cannot assure that
additional capital will be available on terms favorable to it,
or at all. The various elements of the Companys business
and growth strategies, including its introduction of new
products, the expansion of its marketing and distribution
activities and its efforts to obtain regulatory approval or
market acceptance, will require additional capital. If adequate
funds are not available or are not available on acceptable
terms, the Companys ability to fund those business
activities essential to its ability to operate profitably,
including further research and development, clinical trials, and
sales and marketing activities, would be significantly limited.

The Companys financial instruments include
cash and short-term investment grade debt securities. At
December 31, 2002, 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, 2002.

The Company leases approximately 45,000 square
feet of office and manufacturing space in an office park in
Goleta, California, approximately 1,100 square feet of office
space in Shanghai, China, approximately 850 square feet of
office space in Beijing, China and approximately 1,300 square
feet of office space in Strasbourg, France. As of
December 31, 2002, the Company had the following aggregate
minimum lease payments for certain facilities: 2003 
$1,032,000, 2004  $1,013,000, 2005 
$766,000, 2006  $751,000 and thereafter $273,000.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are
sensitive to short-term interest rate fluctuations to the extent
that such fluctuations impact the interest income we receive on
the marketable securities, which consist of bank certificates of
deposit, commercial paper, and corporate bonds, all of which by
policy must mature within 360 days. The primary objective
of our investment activities is to preserve principal while at
the same time maximizing the income we receive from our
investments without significantly increasing risk.

Trade accounts receivable and certain marketable
securities are financial instruments, which may subject the
Company to concentration of credit risk. Although the Company
does not anticipate collection problems with its receivables,
payment is contingent to a certain extent upon the economic
condition of the hospitals, which purchase the Companys
products. The credit risk associated with receivables is limited
due to the dispersion of the receivables over a number of
customers in a number of geographic areas. The Company monitors
credit worthiness of its customers to which it grants credit
terms in the normal course of business. Marketable securities
are placed with high credit qualified financial institutions and
Company policy limits the credit exposure to any one financial
instrument; therefore, credit loss is reduced. At
December 31, 2002, the Company had $2,505,000 cash in
excess of Federal Deposit Insurance Corporation (FDIC) insurance
coverage.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The financial statements and Supplementary Data
required by this Item 8 are set forth at the pages
indicated at Item 15 (a)(2).

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

On June 7, 2002, the Board of Directors of
Computer Motion, Inc. (the Company) determined, upon
the recommendation of its audit committee, to appoint Ernst
& Young LLP as the Companys independent auditors,
replacing Arthur Andersen LLP. The Company dismissed Arthur
Andersen LLP on the same date. This determination followed the
Companys decision to seek proposals from independent
public accountants to audit the financial statements of the
Company.

The audit reports of Arthur Andersen LLP on the
consolidated financial statements of the Company as of and for
the years of the Company ended December 31, 2001 and 2000
did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit
scope or accounting principles.

During the two most recent years of the Company
ended December 31, 2001 and the subsequent interim period
to the date hereof, there were no disagreements between the
Company and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to Arthur Andersen LLPs satisfaction, would have
caused Arthur Andersen LLP to make reference to the subject
matter of the disagreement in connection with its reports.

None of the reportable events described under
Item 304(a)(1)(v) of Regulation S-K occurred within
the two most recent fiscal years of the Company ended
December 31, 2001 and the subsequent interim period to the
date hereof.

During the two most recent fiscal years of the
Company ended December 31, 2001 and the subsequent interim
period to the date hereof, the Company did not consult with
Ernst & Young LLP regarding any of the matters or
events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.

The Company provided Arthur Andersen LLP a copy
of the foregoing disclosures. Attached as Exhibit 16 is a
copy of Arthur Andersens letter dated June 7, 2002
stating that it has found no basis for disagreement with such
statements.




PART III






|         |                                     
|-------- | ------------------------------------
|Item 10. | Directors and Executive
    Officers

Daniel R. Doiron,
Ph.D., 52, was a founder and director
of Miravent Medical Technologies, Inc. (formerly PDT, Inc.), a
pharmaceutical company specializing in photodynamic therapy for
certain cancers and other diseases, where he served in various
capacities, including Vice President of Technology and Chief
Scientist and President of its subsidiary, PDT Systems, Inc.,
from 1989 to 1997. Dr. Doiron holds B.S. and M.S. degrees
in Nuclear Engineering and a Ph.D. in Chemical Engineering from
the University of California at Santa Barbara.

Robert W. Duggan,
58, 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.
Mr. Duggan is Chairman of MAG International
(MAG). MAG was established by Robert W. Duggan and
Associates in 1992 and its the largest independent outdoor
advertising company in the combined Republic of Slovenia,
Croatia, Srpska, Serbia. MAG controls over 8,500 display faces.

Jeffrey O. Henley,
58, is currently an Executive Vice President and the Chief
Financial Officer of Oracle Corporation. Prior to joining Oracle
in 1991, Mr. Henley served as Executive Vice President and
Chief Financial Officer at Pacific Holding Company, Los Angeles,
and Executive Vice President and Chief Financial Officer at Saga
Corp., a multi-billion dollar food service company. He also
served as Director of

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Finance at Memorex Corp. in its large storage
division and as Controller of International Operations at
Fairchild Camera and Instruments. Mr. Henley holds a
bachelors degree in economics from the University of
California at Santa Barbara and an MBA in finance from UCLA.


Eric H. Halvorson,
53, joined the Company in July 2002 as a member of the Board of
Directors. Mr. Halvorson is currently a Visiting Professor
of Business Law and Accounting at Pepperdine University, Malibu,
California where he instructs classes in the Legal and
Regulatory Environment of Business and Financial Accounting.
Mr. Halvorson also has an extensive background in business.
He was the Executive Vice President and Chief Operating Officer
at Salem Communications Corp (NASDAQ:SALM) from 1995-2000. He
directed Salems 1999 $150 million initial public
equity offering and its $150 million public debt offering
in 1997. Prior to becoming the Chief Operating Officer of Salem
Communications, he was Vice President and General Counsel for
ten years. From 1976 until 1985, he was a partner at Godfrey and
Kahn, a Milwaukee, Wisconsin based law firm. At Godfrey and
Kahn, Mr. Halvorson specialized in corporate, banking and
securities law with a particular emphasis in mergers and
acquisitions. Mr. Halvorson is a Certified Public
Accountant and holds a Bachelor of Science degree in Accounting
from Bob Jones University and a Juris Doctor degree from Duke
University School of Law. Mr. Halvorson is currently a
director of Salem Communications Corp. and Media Arts Group,
Inc. At Computer Motion, he serves on the Audit and Compensation
Committees of the Board of Directors.

Joseph M. DeVivo,
36, joined the Company in August 2002 as President and Chief
Operating Officer. Mr. DeVivo was also granted a seat on
the Companys Board of Directors. His responsibilities
include worldwide sales and marketing. Mr. DeVivo has
extensive experience in the healthcare industry, most recently
serving as Vice President and General Manager of a
$350 million annual revenue division of TYCO
Internationals Healthcare Business, U.S. Surgical/ Davis
and Geck Sutures. As Vice President and General Manager,
Mr. DeVivo was responsible for all aspects of the division
including sales, marketing, research and development, and
finance. Additionally, over his nine years with U.S. Surgical,
Mr. DeVivo held senior positions in sales and marketing and
supervised numerous successful product launches. Mr. DeVivo
received a Bachelors of Science Degree in Marketing and
Management from the E. Claiborne Robins School of Business,
University of Richmond, Richmond, Virginia.

Executive Officers

William J. Meloche,
59, joined the Company as Executive Vice President of Sales and
Marketing in July of 2000 and is currently serving as Executive
Vice President. Mr. Meloche was formerly president and CEO
of Meloche Communications International, a communications agency
he started in 1975 focused on strategic marketing to global
markets. Meloche Communications grew from inception up to the
sale of the company to a group of investors in 1994 to annual
revenues in excess of $50,000,000. Previous clients include
American Express, Air Canada, Timex and Toyota Corporation. From
1994 until the time of his employment with the Company,
Mr. Meloche acted as an independent consultant and advisor
to companies in the areas of building business to business
relationships and changes in the management processes. He is a
respected communications innovator and the architect of the
Customer Care Process, as practiced by several leading service
corporations.

David A. Stuart, 46,
joined the Company as Vice President of Operations in June 1996.
In December 2002, he became the Vice President of Product
Marketing, Business Development, and the General Surgery
business unit. 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. Mr. Stuart
currently serves as a board member of the American Management
Association Executive Council for Strategic Supply Chain
Management.

Eugene W. Teal, 58,
joined the Company as the Executive Vice President, Finance and
Administration in January 2002. In his current role as Executive
Vice President he is helping implement strategies to ensure
sustainable competitive advantage in the Companys markets.
From 2000 to 2001 Mr. Teal served as a Business Consulting
Director at Oracle Corporation. Prior to joining Oracle, from
1981 to 1990 Mr. Teal

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served as a Senior Vice President responsible for
numerous profit centers and was a member of the Board of
Directors at Alexander & Alexander, Inc., a wholly owned
subsidiary of Alexander & Alexander Services. Between 1990
and 2000 Mr. Teal held various consulting and college
teaching positions, including the University of La Verne.
Mr. Teal was also a consultant for McKinsey & Company,
where he solved strategic problems of concern to CEOs and boards
of directors. Mr. Teal holds a Bachelors degree in
Economics from the University of California at Santa Barbara and
an MBA in Finance from UCLA.


Stephen Pedroff, 46,
joined the Company as Vice President, Corporate Relations in
September 2001. Prior to joining the Company, from 2000 to 2001
Mr. Pedroff served as Director of Business Development at
Salus Media, Inc., a developer of online health and wellness
products for the medical and insurance industries. From 1998 to
2000 Mr. Pedroff served as Vice President of Business
Development at Digital Media International, a maker of location
based entertainment products. From 1996 until 1998
Mr. Pedroff served as an Executive Producer for America
Online. Prior to joining America Online, from 1988 to 1996
Mr. Pedroff owned and ran a public relations and marketing
firm, where he created successful communications campaigns for
clients including MCI, General Motors, McGhan Medical, and
Fujitsu. Mr. Pedroff has also engaged in business
development work with companies including Mattel, Disney
Imagineering, Cendant Software, and Segasoft.

Darrin Uecker, 37,
was appointed the Companys Chief Technical Officer in
August 2002. Previously, Mr. Uecker served as the
Companys Chief Operating Officer and Vice President of
Engineering. While Vice President of Engineering,
Mr. Uecker led the research and development teams for the
Companys core product platforms: AESOP, HERMES and ZEUS.
Most recently, he was responsible for the creation of Zeus with
MicroWrist. In his current positions Mr. Uecker has overall
responsibility for the Companys Engineering, Production
and Clinical/ Regulatory/ Quality Affairs departments.
Mr. Uecker joined the Company in 1993 and has served as
Staff Software Engineer, Manager and Vice President of
Engineering. Mr. Uecker holds 11 patents and has written
numerous publications in the areas of computer vision,
man-machine interface design, and medical robotic systems and
has more than a dozen patents pending. Computer Motion is the
assignee of all patents held by Mr. Uecker that are related
to Mr. Ueckers employment, and uses those patents in
its business. The assignment from Mr. Uecker to the Company
was accomplished through an invention assignment agreement, the
form of which is used for all of the Companys technical
employees, and the signing of which was necessary in order for
the Company to agree to employ Mr. Uecker. The Company did
not pay, and is not obligated to pay, any compensation to
Mr. Uecker for any patent so assigned to the Company. In
the event Mr. Ueckers employment with the Company is
terminated for any reason, the patents would remain assigned to
the Company. In addition, as a result of the merger with
Intuitive Surgical, all of the Companys intellectual
property, including Mr. Ueckers patents that are
assigned to the Company, will be acquired by Intuitive Surgical,
with no requirement that additional compensation be paid to
Mr. Uecker. The Company believes that Intuitive Surgical
will continue to use the Companys intellectual property,
including Mr. Ueckers patents that are assigned to
the Company, in its business following the merger.
Mr. Uecker received both his B.S. and M.S. degrees in
Electrical and Computer Engineering from the University of
California at Santa Barbara.

David Munjal, 62,
joined the Company in October 2001 as Vice President of Clinical
Affairs, Regulatory Affairs, and Quality Assurance. Prior to
joining the Company, from 1997 to 2001, Dr. Munjal served
as Director of Clinical Research & Regulatory Affairs at
BioEnterics Corporation (BEC), an Inamed Company where he was
responsible for the Companys worldwide clinical and
regulatory affairs, managed and completed clinical trials for a
number of devices projects, and made regulatory submissions for
FDA approval and international regulatory agencies. Prior to
joining BEC, Dr. Munjal worked for nine years as Corporate
Director of Clinical Research/ Clinical Affairs for Meadox
Medical/ Boston Scientific Corporation. Previously,
Dr. Munjal served in various positions at Organon, Inc.,
Abbott Laboratories, and Integra Life Sciences. Dr. Munjal
received his Ph.D. in Biochemistry/ Immunology from the State
University of New York at Buffalo and did advanced post-doctoral
training and teaching at Harvard University, University of
Kentucky, and Ohio State University.

Larry Redfern, 57,
was appointed the Companys Chief Accounting Officer in
December 2002. Previously, Mr. Redfern served as the
Companys Controller since joining the Company in April
2000. Prior to

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joining Computer Motion, Mr. Redfern was
Treasurer for Applied Magnetics Corporation in Santa Barbara,
California. Mr. Redfern joined the company in 1976, as
General Accounting Manager. Applied Magnetics Corporation at one
time was the leading independent manufacturer of magnetic
recording heads for the computer industry reaching their highest
annual sales of just under $500 million for 1997.
Mr. Redfern was an Audit Manager with Laventhol and
Horwath, CPAs prior to entering private industry.
Mr. Redfern holds a bachelors degree in business from
California State University at Northridge and an MBA in business
from the University of Hawaii. In addition, Mr. Redfern
holds CPA licenses in the states of California and Hawaii.


Charles J. Vivian,
52, joined Computer Motion as Executive Vice President of Sales
for the Americas in September of 2002. Mr. Vivian has more
than twenty-five years of sales experience in the healthcare
industry, most recently as the Vice President, Sales for U.S.
Surgical, a division of TYCO Internationals Healthcare
Business. At U.S. Surgical, he managed a sales organization of
432 representatives, managers, and specialists. During his
sixteen years at U.S. Surgical, Mr. Vivian held senior
positions in sales and distribution development and has
consistently been recognized as a top performer in the U.S.
Surgical organization. He began his career at American Hospital
Supply as a sales representative. He was also a top performer in
computer system sales before joining U.S. Surgical.

Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), requires the
Companys directors and executive officers, and persons who
own more than ten percent of a registered class of the
Companys equity securities, to file reports of ownership
of, and transactions in, the Companys securities with the
Securities and Exchange Commission and The Nasdaq Stock Market.
Such directors, executive officers and 10% stockholders are also
required to furnish the Company with copies of all
Section 16(a) forms they file.

Based solely upon its review of the copies of
Forms 3, 4 and 5 and amendments thereto, the Company
believes that all filing requirements under Section 16(a)
of the Exchange Act applicable to its directors, officers and
any persons holding ten percent or more of the Companys
common stock were made with respect to the Companys fiscal
year ended December 31, 2002.

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##### Table of Contents






Item 11.     Executive
Compensation

Summary of Cash and Certain Other
Compensation

The following table shows the cash compensation
and certain other compensation paid or accrued by the Company to
its Chief Executive Officer (CEO) and each of the
four other most highly compensated executive officers of the
Company other than the CEO (collectively the Named
Executive Officers) during fiscal years 2002, 2001 and
2000 in all capacities in which they served.

Summary Compensation Table

|                   |                           |      |      |                     |  |            |         |           |  |              |        |        |  |  |         |         |  |  |   |        | 
|------------------ | ------------------------- | ---- | ---- | ------------------- |  | ---------- | ------- | --------- |  | ------------ | ------ | ------ |  |  | ------- | ------- |  |  | - | ------ | 
|                   |                           |      |      |                     |  |            |         |          
|                   |                           |      |      | Annual Compensation |  | Securities |         |          
|Name and           |                           |      |      |                     |  | Underlying |         | All Other
|Principal Position |                           | Year |      | Salary              |  | Bonus      |         | Options   |  | Compensation
|                   |                           |      |      |                     |  |            |         |           |  |             
|Robert Duggan      |                           |      | 2002 |                     |  | $          | 159,537 |           |  |              |       |        |  |  | 80,000  |         |  |  |  |       
|                   | Chairman                  |      |      | 2001                |  |            | $       | 167,680   |  |              | $      | 16,400 |  |  |         | 25,000  |  |  |   |       | 
|                   | Chief Executive Officer   |      |      | 2000                |  |            | $       | 164,000   |  |              | $      | 3,280  |  |  |         | 40,400  |  |  |   |       | 
|                  
|Joseph DeVivo(1)   |                           |      | 2002 |                     |  | $          | 75,474  |           |  | $            | 80,000 |        |  |  | 400,000 |         |  |  |  |       
|                   | President                 |      |      | 2001                |  |            |         |          |  |              |        |       |  |  |         |        |  |  |   |       | 
|                   | Chief Operating Officer   |      |      | 2000                |  |            |         |          |  |              |        |       |  |  |         |        |  |  |   |       | 
|                  
|Eugene Teal(2)     |                           |      | 2002 |                     |  | $          | 143,527 |           |  | $            | 40,000 |        |  |  | 170,000 |         |  |  |  |       
|                   | Executive Vice President  |      |      | 2001                |  |            |         |          |  |              |        |       |  |  |         |        |  |  |   |       | 
|                   |                           |      | 2000 |                     |  |            |        |           |  |              |       |        |  |  |        |         |  |  |  |       
|                  
|David A. Stuart    |                           |      | 2002 |                     |  | $          | 157,537 |           |  |              |       |        |  |  | 20,000  |         |  |  |  |       
|                   | Vice President Operations |      |      | 2001                |  |            | $       | 163,590   |  |              | $      | 14,808 |  |  |         | 15,000  |  |  |   |       | 
|                   |                           |      | 2000 |                     |  | $          | 147,000 |           |  | $            | 10,050 |        |  |  | 20,520  |         |  |  |  |       
|                  
|Darrin Uecker(3)   |                           |      | 2002 |                     |  | $          | 180,080 |           |  | $            | 16,000 |        |  |  | 250,000 |         |  |  |  |       
|                   | Chief Technical Officer   |      |      | 2001                |  |            | $       | 145,609   |  |              | $      | 8,613  |  |  |         | 110,000 |  |  |   |       | 
|                   |                           |      | 2000 |                     |  |            |        |           |  |              |       |        |  |  | 90,000  |         |  |  |  |       
|                  
|William Meloche    |                           |      | 2002 |                     |  | $          | 164,422 |           |  |              |       |        |  |  | 10,000  |         |  |  |  |       
|                   | Executive Vice President  |      |      | 2001                |  |            | $       | 165,000   |  |              |        |       |  |  |         | 20,000  |  |  | $ | 30,792 | 
|                   |                           |      | 2000 |                     |  | $          | 80,752  |           |  |              |       |        |  |  | 150,000 |         |  |  |   |       



---



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | Mr. DeVivo joined the Company in August 2002
    at an annual salary of $220,000.
|   
|(2) | Mr. Teal joined the Company in January 2002
    at an annual salary of $160,000. 
|   
|(3) | Mr. Uecker became the Chief Technical
    Officer in August of 2002.             

Option Grants

The following table sets forth certain
information concerning grants of stock options to each of the
Companys Named Executive Officers during the fiscal year
ending December 31, 2002. In addition, in accordance with
the rules and regulations of the Securities and Exchange
Commission, the following table sets forth the hypothetical
gains or option spreads that would exist for the
options. Such gains are based on assumed rates of annual
compound stock appreciation of 5% and 10% from the date on which
the options were granted over the full term of the options. The
rates do not represent the Companys estimate or projection
of future common stock prices and no assurance can be given that
the rates of annual compound stock appreciation assumed for the
purposes of the following table will be achieved.

40



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##### Table of Contents



Option Grants in Last Fiscal Year

|                 |  |            |         |            |  |                |      |            |  |                          |      |     |  |  |          |  |  |   |         |  |  |   |         | 
|---------------- |  | ---------- | ------- | ---------- |  | -------------- | ---- | ---------- |  | ------------------------ | ---- | --- |  |  | -------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  |            |         |            |  |                |      |            |  |                         
|                 |  |            |         |            |  |                |      |            |  | Potential Realizable    
|                 |  | Number of  |         | % of Total |  |                |      |            |  | Value at Assumed Annual 
|                 |  | Securities |         | Options    |  |                |      |            |  | Rates of Stock Price for
|                 |  | Underlying |         | Granted to |  |                |      |            |  | Option Term(3)          
|                 |  | Options    |         | Employees  |  | Exercise       |      | Expiration |  |                         
|Name             |  | Granted(1) |         | 2002       |  | Price/Share(2) |      | Date       |  | 5%                       |      | 10%
|                 |  |            |         |            |  |                |      |            |  |                          |      |    
|Robert W. Duggan |  |            | 80,000  |            |  |                | 2.8  | %          |  | $                        | 0.65 |     |  |  | 7/5/12   |  |  | $ | 32,703  |  |  | $ | 82,875  | 
|Eugene Teal      |  |            | 30,000  |            |  |                | 1.1  | %          |  | $                        | 0.65 |     |  |  | 7/5/12   |  |  | $ | 12,263  |  |  | $ | 31,078  | 
|David A. Stuart  |  |            | 20,000  |            |  |                | 0.7  | %          |  | $                        | 0.65 |     |  |  | 7/5/12   |  |  | $ | 8,176   |  |  | $ | 20,719  | 
|Joseph DeVivo    |  |            | 300,000 |            |  |                | 10.6 | %          |  | $                        | 0.80 |     |  |  | 7/8/12   |  |  | $ | 150,935 |  |  | $ | 382,498 | 
|Joseph DeVivo    |  |            | 100,000 |            |  |                | 3.5  | %          |  | $                        | 0.86 |     |  |  | 12/30/12 |  |  | $ | 54,085  |  |  | $ | 137,062 | 
|Darrin Uecker    |  |            | 50,000  |            |  |                | 1.8  | %          |  | $                        | 1.65 |     |  |  | 5/24/12  |  |  | $ | 51,884  |  |  | $ | 131,484 | 
|Darrin Uecker    |  |            | 100,000 |            |  |                | 3.5  | %          |  | $                        | 0.65 |     |  |  | 7/5/12   |  |  | $ | 40,878  |  |  | $ | 103,593 | 
|Darrin Uecker    |  |            | 100,000 |            |  |                | 3.5  | %          |  | $                        | 0.86 |     |  |  | 12/30/12 |  |  | $ | 54,085  |  |  | $ | 137,062 | 
|William Meloche  |  |            | 10,000  |            |  |                | 0.4  | %          |  | $                        | 0.65 |     |  |  | 7/5/12   |  |  | $ | 4,088   |  |  | $ | 10,359  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Stock options vest at 25% per year for four years
    and expire 10 years from the issue date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | The exercise price per share was equal to the
    fair market value of the common stock on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | The potential realizable value is calculated
    assuming that the fair market value of the Companys common
    stock on the date of grant appreciates at the indicated annual
    rate compounded annually for the entire term of the stock option
    (ten years) and that the stock option is exercised and sold on
    the last day of its term for the appreciated stock price. The 5%
    and 10% assumed annual rates of stock price appreciation are
    mandated by the rules of the Securities and Exchange Commission.
    Actual gain, if any, on stock option exercises is dependent on
    the future performance of the common stock.

Option Exercises

The following table sets forth information
concerning the exercise of stock options during the last fiscal
year and unexercised stock options held as of the end of the
fiscal year for the Named Executive Officers. In addition, the
table includes the number of shares covered by both exercisable
and unexercisable stock options as of December 31, 2002.
Also reported are the values for in the money
options, which represent the positive spread between the
exercise prices of any such existing stock options and the
fiscal year end price of the Companys common stock.

Aggregate Option Exercises in Last Fiscal
Year-end Option Values

|                 |  |          |   |          |  |                        |   |                      |  |             |         |             |  |  |         |  |  |   |        |  |  |   |        | 
|---------------- |  | -------- | - | -------- |  | ---------------------- | - | -------------------- |  | ----------- | ------- | ----------- |  |  | ------- |  |  | - | ------ |  |  | - | ------ | 
|                 |  |          |   |          |  |                        |   |                     
|                 |  |          |   |          |  | Number of Securities   |   | Value of Unexercised
|                 |  |          |   |          |  | Underlying Unexercised |   | In-the-Money Options
|                 |  |          |   |          |  | Options at Fiscal      |   | at Fiscal           
|                 |  | Shares   |   |          |  | Year-end               |   | Year End(1)(2)      
|                 |  | Acquired |   |          |  |                        |   |                     
|                 |  | on       |   | Value    |  |                        |   | Non-                 |  |             |         | Non-       
|Name             |  | Exercise |   | Realized |  | Exercisable            |   | exercisable          |  | Exercisable |         | exercisable
|                 |  |          |   |          |  |                        |   |                      |  |             |         |            
|Robert W. Duggan |  |          |  |          |  |                        |  |                      |  |             | 93,654  |             |  |  | 117,719 |  |  |   |       |  |  | $ | 30,400 | 
|Joseph DeVivo    |  |          |  |          |  |                        |  |                      |  |             | 75,000  |             |  |  | 325,000 |  |  | $ | 17,250 |  |  | $ | 68,750 | 
|David A. Stuart  |  |          |  |          |  |                        |  |                      |  |             | 140,933 |             |  |  | 42,760  |  |  |   |       |  |  | $ | 7,600  | 
|Eugene Teal      |  |          |  |          |  |                        |  |                      |  |             | 65,334  |             |  |  | 104,666 |  |  |   |       |  |  | $ | 11,400 | 
|Darrin Uecker    |  |          |  |          |  |                        |  |                      |  |             | 77,500  |             |  |  | 372,500 |  |  |   |       |  |  | $ | 55,000 | 
|William Meloche  |  |          |  |          |  |                        |  |                      |  |             | 85,000  |             |  |  | 95,000  |  |  |   |       |  |  | $ | 3,800  | 



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents market value of underlying securities
    at date of exercise less option exercise price.                                                                                                     
|   
|(2) | Values were calculated using a price of $1.03 per
    share, the closing sale price of the Companys common stock
    as reported by the NASDAQ on December 31, 2002 minus the option
    exercise price.

41



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##### Table of Contents



Employment Agreements

In January 2002, Computer Motion entered into a
letter agreement with Eugene W. Teal, Executive Vice President,
which provides for an annual base salary of $160,000 and a
target bonus percentage of 50% of annual base salary.
Mr. Teals bonus was guaranteed for the first year of
his employment, which began on January 23, 2002. The letter
agreement also guarantees payment of Mr. Teals base
salary for a two-year period. In addition, the letter agreement
provides that in the event Computer Motion is acquired or
experiences a change in control, Mr. Teal is guaranteed
payment of his base salary through January 22, 2005.

In June 2002, Computer Motion entered into a
letter agreement with Joseph M. DeVivo, President and Chief
Operating Officer, which provides for an annual base salary of
$220,000 and a bonus of up to 90% of annual base salary. The
letter agreement guarantees payment of Mr. DeVivos
base salary and a 90% bonus for a one-year period. In addition,
in the event Mr. DeVivo terminates his employment for any
reason following 90 days after Computer Motion is acquired
or experiences a change in control, or if Computer Motion
terminates Mr. DeVivo for any reason other than for cause
after one year of service, Mr. DeVivo is guaranteed payment
of his base salary for a one-year period thereafter.

Indemnification Agreements

The Company indemnifies its directors and
officers against certain costs that could be incurred if they
were made, or threatened to be made, a party to a legal
proceeding because of their official status as a director of
officer. The indemnification agreements, together with the
Companys bylaws, provide for indemnification to the
fullest extent permitted by Delaware law.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table presents information as of
December 31, 2002 concerning compensation plans under which
the Companys equity securities are authorized for issuance:

|                                                               |  |                            |           |                      |  |                           |      |  |  |  |        | 
|-------------------------------------------------------------- |  | -------------------------- | --------- | -------------------- |  | ------------------------- | ---- |  |  |  | ------ | 
|                                                               |  |                            |           |                      |  | Number of Securities     
|                                                               |  | Number of Securities to be |           | Weighted-average     |  | Remaining Available Under
|                                                               |  | Issued Upon Exercise of    |           | Exercise Price of    |  | Equity Compensation Plans
|                                                               |  | Outstanding Options,       |           | Outstanding Options, |  | (excluding securities    
|Plan Category                                                  |  | Warrants and Rights        |           | Warrants and Rights  |  | reflected in column (a)) 
|                                                               |  |                            |           |                      |  |                          
|                                                               |  | (a)                        |           | (b)                  |  | (c)                      
|Equity compenstion plans approved by security
    holders      |  |                            | 5,535,588 |                      |  | $                         | 3.68 |  |  |  | 80,618 | 
|Equity compensation plans not approved by
    security holders |  |                            | 0         |                      |  |                           | 0    |  |  |  | 0      | 
|Total                                                          |  |                            | 5,535,588 |                      |  | $                         | 3.68 |  |  |  | 80,618 | 

The following table presents information provided
to the Company as to beneficial ownership of the Companys
common stock as of March 1, 2003 (i) by each person
(or group of affiliated persons) who is known by the Company to
own beneficially more than five percent of the Companys
common stock; (ii) by each of the Companys directors,
including the Companys Chief Executive Officer;
(iii) by each of the Named Executive Officers; and
(iv) by all directors and executive officers as a group.

Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of common
stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of
March 1, 2003 are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. To the Companys
knowledge, except as otherwise indicated and except for the
effect of community property laws, as applicable, the persons
listed below have sole voting and investment power with respect
to all shares shown as beneficially owned by them.

42



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##### Table of Contents



|                                                             |  |                    |           |                    |  |  |       |  
|------------------------------------------------------------ |  | ------------------ | --------- | ------------------ |  |  | ----- | -
|                                                             |  | Common Stock       |           | Percent of        
|Beneficial Owners                                            |  | Beneficially Owned |           | Outstanding Shares
|                                                             |  |                    |           |                   
|Directors and Executive Officers                             |  |                    |           |                    |  |  |       |  
|Joseph DeVivo(2)                                             |  |                    | 215,853   |                    |  |  | 1.10  | %
|Daniel Doiron(3)                                             |  |                    | 146,166   |                    |  |  | *     |  
|Robert W. Duggan(1)                                          |  |                    | 4,448,477 |                    |  |  | 20.96 | %
|Eric Halvorson                                               |  |                    | 8,918     |                    |  |  | *     |  
|Jeffrey Henley(3)                                            |  |                    | 196,033   |                    |  |  | 1.01  | %
|William Meloche(3)                                           |  |                    | 86,200    |                    |  |  | *     |  
|David Stuart(3)                                              |  |                    | 148,757   |                    |  |  | *     |  
|Eugene Teal(3)                                               |  |                    | 65,334    |                    |  |  | *     |  
|Darrin Uecker(3)                                             |  |                    | 91,200    |                    |  |  | *     |  
|                                                             |  |                    |           |                    |  |  |       |  
|Directors and Executive Officers as a Group
    (11 persons) |  |                    | 5,460,858 |                    |  |  | 24.84 | %



---



|  |             
|- | ------------
|* | less than 1%



|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 492,546 shares and 3,565 warrants owned
    by Mr. Duggans spouse of which he disclaims
    beneficial ownership and 100,154 stock options and 676,272
    warrants which may be exercised within 60 days from
    March 1, 2003.                
|   
|(2) | Includes 75,000 stock options and 40,000 warrants
    that may be exercised within 60 days from March 1,
    2003.                                                                                                                                         
|   
|(3) | Includes 146,833, 91,200, 86,200, 73,213, 65,334
    and 37,830 stock options and warrants which may be exercised by
    Mr. Stuart, Mr. Uecker, Mr. Meloche,
    Mr. Doiron, Mr. Teal, and Mr. Henley,
    respectively within 60 days from March 1, 2003.

Board Compensation

Directors do not receive any cash compensation
for their service as members of the Board of Directors, but are
reimbursed for expenses in connection with attendance at Board
of Directors and Board Committee meetings. Non-employee
Directors are eligible to receive discretionary stock option
grants under the Companys stock plans. Each non-employee
Director received a grant of 25,000 stock options during the
year ended December 31, 2002.

Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

During the year ended December 31, 2002, the
Compensation Committee of the Companys Board of Directors
established the levels of compensation for the Companys
executive officers. The Compensation Committee consisted of
Dr. Doiron (Chairman), Mr. Halvorson and
Mr. Henley. None of these individuals has served as an
officer or employee of the Company.

Compensation Committee Report

The Compensation Committee of the Board of
Directors (the Committee) was responsible for
administering the compensation program for the Companys
executive officers, including the named executive officers, in
2002. The Committee is composed exclusively of independent,
non-employee directors who are not eligible to participate in
any aspect of the executive compensation program, except for the
possible receipt of stock options under the Companys stock
plans.

Compensation
Philosophy.The Companys
continued growth, new product development, regulatory clearance
and market introduction activities, together with worldwide
healthcare reform and competitive pressures, present significant
challenges to the Companys management. The Committee
believes that, if the Company is to continue its growth, bring
new products to market, achieve significant revenues and become
profitable, its executive compensation program must have the
flexibility to attract and retain high quality

43



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##### Table of Contents



employees. Furthermore, the executive
compensation program must provide incentives, which will reward
key managers for aggressively pursuing the actions necessary to
improve the Companys performance and enhance long-term
stockholder value. The Companys executive compensation
program is based upon a pay-for-performance philosophy. There
are three components to the Companys executive
compensation program: base salary, a cash incentive bonus
opportunity and long-term stock based incentives. The Company is
committed to a strong link between its business and strategic
goals and its compensation program. The financial goals for
certain elements of the compensation program are reviewed and
approved by the Board of Directors in conjunction with its
approval of the Companys strategic and operating plans.


Base Salary.An
executives base salary is determined by an assessment of
his sustained performance, advancement potential, experience,
responsibility, scope and complexity of the position, current
salary in relation to the range designated for the job and
salary levels for comparable positions at peer group companies.
Additionally, the Board sets base salaries for executive
officers based on the executives contribution to the
Companys success through operational improvements and
strategic initiatives. Factors considered in determining base
salary are not assigned pre-determined relative weights.

Bonus Program.Payments under the Companys management bonus program are
based on the Companys achievement of performance goals as
approved by the Compensation Committee and the executives
achievement of individual objectives as approved by the Chief
Executive Officer. Company performance goals for 2002 were
related to targeted levels of revenue, profitability and gross
margin based on the Companys 2002 operating plan that was
approved by the Board of Directors. It is anticipated that
performance goals for 2003 will also relate to these categories.
The management bonus program provides for a normal bonus of up
to a maximum of 90% of base pay, with an over-achievement bonus
of up to an additional maximum of 25% of base pay.

Equity Based
Compensation.The Companys
overall equity based compensation philosophy is that equity
based incentives should be directly related to the creation of
stockholder value, thus providing a strong link between
management and stockholders. The Company believes that stock
based incentives are very consistent with the entrepreneurial
spirit the Company seeks in its executive team. In support of
this philosophy, the Company has awarded to its executive
officers stock options and to a limited extent, restricted stock.

Stock Option Grants.Stock options encourage and reward executive officers for
creating stockholder value as measured by stock price
appreciation. Stock options are granted at an exercise price
equal to the fair market value of the stock on the date of grant
and therefore, only have value if the price of the
Companys stock appreciates in value from the price of the
stock on the date options are granted. The executive officers
and stockholders benefit equally from such stock price
appreciation. The Company utilizes stock options, in lieu of
higher, industry standard base salaries and bonuses, as a means
to attract, retain and motivate talented executives upon whose
performance the Company is dependent. Stock options are
generally granted annually and are consistent with the
Companys objective to provide (i) a long-term equity
interest in the Company, and (ii) an opportunity for a
greater financial reward if long-term performance is sustained.
To encourage a long-term perspective, stock options cannot be
exercised immediately. Generally, stock options become
exercisable over a four-year period. All stock options granted
to executive officers are approved by the Compensation
Committee. Individual grants are dependent on the executive
officers experience, position and level of responsibility
within the Company, an evaluation of the officers
performance and an assessment of the executive officers
ability to positively impact the Companys future business
plans. No pre-assigned relative weight is ascribed to any of
these factors.

Compensation of Chief Executive Officer
Robert W. Duggan, the Companys Chairman of the Board,
assumed the responsibility of Chief Executive Officer in October
1997. Mr. Duggans annual salary for 2002 was
$159,537. He has an annual normal bonus of up to a maximum of
50% of base pay, with an annual over-achievement bonus
opportunity of up to an additional maximum of 25% of base pay
based on over-achievement of stated objectives. For the year
ended December 31, 2002, the Companys overall
performance was below targeted levels and therefore,
Mr. Duggan did not receive a bonus. Mr. Duggans
salary and bonus opportunity were considered to be very
reasonable in comparison to similar salaries and bonus
structures for

44



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##### Table of Contents



medical device company chief executive officers.
The Compensation Committee will consider future salary and bonus
adjustments and stock option grants for the chief executive
officer based on the Companys operating performance, as
well as the compensation packages of similarly positioned
medical device company Chief Executive Officers. The Committee
believes that its Chief Executive Officer should have an equity
interest in the Company.


Fiscal Year 2002 Compensation Under
Section 162(m) of the Internal Revenue Code of 1986, as
amended, compensation paid or accrued with respect to an
employee of a public corporation is limited to no more than
$1 million per year. It is not expected that the
compensation to be paid to the Companys executive officers
will exceed the $1 million limit per employee. The
Companys stock option plans are structured such that any
compensation deemed paid to an executive officer when he
exercises an outstanding stock option under the plan will
qualify as performance-based compensation that will not be
subject to the $1 million limitation.

Submitted by the Compensation Committee

|                   |  |                      |  |                      
|------------------ |  | -------------------- |  | ---------------------
|/s/ ERIC HALVORSON |  | /s/ DANIEL R. DOIRON |  | /s/ JEFFREY O. HENLEY
|                   |  |                      |  |                      
|                  
|Eric Halvorson     |  | Daniel R. Doiron     |  | Jeffrey O. Henley    

45



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##### Table of Contents



Stock Performance

The Securities and Exchange Commission requires
that the Company include in this proxy statement a line-graph
presentation comparing cumulative five-year stockholder returns
on an indexed basis with the Standard and Poors
(S&P) 500 Stock Index and either a nationally
recognized industry standard or an index of peer companies
selected by the Company. The Company uses the S&P Medical
Products and Supplies Index as its peer group index. The table
below compares the cumulative total return as of the
Companys last fiscal year assuming $100 was invested as of
August 11, 1997, the date of the Companys initial
public offering, in the common stock of the Company, the S&P
Medical Products and Supplies Index and the S&P 500
Stock Index, assuming the reinvestment of all dividends. The
Indexes are weighted based on market capitalization at the time
of each reported data point.

(GRAPH)

|                                                    |  |          |        |          |  |          |        |          |  |          |        |  |  |   |        |  |  |   |       | 
|--------------------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ | -------- |  | -------- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                                   
|                                                   
|                                                    |  | 12/31/98 |        | 12/31/99 |  | 12/31/00 |        | 12/31/01 |  | 12/31/02
|                                                   
|                                                   
|Computer Motion                                     |  | $        | 89.29  |          |  | $        | 78.57  |          |  | $        | 33.07  |  |  | $ | 28.21  |  |  | $ | 7.36  | 
|S&P 500                                             |  | $        | 133.62 |          |  | $        | 161.83 |          |  | $        | 147.42 |  |  | $ | 130.05 |  |  | $ | 93.30 | 
|S&P 500 Healthcare Equipment and
    Supplies Index |  | $        | 138.81 |          |  | $        | 131.20 |          |  | $        | 188.06 |  |  | $ | 177.55 |  |  | $ | 63.96 | 








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

On September 9, 2002 the Company issued a
$1,000,000 promissory note to Robert W. Duggan, the
Companys Chairman of the Board and Chief Executive
Officer, in exchange for funds loaned to the Company. On
January 27, 2003 the Company received stockholder approval
to convert $999,600 of the outstanding promissory note from the
Company to Mr. Duggan, into shares of the Companys
Series C Convertible Preferred Stock. On January 29,
2003 the Company issued 714 shares of Series C Convertible
Preferred Stock in exchange for the note. In addition, the
stockholders approved the purchase of an additional $999,600 of
Series C Convertible Preferred Stock by Mr. Duggan, or
his designees, which was received in March 2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. Our Chief Executive Officer and Chief Accounting
Officer are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c) for the Company. Our Chief Executive Officer and Chief
Accounting Officer, after evaluating the effectiveness of our
disclosure controls and procedures as of a date within 90 days
before the filing date of this Annual Report on Form 10-K,
have concluded that our disclosure controls and procedures are
effective.

46



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##### Table of Contents



(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in
other factors that could significantly affect those controls
subsequent to the date of the evaluation.




PART IV






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



| |     |                                                   
| | --- | --------------------------------------------------
| | (a) | List of Documents Filed as Part of This
    Report



| |                         
| | ------------------------
| | (1) Financial Statements



| |                                                                
| | ---------------------------------------------------------------
| | See Index to Financial Statements and Schedule on
    page F-1.



| |                                     
| | ------------------------------------
| | (2) Financial Statement
    Schedule



| |                                                                
| | ---------------------------------------------------------------
| | See Index to Financial Statements and Schedule on
    page F-1.



| |              
| | -------------
| | (3) Exhibits.

|        |    |             |  |                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Second Amended and Restated Certificate of
    Incorporation.*                                                                                                                                                                                                   
|        | 3  | .2          |  | Bylaws of the Company.*                                                                                                                                                                                                                                          
|        | 4  | .1          |  | Certificate of Designations Setting Forth the
    Preferences, Rights, and Limitations of the Series B
    Convertible Preferred Stock, filed on February 16,
    2001.                                                                                         
|        | 4  | .2          |  | Registration Rights Agreement, dated as of
    February 16, 2001, by and between the Company, Societe
    Generale, Catalpa Enterprises, Ltd., Jeffrey O. Henley, Robert
    W. Duggan, Mahkam Zananeh, Baystar Capital, LP, and Baystar
    International, Ltd.
|        | 4  | .3          |  | Form of Warrant for the purchase of Common Stock
    of The Company, Inc.                                                                                                                                                                                       
|        | 4  | .4          |  | Registration Rights Agreement, dated as of
    March 30, 2001, by and between the Company and Societe
    Generale.                                                                                                                                            
|        | 4  | .5          |  | Registration Rights Agreement, dated as of
    February 13, 2002, among the Company and the Purchasers
    listed on Exhibit A thereto.                                                                                                                      
|        | 4  | .6          |  | Certificate of Designations Setting Forth the
    Preferences, Rights and Limitations of the Series C
    Convertible Preferred Stock, filed on October 31, 2002.(1)                                                                                             
|        | 4  | .7          |  | Form of Registration Rights Agreement, dated as
    of October 31, 2002, by and among the Company and the
    investors signatory thereto.(1)                                                                                                                    
|        | 4  | .8          |  | Form of Series C-1 Warrant for the purchase
    of the Companys common stock.(1)                                                                                                                                                                                
|        | 4  | .9          |  | Form of Series C-2 Warrant for the purchase
    of the Companys common stock.(1)                                                                                                                                                                                
|        | 4  | .10         |  | Form of Agreement (regarding the Series C
    Convertible Preferred Stock), dated December 11, 2002, by
    and among the Company and the investors signatory thereto.(2)                                                                                        
|        | 4  | .11         |  | Form of Secured Promissory Note (included as
    Exhibit C to Exhibit 10.28 below).(3)                                                                                                                                                                           
|        | 4  | .12         |  | Form of Warrant for the purchase of the
    Companys common stock.(3)                                                                                                                                                                                           
|        | 4  | .13         |  | Certificate of Designations Setting Forth the
    Preferences, Rights and Limitations of the Series D
    Convertible Preferred Stock, filed on March 6, 2003.(4)                                                                                                
|        | 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.*(5)                                                                                                                
|        | 10 | .3          |  | Registration Agreement between the Company and
    certain stockholders.*                                                                                                                                                                                        
|        | 10 | .4          |  | Sales Agreement between the Company and
    Medtronic, Inc. dated May 28, 1997.*(5)                                                                                                                                                                              
|        | 10 | .5          |  | Form of Warrant to Purchase Common Stock issued
    in connection with Bridge Financing Agreements.*                                                                                                                                                             

47



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 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.*(5)                                                                                                                                                    
|        | 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 | .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*                                                                                                                                                                                                           
|        | 10 | .15         |  | Stock Purchase Agreement between the Company and
    the Investors listed on Schedule A thereto, dated
    June 29, 2000.***                                                                                                                               
|        | 10 | .16         |  | Promissory Note between the Company and Robert W.
    Duggan, dated July 25, 2000.***                                                                                                                                                                      
|        | 10 | .17         |  | Form of Redeemable Warrant to Purchase common
    stock of the Company.***                                                                                                                                                                                 
|        | 10 | .18         |  | Promissory Note between the Company and Robert W.
    Duggan, dated December 12, 2000.****                                                                                                                                                                 
|        | 10 | .19         |  | Securities Purchase Agreement, dated
    February 16, 2001, by and between the Company, Societe
    Generale, Catalpa Enterprises, Ltd., Jeffrey O. Henley, Robert
    W. Duggan, Mahkam Zananeh, Baystar Capital, LP, and Baystar
    International, Ltd.
|        | 10 | .20         |  | Equity Line Financing Agreement, dated as of
    March 30, 2001, by and between the Company and Societe
    Generale.                                                                                                                                    
|        | 10 | .21         |  | Amended and Restated Equity Line Financing
    Agreement, dated as of September 30, 2001, by and between
    and Societe Generale.                                                                                                                      
|        | 10 | .22         |  | Stock Purchase Agreement, dated January 30,
    2002, by and between the Company and Steven L.
    Gruba.                                                                                                                                              
|        | 10 | .23         |  | Stock Purchase Agreement, dated January 22,
    2002, by and between the Company and Stradling Yocca Carlson
    & Rauth, P.C.                                                                                                                         
|        | 10 | .24         |  | Securities Purchase Agreement, dated
    February 13, 2002, among the Company and the Purchasers
    listed on Exhibit A thereto.                                                                                                                      
|        | 10 | .25         |  | Stock Purchase Agreement, dated February 19,
    2002, by and between the Company and Corlund Electronics,
    Inc.                                                                                                                                    
|        | 10 | .26         |  | Form of Series C Convertible Preferred Stock
    Purchase Agreement, dated October 31, 2002, by and among
    the Company and the investors signatory thereto.(1)                                                                                          
|        | 10 | .27         |  | Form of Amendment No. 1 to Series C
    Convertible Preferred Stock Purchase Agreement, dated
    December 11, 2002, by and among the Company and the
    investors signatory thereto.(2)                                                                  
|        | 10 | .28         |  | Form of Loan and Security Agreement, dated
    February 13, 2003, between the Company and Agility Capital,
    LLC.(3)                                                                                                                                     
|        | 10 | .29         |  | Form of Stock Exchange Agreement, dated
    March 6, 2003, by and between the Company and the investors
    signatory thereto.                                                                                                                             
|        | 16 | .1          |  | Letter of Arthur Andersen LLP.                                                                                                                                                                                                                             
|        | 21 | .1          |  | Subsidiaries of the Company.                                                                                                                                                                                                                               
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                                                    
|        | 23 | .2          |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                                                           

48



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##### Table of Contents



|        |    |             |  |                                                                                                                                                          
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 99 | .1          |  | Certification of Robert W. Duggan, the
    Companys Chairman and Chief Executive Officer, pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 99 | .2          |  | Certification of Larry Redfern, the
    Companys Chief Accounting Officer, pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.               



---



|     |                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------
|*    | Incorporated by reference to the Companys
    Form S-1 (File No. 333-29505) declared effective
    August 11, 1997. 
|    
|**   | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1997.  
|    
|***  | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the period ended
    March 31, 2001.
|    
|**** | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2000.  



|     |                                                                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Companys Current Report on Form 8-K
    filed with the Commission on March 26, 2001.                                                                                 
|    
|   | Companys Quarterly Report on Form 10-Q
    for the period ended March 31, 2001.                                                                                      
|    
|  | Incorporated herein by reference to the
    Companys Pre-Effective Amendment No. 2 to
    Form S-2 (File No. 333-65952) declared effective on
    September 24, 2001.
|    
| | Incorporated herein by reference to the
    Companys Registration Statement on Form S-3 (File
    No. 333-83552) filed with the Commission on
    February 28, 2002. 



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to the
    Companys Current Report on Form 8-K filed with the
    Commission on November 4, 2002.                                             
|   
|(2) | Incorporated herein by reference to the
    Companys Current Report on Form 8-K filed with the
    Commission on December 12, 2002.                                            
|   
|(3) | Incorporated herein by reference to the
    Companys Current Report on Form 8-K filed with the
    Commission on February 24, 2003.                                            
|   
|(4) | Incorporated herein by reference to the
    Companys Current Report on Form 8-K filed with the
    Commission on March 11, 2003.                                               
|   
|(5) | 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.



|    |                    
|--- | -------------------
|(b) | Reports on Form 8-K



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed Current Reports on
    Form 8-K on November 4, 2002 and December 12,
    2002. Since December 31, 2002 the Company has filed Current
    Reports on Form 8-K on February 7, 2003,
    February 24, 2003, March 11, 2003 and April 24,
    2003.



|    |         
|--- | --------
|(c) | Exhibits



| |                                  
| | ---------------------------------
| | See Item 15(a)(3) of this Report.

49



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##### Table of Contents



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.

|                  |  |                                                       
|----------------- |  | ------------------------------------------------------
|Date May 29, 2003 |  | /s/ ROBERT W. DUGGAN                                  
|                  |  |                                                       
|                  |  | Robert W. Duggan                                      
|                  |  | Chairman and Chief Executive Officer                  
|                  |  | (Principal Executive Officer)                         
|                 
|Date May 29, 2003 |  | /s/ LARRY REDFERN                                     
|                  |  |                                                       
|                  |  | Larry Redfern                                         
|                  |  | Controller, Chief Accounting 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.

|                                       |  |          |  |              |  | 
|-------------------------------------- |  | -------- |  | ------------ |  | 
|                                      
|/s/ DANIEL R. DOIRONDaniel R. Doiron   |  | Director |  | May 29, 2003
|                                      
|/s/ ROBERT W. DUGGANRobert W. Duggan   |  | Director |  | May 29, 2003
|                                      
|/s/ ERIC HALVORSONEric Halvorson       |  | Director |  | May 29, 2003
|                                      
|/s/ JEFFERY O. HENLEYJeffrey O. Henley |  | Director |  | May 29, 2003
|                                      
|/s/ JOSEPH M. DEVIVOJoseph M. DeVivo   |  | Director |  | May 29, 2003

50



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##### Table of Contents



CERTIFICATIONS

I, Robert W. Duggan, Chairman and Chief Executive
Officer of Computer Motion, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K/A of Computer Motion, Inc.;                                                                                                                                                                                                                                                                 
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results or
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Rules 13a-14 and 15d-14 of
    the Exchange Act) for the registrant and we have:                                                                                                



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                      
| | ---------------------
| | COMPUTER MOTION, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ ROBERT W. DUGGAN

| |                                   
| | ----------------------------------
| |                                   
| | Robert W. Duggan                  
| | Chairman of the Board of Directors
| | and Chief Executive Officer       

Dated: May 29, 2003

51



---



##### Table of Contents



I, Larry Redfern, Chief Accounting Officer of
Computer Motion, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K/A of Computer Motion, Inc.;                                                                                                                                                                                                                                                                 
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results or
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Rules 13a-14 and 15d-14 of
    the Exchange Act) for the registrant and we have:                                                                                                



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                      
| | ---------------------
| | COMPUTER MOTION, INC.



| |     |                  
| | --- | -----------------
| | By: | /s/ LARRY REDFERN

| |                                            
| | -------------------------------------------
| |                                            
| | Larry Redfern                              
| | Controller and Chief Accounting
    Officer

Dated: May 29, 2003

52



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

To the Board of Directors of

Computer Motion,
Inc.:


We have audited the accompanying consolidated
balance sheet of Computer Motion, Inc. as of December 31,
2002, and the related consolidated statements of operations, and
comprehensive income (loss), stockholders equity and cash
flows for the year then ended. Our audit for the year ended
December 31, 2002 also included the financial statement
schedule listed in the index at Item 15 (a)(2). 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 audit. The
consolidated financial statements of Computer Motion, Inc. for
the years ended December 31, 2001 and 2000, were audited by
other auditors who ceased operations. Those auditors expressed
an unqualified opinion on those statements in their report dated
February 25, 2002.

We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Computer Motion, Inc. as of
December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule
for the year ended December 31, 2002 in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

The accompanying consolidated financial
statements have been prepared assuming that Computer Motion,
Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred recurring operating
losses and has an accumulated deficit of $116,674,000 at
December 31, 2002. These conditions raise substantial doubt
about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.



| |                       
| | ----------------------
| | /s/ ERNST & YOUNG, LLP
| | Ernst & Young, LLP    

Los Angeles, California

March 7, 2003


53



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##### Table of Contents



This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with Computer
Motion, Inc.s filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued
by Arthur Andersen LLP in connection with this filing on
Form 10-K. See Exhibit 23.2 for further discussion.
The balance sheet as of December 31, 2000, referred to in
this report has not been included in the accompanying financial
statements.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of

Computer Motion
Inc.:


We have audited the accompanying consolidated
balance sheets of Computer Motion, Inc. and Subsidiary (a
Delaware corporation) as of December 31, 2001 and 2000, and
the related consolidated statements of operations,
shareholders equity and cash flows for the years then
ended. 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 in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Computer Motion, Inc. as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Los Angeles, California

February 25, 2002


54



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##### Table of Contents



COMPUTER MOTION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |     |  
|----------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ------- | ---- |  | ---- | ------- | ---- | - | - | ------- | --- | -
|                                                                                                      |                                         |                                        
|                                                                                                      |                                         | Years Ended December 31,               
|                                                                                                      |                                         |                                        
|                                                                                                      |                                         | 2002                                    |         | 2001 |  | 2000
|                                                                                                      |                                         |                                         |         |      |  |     
|                                                                                                      |                                         |                                        
|                                                                                                      |                                         | (Amounts in thousands, except per share
|                                                                                                      |                                         | amounts)                               
|Revenue                                                                                               |                                         | $                                       | 24,111  |      |  | $    | 25,531  |      |   | $ | 21,732  |    
|Cost of revenue                                                                                       |                                         |                                         | 9,860   |      |  |      | 10,587  |      |   |   | 8,577   |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Gross profit                                                                                          |                                         |                                         | 14,251  |      |  |      | 14,944  |      |   |   | 13,155  |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Research & development expense                                                                        |                                         |                                         | 10,903  |      |  |      | 12,034  |      |   |   | 11,564  |    
|Selling, general & administrative expense                                                             |                                         |                                         | 17,895  |      |  |      | 18,034  |      |   |   | 17,318  |    
|Litigation provision                                                                                  |                                         |                                         | 6,521   |      |  |      | 1,248   |      |   |   | 480     |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Total operating expenses                                                                              |                                         |                                         | 35,319  |      |  |      | 31,316  |      |   |   | 29,362  |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Loss from operations                                                                                  |                                         |                                         | (21,068 | )    |  |      | (16,372 | )    |   |   | (16,207 | )  
|Interest income                                                                                       |                                         |                                         | 62      |      |  |      | 91      |      |   |   | 140     |    
|Interest expense                                                                                      |                                         |                                         | (63     | )    |  |      | (114    | )    |   |   | (189    | )  
|Foreign currency translation gain/(loss)                                                              |                                         |                                         | (30     | )    |  |      | 25      |      |   |   | (44     | )  
|Other income/(expense)                                                                                |                                         |                                         | (22     | )    |  |      | (23     | )    |   |   | (25     | )  
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Total other income/(expense)                                                                          |                                         |                                         | (53     | )    |  |      | (21     | )    |   |   | (118    | )  
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Loss before income tax provision                                                                      |                                         |                                         | (21,121 | )    |  |      | (16,393 | )    |   |   | (16,325 | )  
|Income tax provision                                                                                  |                                         |                                         | 30      |      |  |      | 20      |      |   |   | 24      |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Net loss                                                                                              |                                         |                                         | (21,151 | )    |  |      | (16,413 | )    |   |   | (16,349 | )  
|Other comprehensive income (loss), net of tax:                                                        |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|                                                                                                      | Foreign currency translation adjustment |                                         |         | 142  |  |      |         | (192 | ) |   |         | (21 | )
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Comprehensive loss                                                                                    |                                         |                                         | (21,009 | )    |  |      | (16,605 | )    |   |   | (16,370 | )  
|Dividend to Series B preferred shareholders                                                           |                                         |                                         | 4,978   |      |  |      | 3,897   |      |   |   |        |    
|Dividend to Series C preferred shareholders                                                           |                                         |                                         | 5,951   |      |  |      |        |      |   |   |        |    
|Dividend to warrant holders                                                                           |                                         |                                         |        |      |  |      |        |      |   |   | 1,362   |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Net loss available to common shareholders                                                             |                                         | $                                       | (32,080 | )    |  | $    | (20,310 | )    |   | $ | (17,711 | )  
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Weighted average common shares outstanding used
    to compute net loss per share  basic and diluted |                                         |                                         | 16,665  |      |  |      | 10,276  |      |   |   | 9,309   |    
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    
|Net loss per share  basic and diluted                                                                |                                         | $                                       | (1.93   | )    |  | $    | (1.98   | )    |   | $ | (1.90   | )  
|                                                                                                      |                                         |                                         |         |      |  |      |         |      |   |   |         |    

See accompanying notes to consolidated financial
statements

55



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##### Table of Contents



COMPUTER MOTION, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |         |  
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------ | -------- | - | - | ------ | ------- | -
|                                         |                                                                                                                                                                                                                                  |                       
|                                         |                                                                                                                                                                                                                                  | December 31,          
|                                         |                                                                                                                                                                                                                                  |                       
|                                         |                                                                                                                                                                                                                                  | 2002                   |        | 2001    
|                                         |                                                                                                                                                                                                                                  |                        |        |         
|                                         |                                                                                                                                                                                                                                  |                       
|                                         |                                                                                                                                                                                                                                  | (Amounts in thousands,
|                                         |                                                                                                                                                                                                                                  | except par value)     
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|                                         | Cash and cash equivalents                                                                                                                                                                                                        |                        | $      | 2,606    |   |   | $      | 987     |  
|                                         | Restricted cash                                                                                                                                                                                                                  |                        |        | 98       |   |   |        | 80      |  
|                                         | Accounts receivable, net of allowance for
    doubtful accounts and returns of $781 in 2002 and $1,184 in 2001                                                                                                                   |                        |        | 6,786    |   |   |        | 8,594   |  
|                                         | Inventories                                                                                                                                                                                                                      |                        |        | 5,866    |   |   |        | 5,853   |  
|                                         | Other current assets                                                                                                                                                                                                             |                        |        | 1,471    |   |   |        | 811     |  
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total current assets                     |                                                                                                                                                                                                                                  |                        | 16,827 |          |   |   | 16,325 |        
|Property and equipment:                  |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|                                         | Furniture and fixtures                                                                                                                                                                                                           |                        |        | 1,896    |   |   |        | 2,020   |  
|                                         | Computer equipment                                                                                                                                                                                                               |                        |        | 3,050    |   |   |        | 2,889   |  
|                                         | Machinery and equipment (including demo equipment)                                                                                                                                                                               |                        |        | 7,419    |   |   |        | 5,381   |  
|                                         | Accumulated depreciation                                                                                                                                                                                                         |                        |        | (7,398   | ) |   |        | (5,492  | )
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Property and equipment, net              |                                                                                                                                                                                                                                  |                        | 4,967  |          |   |   | 4,798  |        
|Other assets                             |                                                                                                                                                                                                                                  |                        | 56     |          |   |   | 63     |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total assets                             |                                                                                                                                                                                                                                  | $                      | 21,850 |          |   | $ | 21,186 |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|                                         | Note payable to shareholder                                                                                                                                                                                                      |                        | $      | 1,000    |   |   | $      | 900     |  
|                                         | Accounts payable                                                                                                                                                                                                                 |                        |        | 3,541    |   |   |        | 6,497   |  
|                                         | Accrued expenses                                                                                                                                                                                                                 |                        |        | 7,953    |   |   |        | 4,551   |  
|                                         | Deferred revenue                                                                                                                                                                                                                 |                        |        | 2,461    |   |   |        | 3,628   |  
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total current liabilities                |                                                                                                                                                                                                                                  |                        | 14,955 |          |   |   | 15,576 |        
|Deferred revenue                         |                                                                                                                                                                                                                                  |                        | 1,226  |          |   |   | 1,711  |        
|Other liabilities                        |                                                                                                                                                                                                                                  |                        | 18     |          |   |   | 37     |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total liabilities                        |                                                                                                                                                                                                                                  |                        | 16,199 |          |   |   | 17,324 |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Commitments and contingencies (Note 12)  |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Stockholders equity:                    |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|                                         | Series C convertible preferred stock, $.001
    par value authorized 10,750 shares, outstanding at
    12/31/02  6,299 shares; at 12/31/01  0
    liquidation preference of $14,106 including accrued and unpaid
    dividends |                        | $      | 9,017    |   |   | $      |        |  
|                                         | Series B convertible preferred stock, $.001
    par value, authorized 12,000 shares, outstanding at
    12/31/02  0; 12/31/01  8.5 shares                                                                                      |                        |        |         |   |   |        | 8,674   |  
|                                         | Common stock, $.001 par value,
    authorized  50,000 shares; Outstanding at
    12/31/02  17,627 shares; at 12/31/01 
    11,439 shares                                                                                      |                        |        | 18       |   |   |        | 11      |  
|                                         | Stock subscription                                                                                                                                                                                                               |                        |        | 1,499    |   |   |        |        |  
|                                         | Additional paid-in capital                                                                                                                                                                                                       |                        |        | 112,157  |   |   |        | 80,343  |  
|                                         | Deferred compensation                                                                                                                                                                                                            |                        |        | (262     | ) |   |        | (326    | )
|                                         | Accumulated deficit                                                                                                                                                                                                              |                        |        | (116,674 | ) |   |        | (84,594 | )
|                                         | Other comprehensive loss                                                                                                                                                                                                         |                        |        | (104     | ) |   |        | (246    | )
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total stockholders equity               |                                                                                                                                                                                                                                  |                        | 5,651  |          |   |   | 3,862  |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        
|Total liabilities & stockholders equity |                                                                                                                                                                                                                                  | $                      | 21,850 |          |   | $ | 21,186 |        
|                                         |                                                                                                                                                                                                                                  |                        |        |          |   |   |        |        

See accompanying notes to consolidated financial
statements

56



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##### Table of Contents



COMPUTER MOTION INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                         |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |               |         |       |  |   |      |   |  |   |          |        |   |   |      |   |  |   |         |   | 
|------------------------------------------------------------------------ | ----------------------------------------------------------- | -------------- | ----- | ----------- |  | ------ | ------ | ------------ |  | ---------- | -- | ------------ |  | ----------- | ----- | ------------- |  | ------------- | ------- | ----- |  | - | ---- | - |  | - | -------- | ------ | - | - | ---- | - |  | - | ------- | - | 
|                                                                         |                                                             | Series C       |       | Series B    |  |        |        |              |  |            |    |              |  |             |       |               |  |              
|                                                                         |                                                             | Convertible    |       | Convertible |  |        |        | Stock        |  |            |    |              |  | Other       |       | Total         |  | Stockholders
|                                                                         |                                                             | Preferred      |       | Preferred   |  | Common |        | Subscription |  | Additional |    | Deferred     |  | Accumulated |       | Comprehensive |  | Equity       
|                                                                         |                                                             | Stock          |       | Stock       |  | Stock  |        | Capital      |  | Paid-In    |    | Compensation |  | Deficit     |       | Loss          |  | (Deficit)    
|                                                                         |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |              
|                                                                         |                                                             |               
|                                                                         |                                                             | (In thousands)
|Balance December 31, 1999                                                |                                                             | $              |      |             |  | $      |       |              |  | $          | 9  |              |  | $           |      |               |  | $             | 62,663  |       |  | $ | (247 | ) |  | $ | (46,573  | )      |   | $ | (33  | ) |  | $ | 15,819  |  
|Common stock issued                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 4,923   |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 4,923   |  
|Exercise of options                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 376     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 376     |  
|Exercise of warrants                                                     |                                                             |                |      |             |  |        |       |              |  |            | 1  |              |  |             |      |               |  |               | 3,416   |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 3,417   |  
|Deferred compensation associated with stock
    options to non-employees |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 605     |       |  |   | (605 | ) |  |   |         |        |   |   |     |   |  |   |        |  
|Amortization of deferred compensation                                    |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 100     |       |  |   | 247  |   |  |   |         |        |   |   |     |   |  |   | 347     |  
|Dividend to warrant holders                                              |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 1,362   |       |  |   |      |   |  |   | (1,362   | )      |   |   |     |   |  |   |        |  
|Other                                                                    |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   |        |  
|Other comprehensive loss                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   |         |        |   |   | (21  | ) |  |   | (21     | )
|Net loss                                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (16,349  | )      |   |   |     |   |  |   | (16,349 | )
|                                                                         |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |               |         |       |  |   |      |   |  |   |          |        |   |   |      |   |  |   |         |  
|Balance December 31, 2000                                                |                                                             | $              |      |             |  | $      |       |              |  | $          | 10 |              |  | $           |      |               |  | $             | 73,445  |       |  | $ | (605 | ) |  | $ | (64,284  | )      |   | $ | (54  | ) |  | $ | 8,512   |  
|Preferred stock issued, net                                              |                                                             |                |      |             |  |        | 10,024 |              |  |            |   |              |  |             |      |               |  |               | 2,030   |       |  |   |     |   |  |   | (2,603   | )      |   |   |     |   |  |   | 9,451   |  
|Dividend to Preferred Stockholders                                       |                                                             |                |      |             |  |        | 202    |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (202     | )      |   |   |     |   |  |   |        |  
|Conversion of Preferred stock to Common Stock                            |                                                             |                |      |             |  |        | (1,552 | )            |  |            |   |              |  |             |      |               |  |               | 1,552   |       |  |   |     |   |  |   |          |        |   |   |     |   |  |   |        |  
|Series B Convertible Preferred stock
    beneficial conversion feature   |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 1,092   |       |  |   |     |   |  |   | (1,092   | )      |   |   |     |   |  |   |        |  
|Common stock issued                                                      |                                                             |                |      |             |  |        |       |              |  |            | 1  |              |  |             |      |               |  |               | 2,005   |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 2,006   |  
|Exercise of options                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 52      |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 52      |  
|Deferred compensation associated with stock
    options to non-employees |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 149     |       |  |   | (149 | ) |  |   |         |        |   |   |     |   |  |   |        |  
|Amortization of deferred compensation                                    |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |         |       |  |   | 255  |   |  |   |         |        |   |   |     |   |  |   | 255     |  
|Reversal of deferred compensation relating to
    options cancelled)     |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | (173    | )     |  |   | 173  |   |  |   |         |        |   |   |     |   |  |   |        |  
|Stock purchase plan                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 191     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 191     |  
|Other comprehensive loss                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   |         |        |   |   | (192 | ) |  |   | (192    | )
|Net loss                                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (16,413  | )      |   |   |     |   |  |   | (16,413 | )
|                                                                         |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |               |         |       |  |   |      |   |  |   |          |        |   |   |      |   |  |   |         |  
|Balance December 31, 2001                                                |                                                             | $              |      |             |  | $      | 8,674  |              |  | $          | 11 |              |  | $           |      |               |  | $             | 80,343  |       |  | $ | (326 | ) |  | $ | (84,594  | )      |   | $ | (246 | ) |  | $ | 3,862   |  
|Preferred stock issued, net                                              |                                                             |                | 8,817 |             |  |        |       |              |  |            |   |              |  |             | 1,499 |               |  |               | (941    | )     |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 9,375   |  
|Proceeds from private placement                                          |                                                             |                |      |             |  |        |       |              |  |            | 4  |              |  |             |      |               |  |               | 10,524  |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 10,528  |  
|Dividend to Series B Preferred Stockholders                              |                                                             |                |      |             |  |        | 1,193  |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (1,193   | )      |   |   |     |   |  |   |        |  
|Dividend to Series C Preferred Stockholders                              |                                                             |                | 200   |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (200     | )      |   |   |     |   |  |   |        |  
|Conversion of Preferred stock to Common Stock                            |                                                             |                |      |             |  |        | (9,867 | )            |  |            | 3  |              |  |             |      |               |  |               | 9,864   |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   |        |  
|Write off of Intrinsic Value at Series B                                 |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |               |         |       |  |   |      |   |  |   |          |        |   |   |      |   |  |   |         |  
|                                                                         | Preferred conversion to Common and warrant price
    change |                |       |            |  |        |        |             |  |            |    |             |  |             |       |              |  |               |         | 3,785 |  |   |      |  |  |   |          | (3,785 | ) |   |      |  |  |   |         |  | 
|Series C Convertible Preferred stock
    beneficial conversion feature   |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 3,244   |       |  |   |     |   |  |   | (3,244   | )      |   |   |     |   |  |   |        |  
|Fair Value of Warrants to Series C Preferred
    Stockholders            |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 2,507   |       |  |   |     |   |  |   | (2,507   | )      |   |   |     |   |  |   |        |  
|Common stock issued for services                                         |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 1,395   |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 1,395   |  
|Common stock issued through Equity Line                                  |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 508     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 508     |  
|Exercise of options                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 282     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 282     |  
|Unexercised MBO Options issued                                           |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 416     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 416     |  
|Fair Value of options to non-employees                                   |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 121     |       |  |   | (121 | ) |  |   |         |        |   |   |     |   |  |   |        |  
|Amortization of deferred compensation                                    |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   | 185  |   |  |   |         |        |   |   |     |   |  |   | 185     |  
|Stock purchase plan                                                      |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               | 109     |       |  |   |     |   |  |   |         |        |   |   |     |   |  |   | 109     |  
|Other comprehensive loss                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   |         |        |   |   | 142  |   |  |   | 142     |  
|Net loss                                                                 |                                                             |                |      |             |  |        |       |              |  |            |   |              |  |             |      |               |  |               |        |       |  |   |     |   |  |   | (21,151  | )      |   |   |     |   |  |   | (21,151 | )
|                                                                         |                                                             |                |       |             |  |        |        |              |  |            |    |              |  |             |       |               |  |               |         |       |  |   |      |   |  |   |          |        |   |   |      |   |  |   |         |  
|Balance December 31, 2002                                                |                                                             | $              | 9,017 |             |  | $      |       |              |  | $          | 18 |              |  | $           | 1,499 |               |  | $             | 112,157 |       |  | $ | (262 | ) |  | $ | (116,674 | )      |   | $ | (104 | ) |  | $ | 5,651   |  

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|                                              |  |           |      |           |  |               |      |      |  |      |        |  |  |  |        |  |  |  |        | 
|--------------------------------------------- |  | --------- | ---- | --------- |  | ------------- | ---- | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                              |  |           |      |           |  |              
|                                              |  | Preferred |      | Preferred |  | Common Shares
|                                              |  | Stock     |      | Stock     |  |              
|                                              |  | 2002      |      | 2001      |  | 2002          |      | 2001 |  | 2000
|                                              |  |           |      |           |  |               |      |      |  |     
|Beginning balance                             |  |           | 8.5  |           |  |               |     |      |  |      | 11,439 |  |  |  | 10,151 |  |  |  | 8,745  | 
|Issued                                        |  |           | 6.3  |           |  |               | 10.0 |      |  |      | 3,269  |  |  |  | 807    |  |  |  | 646    | 
|Stock subscription                            |  |           | 1.1  |           |  |               |     |      |  |      |       |  |  |  |       |  |  |  |       | 
|Conversion of Preferred stock to Common Stock |  |           | (8.5 | )         |  |               | (1.5 | )    |  |      | 2,520  |  |  |  | 402    |  |  |  |       | 
|Exercise of options                           |  |           |     |           |  |               |     |      |  |      | 159    |  |  |  | 24     |  |  |  | 87     | 
|Exercise of warrants                          |  |           |     |           |  |               |     |      |  |      | 145    |  |  |  |       |  |  |  | 659    | 
|Stock purchase plan                           |  |           |     |           |  |               |     |      |  |      | 95     |  |  |  | 55     |  |  |  | 14     | 
|                                              |  |           |      |           |  |               |      |      |  |      |        |  |  |  |        |  |  |  |        | 
|Ending balance                                |  |           | 7.4  |           |  |               | 8.5  |      |  |      | 17,627 |  |  |  | 11,439 |  |  |  | 10,151 | 

See accompanying notes to consolidated financial
statements

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COMPUTER MOTION INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |         |        |  
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------- | ------ | ------- | ------ | ---- | ------ | ------- | ------ | - | ------ | ------- | ------ | -
|                                                                          |                                                                                           |                                             
|                                                                          |                                                                                           | Years Ended December 31,                    
|                                                                          |                                                                                           |                                             
|                                                                          |                                                                                           | 2002                                         |        | 2001    |        | 2000
|                                                                          |                                                                                           |                                              |        |         |        |     
|                                                                          |                                                                                           |                                             
|                                                                          |                                                                                           | (In thousands)                              
|Cash Flows from Operating Activities:                                     |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|                                                                          | Net Loss                                                                                  |                                              | $      | (21,151 | )      |      | $      | (16,413 | )      |   | $      | (16,349 | )     
|                                                                          | Adjustments to reconcile net loss to net cash
    used in operating actives:              |                                              |        |         |        |      |        |         |        |   |        |         |       
|                                                                          |                                                                                           | Depreciation and Amortization                |        |         | 2,041  |      |        |         | 1,714  |   |        |         | 1,397  |  
|                                                                          |                                                                                           | Provision for Doubtful Accounts              |        |         | 284    |      |        |         | 250    |   |        |         | 931    |  
|                                                                          |                                                                                           | Loss on Disposal of fixed assets             |        |         |       |      |        |         |       |   |        |         | 73     |  
|                                                                          |                                                                                           | Unexercised MBO Options                      |        |         | 416    |      |        |         |       |   |        |         |       |  
|                                                                          |                                                                                           | Common stock and options issued for services |        |         | 1,395  |      |        |         |       |   |        |         | 471    |  
|                                                                          |                                                                                           | Amortization of Deferred Compensation        |        |         | 185    |      |        |         | 255    |   |        |         | 247    |  
|                                                                          | Decrease (Increase) in:                                                                   |                                              |        |         |        |      |        |         |        |   |        |         |       
|                                                                          |                                                                                           | Accounts receivable                          |        |         | 1,524  |      |        |         | 3,273  |   |        |         | (5,630 | )
|                                                                          |                                                                                           | Inventories                                  |        |         | (1,268 | )    |        |         | (1,118 | ) |        |         | 328    |  
|                                                                          |                                                                                           | Other current assets                         |        |         | (660   | )    |        |         | (372   | ) |        |         | (108   | )
|                                                                          |                                                                                           | Other assets                                 |        |         |       |      |        |         |       |   |        |         | 74     |  
|                                                                          | Increase (Decrease) in:                                                                   |                                              |        |         |        |      |        |         |        |   |        |         |       
|                                                                          |                                                                                           | Accounts payable                             |        |         | (2,956 | )    |        |         | 2,066  |   |        |         | 1,196  |  
|                                                                          |                                                                                           | Accrued expenses                             |        |         | 3,402  |      |        |         | 1,065  |   |        |         | 569    |  
|                                                                          |                                                                                           | Other liabilities                            |        |         | (19    | )    |        |         | (38    | ) |        |         | (28    | )
|                                                                          |                                                                                           | Deferred revenue                             |        |         | (1,652 | )    |        |         | 1,754  |   |        |         | 2,298  |  
|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|                                                                          | Net cash used in operating activities                                                     |                                              |        | (18,459 | )      |      |        | (7,564  | )      |   |        | (14,531 | )     
|Cash flows from Investing Activities:                                     |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|                                                                          | Purchase of property and equipment                                                        |                                              |        | (948    | )      |      |        | (2,328  | )      |   |        | (2,763  | )     
|                                                                          | Decrease in marketable securities                                                         |                                              |        |        |        |      |        |        |        |   |        | 3,224   |       
|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|Net cash provided by (used in) investing
    activities                   |                                                                                           |                                              | (948   | )       |        |      | (2,328 | )       |        |   | 461    |        
|Cash Flows from Financing Activities:                                     |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|                                                                          | Repayment of note payable to stockholder                                                  |                                              |        | (900    | )      |      |        | (1,500  | )      |   |        |        |       
|                                                                          | Proceeds from note payable to stockholder                                                 |                                              |        | 1,000   |        |      |        | 900     |        |   |        | 3,000   |       
|                                                                          | Proceeds from preferred stock issuance, net of
    issuance costs                         |                                              |        | 9,375   |        |      |        | 7,951   |        |   |        |        |       
|                                                                          | Proceeds from common stock  private
    placement                                        |                                              |        | 10,528  |        |      |        |        |        |   |        |        |       
|                                                                          | Proceeds from common stock  Societe
    Generale                                         |                                              |        | 508     |        |      |        |        |        |   |        |        |       
|                                                                          | Proceeds from common stock and warrants
    exercised, including ESPP, net of repurchases |                                              |        | 109     |        |      |        | 2,197   |        |   |        | 7,969   |       
|                                                                          | Proceeds from exercise of stock options                                                   |                                              |        | 282     |        |      |        | 52      |        |   |        | 376     |       
|                                                                          | Comprehensive loss and other                                                              |                                              |        | 142     |        |      |        | (192    | )      |   |        | (21     | )     
|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|Net cash provided by financing activities                                 |                                                                                           |                                              | 21,044 |         |        |      | 9,408  |         |        |   | 11,324 |        
|Net increase (decrease) in cash, cash
    equivalents and restricted cash |                                                                                           |                                              | 1,637  |         |        |      | (484   | )       |        |   | (2,746 | )      
|Cash, cash equivalents and restricted cash at
    beginning of period     |                                                                                           |                                              | 1,067  |         |        |      | 1,551  |         |        |   | 4,297  |        
|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        
|Cash, cash equivalents and restricted cash at end
    of period           |                                                                                           | $                                            | 2,704  |         |        | $    | 1,067  |         |        | $ | 1,551  |        
|                                                                          |                                                                                           |                                              |        |         |        |      |        |         |        |   |        |        

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|                                                                            |                                                                                               |                          |   |       |  |      |   |       |  |  |       |     | 
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------ | - | ----- |  | ---- | - | ----- |  |  | ----- | --- | 
|                                                                            |                                                                                               |                         
|                                                                            |                                                                                               | Years Ended December 31,
|                                                                            |                                                                                               |                         
|                                                                            |                                                                                               | 2002                     |   | 2001  |  | 2000
|                                                                            |                                                                                               |                          |   |       |  |     
|                                                                            |                                                                                               |                         
|                                                                            |                                                                                               | (In thousands)          
|Supplemental cash flow disclosure                                           |                                                                                               |                          |   |       |  |      |   |       |  |  |       |    
|Cash paid for:                                                              |                                                                                               |                          |   |       |  |      |   |       |  |  |       |    
|                                                                            | Interest                                                                                      |                          | $ | 59    |  |      | $ | 37    |  |  | $     | 189 | 
|                                                                            | Income taxes                                                                                  |                          |   | 28    |  |      |   | 11    |  |  |       | 23  | 
|Non-cash investing and financing activities
    Dividend to warrant holders |                                                                                               |                          |  |       |  |      |  |       |  |  | 1,362 |    
|                                                                            | Fair Value of warrants issued in connection with
    the Series B Convertible Preferred Stock |                          |   |      |  |      |   | 1,536 |  |  |       |    | 
|                                                                            | Fair Value of warrants issued in connection with
    the Series C Convertible Preferred Stock |                          |   | 2,507 |  |      |   |      |  |  |       |    | 
|                                                                            | Cumulative dividend on the Series B
    Convertible Preferred Stock                           |                          |   | 1,193 |  |      |   | 203   |  |  |       |    | 
|                                                                            | Cumulative dividend on the Series C
    Convertible Preferred Stock                           |                          |   | 200   |  |      |   |      |  |  |       |    | 
|                                                                            | Fair value of additional shares issued due to
    reset provision of Series B                 |                          |   |      |  |      |   | 1,092 |  |  |       |    | 
|                                                                            | Conversion of Series B to Common Stock                                                        |                          |   | 9,867 |  |      |   |      |  |  |       |    | 
|                                                                            | Write off of Intrinsic Value at conversion of
    Series B Preferred to Common                |                          |   | 3,785 |  |      |   |      |  |  |       |    | 
|                                                                            | Beneficial Conversion feature of the
    Series B Convertible Preferred Stock                 |                          |   |      |  |      |   | 1,066 |  |  |       |    | 
|                                                                            | Beneficial Conversion feature of the
    Series C Convertible Preferred Stock                 |                          |   | 3,244 |  |      |   |      |  |  |       |    | 
|                                                                            | Deferred compensation associated with stock
    options to non-employees                      |                          |   | 121   |  |      |   | 149   |  |  |       | 605 | 

See accompanying notes to consolidated financial
statements

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COMPUTER MOTION, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002


Note 1:     Liquidity
and Going Concern

Computer Motion, Inc. (the Company)
has incurred losses since inception. For the years ended
December 31, 2002, 2001 and 2000, the Company has incurred
losses of $21,151,000, $16,413,000 and $16,349,000,
respectively. In addition, for the years ended December 31,
2002, 2001 and 2000, the Company has used cash in operations of
$18,459,000, $7,564,000 and $14,531,000, respectively. The
combination of these factors raises substantial doubt about the
Companys ability to continue as a going concern.

Managements plans in regard to these items
include the following:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Obtain cash proceeds under the working capital
    line of credit agreement with Intuitive Surgical, Inc. (see
    Note 16)
|
| |  | Obtain cash proceeds from the exercise of the
    Series C Preferred Stock warrants                                        

On March 7, 2003, the Company entered into
an Agreement and Plan of Merger with Intuitive Surgical, Inc. At
the effective time of the merger, Intuitive Merger Corporation,
Inc., formerly known as Iron Acquisition corporation, a newly
formed subsidiary of Intuitive Surgical, Inc., will be merged
with and into Computer Motion, Inc., with Computer Motion, Inc.
surviving the merger and continuing as a wholly owned subsidiary
of Intuitive Surgical, Inc. Upon completion of the merger, each
share of Computer Motion common stock will be converted into the
right to receive a fraction of a share of Intuitive Surgical
common stock. The fraction of a share of Intuitive Surgical
common stock to be issued with respect to each share of Computer
Motion common stock will be determined by a formula described in
the merger agreement. Based on the capitalization of Intuitive
Surgical and Computer Motion and the market price of Computer
Motion common stock as of the date of this report and assuming
that the merger is completed on June 30, 2003, we estimate
that the exchange ratio will be approximately 0.52. The exchange
ratio will be adjusted proportionately in the event that the
proposed reverse split of Intuitive Surgicals common stock
is approved by Intuitive Surgicals stockholders and
implemented by Intuitive Surgicals board of directors.

In connection with the proposed merger, Computer
Motion and Intuitive Surgical have entered into a Loan and
Security Agreement, under which Intuitive Surgical has agreed to
provide a short-term secured bridge loan facility of up to
$7.3 million. The loan will terminate and all outstanding
amounts will become due and payable 120 days following
termination of the merger agreement (the Maturity
Date). Interest on the loan will accrue at a rate of 8%
per annum and will be payable on the Maturity Date.

Additionally, pursuant to the merger agreement,
Computer Motion and Intuitive Surgical filed stipulations on
March 10, 2003 to immediately stay all pending litigation
proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or
subject to the cases being dismissed upon consummation of the
transaction contemplated by the merger agreement.

There are no assurances that the proposed merger
will close or that adequate funds will be available to the
Company on acceptable terms, if at all. If the Company is unable
to raise additional required capital in the future, it may be
required to significantly curtail its operations or obtain
funding through the relinquishment of significant technology.
The failure of the Company to successfully achieve one or all of
the above items will have a material impact on the
Companys financial position and results of operations. The
accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and
classification of liabilities that might result should the
Company be unable to continue as a going concern.



|        |                                
|------- | -------------------------------
|Note 2: | Significant Accounting Policies

Nature of
Operations.The Company develops and
markets proprietary robotic and computerized surgical systems
that enhance a surgeons performance and centralize and
simplify a surgeons control of the

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

operating room. The Companys primary
efforts are directed toward developing and commercializing
medical robots and intelligent interface modalities, which will
enable new minimally invasive surgical procedures and enhance
the surgical teams overall productivity.

Consolidation.The
consolidated financial statements include the accounts of the
Company and its wholly owned French subsidiary, Computer Motion,
S.A. Intercompany transactions and balances have been eliminated
in consolidation.

Reclassifications.Certain reclassifications of previously reported amounts have
been reclassified to conform to the current year presentation.

Use of Estimates.Preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes.

Revenue Recognition.The Company applies the provisions of Staff Accounting Bulleting
No. 101 (SAB 101) when recognizing revenue.
SAB 101 states that revenue generally is realized or
realizable and earned when all of the following criteria are
met: a) persuasive evidence of an arrangement exists,
b) delivery has occurred or the services have been
rendered, c) the sellers price to the buyer is fixed
or determinable, and d) collectibility is reasonably
assured.

The Company recognizes revenue from the sale of
products to end-users, including supplies and accessories, once
shipment has occurred, as the Companys general terms are
FOB shipping point. In those few cases where the customer terms
are FOB destination, revenue is not recognized until the Company
receives a signed delivery and acceptance certificate, and all
of the conditions of SAB 101 as identified above have been
met. Revenue is recognized from the performance of services as
the services are performed.

The Company recognizes revenue from the sale of
products to distributors, including supplies and accessories,
once shipment has occurred, and all of the conditions of
SAB 101 have been met. The Companys distributors do
not have rights of return or cancellation. Revenue from
distributors, which does not meet all of the requirements of
SAB 101, is deferred and recognized upon the sale of the
product to the end user.

Revenues from product sales to financing
institutions are not recognized by the Company until a purchase
order is received, the product has been shipped and the funding
by the financing institution has been approved. The Company
recognized revenues from sales to third party financing
institutions of $933,000, $2,179,000 and $1,379,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.

The Company defers revenue from the sale of
extended warranties, product upgrades and other contractual
items and recognizes them over the life of the contract, when
the service is performed or upon shipment to the customer, as
applicable. The value allocated to elements in a multiple
element arrangement is based on objective evidence of relative
fair value of each element.

Shipments of products to be used for
demonstration purposes or prototype products used in development
programs are reflected as consigned inventory and are included
in the property and equipment balance in the accompanying
consolidated balance sheets.

The Company records revenue net of commissions
paid to agents in accordance with Emerging Issues Task Force
(EITF) No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent.

The Company believes that Statement of
Position 97-2, Software Revenue Recognition
(SOP 97-2), is not applicable to the sale of the
Companys products in accordance with the guidance in
paragraphs 2 and 4 of SOP 97-2. The software sold is
considered by the Company to be incidental to the products sold
and is not a significant focus of the marketing efforts of the
Company nor is the software sold separately. In addition, post
contract customer support is not sold by the Company in
conjunction with the software. As such, the Company does not
separately account for the sale of the software.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Foreign Currency
Translation.The assets and
liabilities of Computer Motion, S.A. are translated into U.S.
dollars at exchange rates in effect on reporting dates, while
capital accounts are translated at historical rates. Income
statement items are translated at average exchange rates in
effect during the financial statement period. The cumulative
effect of translation is recorded as a separate component of
stockholders equity.

Net Loss Per Share.Statement of Financial Accounting Standard (SFAS)
No. 128, Earnings Per Share, requires
presentation of both basic and diluted net loss per share in the
financial statements. The Companys basic net loss per
share is the same as its diluted net loss per share because
inclusion of outstanding stock options and warrants in the
calculation is antidilutive. Basic and diluted loss per share is
calculated by dividing net loss available to common stockholders
by the weighted average number of common shares outstanding for
the period.

Loss per share information is summarized as
follows:

|                                                                                                                |  |                                                  |         |       |  |        |       |       |  |        |         |       |  |   |       |   |  |   |         |   |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------- | ----- |  | ------ | ----- | ----- |  | ------ | ------- | ----- |  | - | ----- | - |  | - | ------- | - |  | - | ----- | -
|                                                                                                                |  |                                                 
|                                                                                                                |  | Years Ended December 31,                        
|                                                                                                                |  |                                                 
|                                                                                                                |  |                                                  |         |       |  |       
|                                                                                                                |  | 2002                                             |         | 2001  |  | 2000  
|                                                                                                                |  |                                                  |         |       |  |       
|                                                                                                                |  |                                                  |         | Per   |  |        |       | Per   |  |        |         | Per  
|                                                                                                                |  | Amount                                           |         | Share |  | Amount |       | Share |  | Amount |         | Share
|                                                                                                                |  |                                                  |         |       |  |        |       |       |  |        |         |      
|                                                                                                                |  |                                                 
|                                                                                                                |  | (Amounts in thousands, except per share amounts)
|Loss per share data  basic and diluted:                                                                        |  |                                                  |         |       |  |        |       |       |  |        |         |       |  |   |       |   |  |   |         |   |  |   |       |  
|Net Loss and net loss per share                                                                                 |  | $                                                | (21,151 | )     |  | $      | (1.27 | )     |  | $      | (16,413 | )     |  | $ | (1.60 | ) |  | $ | (16,349 | ) |  | $ | (1.76 | )
|Fair Value of warrants issued in connection with
    the Series B Convertible Preferred Stock                   |  |                                                  |        |       |  |        |      |       |  |        | (1,536  | )     |  |   | (0.15 | ) |  |   |        |   |  |   |      |  
|Cumulative 4.9% dividend on the Series B
    Convertible Preferred Stock                                        |  |                                                  | (1,193  | )     |  |        | (0.07 | )     |  |        | (202    | )     |  |   | (0.02 | ) |  |   |        |   |  |   |      |  
|Fair value of additional shares issued due to a
    reset provision of the Series B Convertible Preferred Stock |  |                                                  |        |       |  |        |      |       |  |        | (1,092  | )     |  |   | (0.11 | ) |  |   |        |   |  |   |      |  
|Beneficial Conversion feature of the
    Series B Convertible Preferred Stock                                   |  |                                                  |        |       |  |        |      |       |  |        | (1,067  | )     |  |   | (0.10 | ) |  |   |        |   |  |   |      |  
|Write off of Intrinsic Value at conversion of
    Series B Convertible Preferred Stock                          |  |                                                  | (3,785  | )     |  |        | (0.23 | )     |  |        |        |       |  |   |      |   |  |   |        |   |  |   |      |  
|Fair Value of warrants issued in connection with
    the Series C Convertible Preferred Stock                   |  |                                                  | (2,507  | )     |  |        | (0.15 | )     |  |        |        |       |  |   |      |   |  |   |        |   |  |   |      |  
|Cumulative dividend on the Series C
    Convertible Preferred Stock                                             |  |                                                  | (200    | )     |  |        | (0.01 | )     |  |        |        |       |  |   |      |   |  |   |        |   |  |   |      |  
|Beneficial Conversion feature of the
    Series C Convertible Preferred Stock                                   |  |                                                  | (3,244  | )     |  |        | (0.20 | )     |  |        |        |       |  |   |      |   |  |   |        |   |  |   |      |  
|Fair Value of warrants issued in connection with
    the Private Placement of Common Stock                      |  |                                                  |        |       |  |        |      |       |  |        |        |       |  |   |      |   |  |   | (1,362  | ) |  |   | (0.14 | )
|                                                                                                                |  |                                                  |         |       |  |        |       |       |  |        |         |       |  |   |       |   |  |   |         |   |  |   |       |  
|Net loss available to common shareholders and net
    loss per share                                            |  | $                                                | (32,080 | )     |  | $      | (1.93 | )     |  | $      | (20,310 | )     |  | $ | (1.98 | ) |  | $ | (17,711 | ) |  | $ | (1.90 | )
|                                                                                                                |  |                                                  |         |       |  |        |       |       |  |        |         |       |  |   |       |   |  |   |         |   |  |   |       |  

Cash Equivalents.Cash equivalents consisting of liquid investments with maturity
of three months or less when purchased and are stated at cost,
which approximates market.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and
Equipment.Property and equipment are
stated at cost and are depreciated using the straight-line
method based on useful lives of seven years for furniture and
fixtures and three to seven years for machinery and equipment
and three years for computer equipment. Included in the property
and equipment section of the consolidated balance sheet is demo
equipment of $5,413,000 and $3,457,000 as of December 31,
2002 and 2001 respectively. Demo equipment is used to enhance
the marketing efforts of the Company and is depreciated over
three years. In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The Company evaluates
its long term assets including property and equipment for
impairment in accordance with SFAS No. 144 whenever events
or changes in circumstances indicate that the carrying value of
an asset may be impaired. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those
assets.

Software Development
Costs.The Company internally produces
and develops software related to its hardware products. Costs to
develop this software are accounted for in accordance with SFAS
No. 86, Accounting for the Costs of Computer Software
to be Sold Leased, or Otherwise Marketed, which requires
the Company to capitalize software development costs when
technological feasibility of the product has been
established and future revenues assure recovery of the
capitalized amounts. Because of the relatively short time period
between technological feasibility and product
release, the Company has not capitalized any software
development costs as of December 31, 2002 or
December 31, 2001.

Stock-based
Compensation.SFAS No. 123,
Accounting for Stock-based Compensation encourages,
but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based
compensation using the intrinsic-value method prescribed in
Accounting Principles board Opinion No. 25,
Accounting for Stock Issued to Employees.

The Company accounts for option and warrant
grants to non-employees using the guidance of SFAS 123 and
EITF No. 96-18 whereby the fair value of option and warrant
grants are determined using the Black Scholes valuation model at
the earlier of the date which the non-employees
performance is completed or a performance commitment is reached.

Research and
Development.Research and development
expenses are charged to operations as incurred and totaled
$10,903,000, $12,034,000 and $11,564,000 for the years ended
December 31, 2002, 2001 and 2000 respectively.

Income Taxes.The
Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under
this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax
basis of assets and liabilities using the enacted tax rate in
effect for the years in which the differences are expected to
reverse.

The Tax Reform Act of 1986 contains provisions
that may limit the net operating loss carryforwards available to
be used in any given year in the event of significant changes in
ownership interests. The Company does not believe that ownership
changes to date have had an impact on its ability to utilize
these carryforwards. There can be no assurance that ownership
changes, including the potential merger as discussed in
Note 16, will not significantly limit the Companys
ability to use existing or future net operating loss or tax
credit carryforwards.

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##### Table of Contents



COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories.Inventories, which include materials, labor and overhead, are
stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method to value inventories. The
components of inventories are as follows:

|                  |  |              |           |              |  |   |           | 
|----------------- |  | ------------ | --------- | ------------ |  | - | --------- | 
|                  |  | December 31, |           | December 31,
|                  |  | 2002         |           | 2001        
|                  |  |              |           |             
|Raw materials     |  | $            | 3,531,000 |              |  | $ | 3,200,000 | 
|Work in process   |  |              | 900,000   |              |  |   | 470,000   | 
|Finished goods    |  |              | 1,435,000 |              |  |   | 2,183,000 | 
|                  |  |              |           |              |  |   |           | 
|Total inventories |  | $            | 5,866,000 |              |  | $ | 5,853,000 | 
|                  |  |              |           |              |  |   |           | 

Patents, Trademarks and Other
Intangibles.Patents, trademarks and
other intangibles are carried at cost less accumulated
amortization that is calculated on the straight-line basis over
the estimated useful lives of the assets.

Other Comprehensive
Loss.The Company accounts for other
comprehensive loss in accordance with SFAS No. 130,
Reporting Comprehensive Income. SFAS 130
requires certain financial statement components, such as net
unrealized holding gains or losses and cumulative translation
adjustments, to be included in other comprehensive income (loss).

Segment Reporting.The Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information(see
Note 15). SFAS No. 131 establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements.

Shipping and Handling
Costs.Shipping and handling costs
totaling $113,000, $71,000 and $72,000 for the years ended
December 31, 2002, 2001 and 2000, respectively were billed
to customers. These billings have been recognized as revenue.
The associated costs have been recognized as a component of cost
of revenues in the accompanying consolidated statements of
operations and comprehensive income (loss) .

Fair Value of Financial
Instruments.The carrying value for
cash and cash equivalents, accounts receivable, note payable to
stockholder and accounts payable approximates fair value because
of the short maturity of these instruments.

Recent Accounting
Pronouncements.In December 2002, the
Financial Accounting Standards Board (FASB) issued SFAS
No. 148. Statement 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition to Statement 123s fair value
method of accounting for stock-based employee compensation.
Statement 148 also amends the disclosure provisions of
Statement 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the
Statement does not amend Statement 123 to require companies to
account for employee stock options using the fair value method,
the disclosure provisions of Statement 148 are applicable to all
companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value
method of Statement 123 or the intrinsic value method of
Opinion 25. The Company adopted the disclosure requirements
of SFAS No. 148 in fiscal 2002. The Company did not adopt
the fair value method of accounting for stock-based compensation
and as such the adoption of SFAS No. 148 did not have a
material impact on the Companys results of operations or
its financial position.

Emerging Issues Task Force
(EITF) No. 00-21, Revenue
Arrangements with Multiple Deliverables, addresses how to
determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting. This EITF also
addresses how arrangement consideration should be measured and
allocated to the separate units of accounting in the arrangement.

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##### Table of Contents



COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As Computer Motions current practice is
consistent with the provisions of EITF 00-21, Computer
Motion does not expect that the adoption of EITF 00-21 will
have a material impact on its results of operations or its
financial condition.



|        |                                
|------- | -------------------------------
|Note 3: | Stock Purchase and Option Plans

Employee Stock Purchase
Plan.The Companys employee
stock purchase savings plan allows participating employees to
purchase, through payroll deductions, shares of common stock at
85% of the fair market value at specified dates. Under the terms
of the plan, 400,000 shares of common stock have been reserved
for purchase by plan participants. Employees purchased 95,033,
54,679, and 14,227 shares in fiscal 2002, 2001, and 2000
respectively. At December 31, 2002, there were 171,407
shares available for purchase under the plan.

Stock Options.Under
the terms of the Companys stock option plans,
6,746,017 shares of common stock have been reserved for
issuance to directors, officers and employees and to others with
relationships with the Company. Stock options are generally
exercisable over periods up to 10 years from date of grant
and may be incentive stock options or
non-qualified stock options. Options generally vest
evenly over four years. At December 31, 2002, there were a
maximum of 80,618 shares available for grant and
5,535,588 options outstanding of which
2,188,897 shares were exercisable at a weighted average
exercise price of $5.55 per share. The weighted average
contractual life of options outstanding December 31, 2002
was 8.3 years. The weighted average fair value of options
granted for the years ended December 31, 2002, 2001, and
2000 were $1.24, $2.63, and $4.70 respectively. Stock option
activity was as follows:

|                             |  |             |           |                  |  |   |      | 
|---------------------------- |  | ----------- | --------- | ---------------- |  | - | ---- | 
|                             |  | Options     |           | Weighted Average
|                             |  | Outstanding |           | Exercise Price  
|                             |  |             |           |                 
|Balance at December 31, 1999 |  |             | 1,695,210 |                  |  | $ | 8.54 | 
|Granted                      |  |             | 1,391,580 |                  |  | $ | 7.82 | 
|Canceled                     |  |             | (245,256  | )                |  | $ | 9.96 | 
|Exercised                    |  |             | (87,031   | )                |  | $ | 4.32 | 
|                             |  |             |           |                  |  |   |      | 
|Balance at December 31, 2000 |  |             | 2,754,503 |                  |  | $ | 8.12 | 
|Granted                      |  |             | 1,523,056 |                  |  | $ | 4.22 | 
|Canceled                     |  |             | (846,037  | )                |  | $ | 8.73 | 
|Exercised                    |  |             | (24,412   | )                |  | $ | 0.01 | 
|                             |  |             |           |                  |  |   |      | 
|Balance at December 31, 2001 |  |             | 3,407,110 |                  |  | $ | 6.31 | 
|Granted                      |  |             | 3,020,699 |                  |  | $ | 1.08 | 
|Canceled                     |  |             | (732,222  | )                |  | $ | 6.00 | 
|Exercised                    |  |             | (159,999  | )                |  | $ | 0.15 | 
|                             |  |             |           |                  |  |   |      | 
|Balance at December 31, 2002 |  |             | 5,535,588 |                  |  | $ | 3.68 | 

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
concerning outstanding and exercisable stock options at
December 31, 2002:

|                         |  |             |           |                     |  |                     |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ------------------- |  | ------------------- | ---- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           |                     |  |                    
|                         |  |             |           | Options Outstanding |  | Options Exercisable
|                         |  |             |           |                     |  |                    
|                         |  |             |           | Weighted            |  | Weighted            |      |             |  | Weighted 
|                         |  |             |           | Average             |  | Average             |      |             |  | Average  
|                         |  |             |           | Remaining           |  | Exercise            |      |             |  | Exercise 
|                         |  | Number      |           | Contractual         |  | Price               |      | Number      |  | Price Per
|Range of Exercise Prices |  | Outstanding |           | Life                |  | Per Share           |      | Exercisable |  | Share    
|                         |  |             |           |                     |  |                     |      |             |  |          
|$  -$1.50                |  |             | 2,454,612 |                     |  |                     | 9.61 |             |  | $         | 0.77  |  |  |  | 426,112   |  |  | $ | 0.40  | 
|1.50-2.25                |  |             | 161,912   |                     |  |                     | 9.28 |             |  |           | 1.77  |  |  |  | 3,112     |  |  |   | 1.54  | 
|2.25-3.38                |  |             | 149,419   |                     |  |                     | 8.74 |             |  |           | 3.25  |  |  |  | 40,303    |  |  |   | 3.23  | 
|3.38-5.06                |  |             | 1,554,909 |                     |  |                     | 7.28 |             |  |           | 4.38  |  |  |  | 825,690   |  |  |   | 4.47  | 
|5.06-7.59                |  |             | 184,450   |                     |  |                     | 8.38 |             |  |           | 5.79  |  |  |  | 144,276   |  |  |   | 5.82  | 
|7.59-11.39               |  |             | 968,711   |                     |  |                     | 6.55 |             |  |           | 9.28  |  |  |  | 694,410   |  |  |   | 9.47  | 
|11.39-17.09              |  |             | 61,575    |                     |  |                     | 5.59 |             |  |           | 13.48 |  |  |  | 54,994    |  |  |   | 13.59 | 
|                         |  |             |           |                     |  |                     |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|                         |  |             | 5,535,588 |                     |  |                     | 8.30 |             |  | $         | 3.68  |  |  |  | 2,188,897 |  |  | $ | 5.55  | 
|                         |  |             |           |                     |  |                     |      |             |  |           |       |  |  |  |           |  |  |   |       | 

When stock options are exercised, the par value
is credited to common stock and the excess of the proceeds over
the par value is credited to additional paid-in capital. When
non-qualified options are exercised, or when incentive stock
options are exercised and sold within a one-year period, the
Company realizes income tax benefits based on the difference
between the fair value of the stock on the date of exercise and
the stock option exercise price. These tax benefits do not
affect the income tax provision, but rather are credited
directly to additional paid-in capital.

Non-employee
Option Grants

Pursuant to the terms of the plans, in 1999 the
Company issued 77,500 options to non-employees. The fair
market value of the stock options on the grant date was
calculated to be $285,000 under the Black-Scholes valuation
model. In May 2001, all 77,500 options were cancelled.
Compensation expense of $0, $42,000 and $71,000 was recognized
for the years ended December 31,2002, 2001 and 2000,
respectively for options granted to non-employees in 1999.

In 2000, the Company issued 92,000 options
to non-employees. The fair market value of the stock options on
the grant date was calculated to be $320,000 under the
Black-Scholes valuation model. Compensation expense of $75,701,
$103,000 and $33,000 was recognized in 2002, 2001 and 2000,
respectively for options granted to non-employees in 2000.

In 2001, the Company issued 49,000 options
to non-employees. The fair market value of the stock options on
the grant date was calculated to be $149,000 under the
Black-Scholes valuation model. Compensation expense of $41,000
and $25,000 was recognized in 2002 and 2001, respectively for
options granted to non-employees in 2001.

In 2002, the Company issued 191,000 options
to non-employees. The fair market value of the stock options on
the grant date was calculated to be $121,000 under the
Black-Scholes valuation model. Compensation expense of $51,000
was recognized in 2002 for options granted to non-employees in
2002.

In accordance with EITF No. 96-18, and SFAS
No. 123, compensation expense related to non-employee
option grants is recognized over the related vesting period as
this method approximates the recognition of compensation expense
over the service period.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Employee
Option Grants

In 1996 and 1997, the Company issued common stock
warrants and granted stock options to employees and directors at
prices less than the estimated fair market value of the common
stock. The difference between the issuance or grant price and
the estimated fair market value at the date of issuance or grant
is reflected as compensation expense. Compensation expense of
$17,000, $86,000 and $143,000 was recognized in 2002, 2001, and
2000 respectively. In accordance with APB No. 25,
compensation expense related to employee option grants is
recognized over the related vesting period. At December 31,
2002, there was no deferred (unamortized) compensation
expense relating to stock options granted to employees.

The Company maintains a management by objectives
program under which non-executive employees may receive up to
10% of their base salary as a bonus if certain objectives are
met. During 2002, the Company suspended cash payments for
bonuses earned under this plan and issued options to purchase
common stock at an exercise price of $.00. The number of shares
issued to each employee is determined by the amount of their
bonus divided by the fair market value of the Companys
common stock on the date of grant. The Company recognized
$416,000 in compensation expense for the full fair market value
of options granted during 2002 at an exercise price of $0.

Under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company has elected to
account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees and related accounting interpretations.

Accordingly, no compensation expense has been
recognized related to the granting of stock options, except as
noted above. If compensation expense related to stock options
was determined based upon their grant date fair value consistent
with the methodology prescribed under SFAS No. 123 the
Companys net loss and net loss per share would have been
increased by $4,828,000 ($.29 per share), $4,839,000 ($.47 per
share) and $3,757,000 ($.40 per share) for the years ended
December 31, 2002, 2001 and 2000, respectively. The fair
market value of the warrants and stock options at the grant date
was estimated using the Black-Scholes valuation model with the
following weighted average assumptions:

|                      |  |      |       |      |  |      |      |   |  |  |      |  
|--------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                      |  | 2002 |       | 2001 |  | 2000
|                      |  |      |       |      |  |     
|Expected life (years) |  |      | 7.0   |      |  |      | 7.0  |   |  |  | 7.0  |  
|Interest rate         |  |      | 3.8   | %    |  |      | 4.9  | % |  |  | 5.8  | %
|Volatility            |  |      | 185.0 | %    |  |      | 77.0 | % |  |  | 63.0 | %
|Dividend yield        |  |      | 0.0   | %    |  |      | 0.0  | % |  |  | 0.0  | %

Note 4:     Line
of Credit

In January 2002, the Company entered into a
secured, revolving line of credit with Bay View Funding. This
line of credit provided for borrowings up to $2,000,000 based on
eligible domestic trade receivables at a factoring fee of 2%
plus a financing fee of prime rate plus 3%, secured by all the
assets of the Company. The six month term of this revolving line
of credit expired in July 2002 and was not renewed

Note 5:     Common
Stock

On March 30, 2001, the Company entered into
an Equity Line Financing Agreement with Societe Generale, under
which the Company was entitled to issue and sell, from time to
time, shares of its common stock for cash consideration up to an
aggregate of $12 million. In February 2002, the Company
terminated the Equity Line Financing Agreement. In connection
with this termination, the Company paid a one-time settlement
fee of $135,000 to Societe Generale. Prior to terminating the
Equity Line Financing Agreement, the Company raised
approximately $508,000 in fiscal 2002 by issuing
111,615 shares of its common stock to Societe Generale.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In February 2002, the Company raised net proceeds
of approximately $10,528,000 through the sale of
2,828,865 shares of common stock and the issuance of
approximately 1,697,319 warrants to purchase common stock at
$5.00 per share, with certain institutional and accredited
investors, including Robert W. Duggan, the Companys
Chief Executive Officer and Chairman. The fair market value of
these warrants was determined to be $3,590,000 under the
Black-Scholes valuation model and was recognized as a direct
cost of raising capital. In February $1,395,000 in accounts
payable from certain vendors was exchanged for
328,689 shares of common stock. The proceeds from the sale
of the Companys common stock were used to retire
approximately $2,359,000 (including the note payable to
Mr. Duggan) in debt and the remainder of the proceeds were
used to fund working capital needs.

Note 6:     Common
Stock Warrants

The Company has issued warrants to purchase
common shares, which are exercisable over periods of up to
7 years from the date of issuance. At December 31,
2002, all outstanding warrants were exercisable. Warrant
information is as follows:

|                             |  |         |           |              |  |   |      | 
|---------------------------- |  | ------- | --------- | ------------ |  | - | ---- | 
|                             |  | Shares  |           | Weighted Avg
|                             |  | Under   |           | Exercise    
|                             |  | Warrant |           | Price       
|                             |  |         |           |             
|Balance at December 31, 1999 |  |         | 1,308,894 |              |  | $ | 5.48 | 
|Granted                      |  |         | 361,533   |              |  | $ | 9.17 | 
|Exercised                    |  |         | (659,482  | )            |  | $ | 5.18 | 
|                             |  |         |           |              |  |   |      | 
|Balance at December 31, 2000 |  |         | 1,010,945 |              |  | $ | 6.08 | 
|Granted                      |  |         | 557,932   |              |  | $ | 8.12 | 
|                             |  |         |           |              |  |   |      | 
|Balance at December 31, 2001 |  |         | 1,568,877 |              |  | $ | 6.81 | 
|Granted                      |  |         | 4,935,115 |              |  | $ | 2.46 | 
|Exercised                    |  |         | (145,153  | )            |  | $ | 0.00 | 
|                             |  |         |           |              |  |   |      | 
|Balance at December 31, 2002 |  |         | 6,358,839 |              |  | $ | 3.92 | 
|                             |  |         |           |              |  |   |      | 

In 2000, the Company issued 361,533 warrants
to current warrant holders as an incentive to exercise their
original warrants. The fair market value of the warrants on the
grant date was calculated to be $1,362,000 under the
Black-Scholes valuation model and was recognized as a dividend
to warrant holders.

In 2001, the Company issued 557,932 warrants
to the Companys Series B Convertible Preferred Stock.
The fair market value of these warrants were determined to be
$1,536,000 under the Black-Scholes valuation model and was
recognized as a dividend to Series B Preferred Stockholders.

In 2002, the Company issued
3,237,796 warrants to the Companys Series C
Convertible Preferred Stock. The fair market value of these
warrants were determined to be $2,507,592 under the
Black-Scholes valuation model and was recognized as a dividend
to Series C Preferred Stockholders. In addition
1,697,319 warrants were issued in connection with the
February 2002 common stock private placement. The fair market
value of these warrants were determined to be $3,590,000 under
the Black-Scholes valuation model and was recognized as a direct
cost of raising capital (See Note 5).

Note 7:     Series B
Convertible Preferred Stock

On February 16, 2001, the Company, sold and
issued 10,024 shares of its Series B Convertible
Preferred Stock at a purchase price of $1,000 per share for an
aggregate amount of $10,024,000 and concurrently therewith
issued warrants for the purchase of up to 557,932 shares of
the Companys Common Stock, in a private placement with
several investors. $3 million of the proceeds were used to
repay the note payable to

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Robert W. Duggan, the Companys
Chairman and Chief Executive Officer. The Preferred Stock had a
three (3) year maturity and was initially convertible into
shares of the Companys common stock at $5.77 per share.
The initial conversion price was subject to adjustment on the
six (6) month and nine (9) month anniversaries of the
closing date of the private placement, whereupon the conversion
price reset to the average of the ten (10) lowest closing
prices for the Companys Common Stock as quoted on the
National Association of Stock Dealers Automated Quotation
(NASDAQ) National Market during the twenty
(20) consecutive dates immediately prior to each adjustment
date if such average is lower than the initial conversion price.
Thus, on August 16, 2001, the conversion price was adjusted
to $3.863 per share and on November 16, 2001 to $3.906 per
share. The conversion price was subsequently lowered to $3.881
per share (due to certain anti-dilution adjustments), which
allows the preferred stockholders an additional
845,372 common shares under the agreement. The investors
entitled to receive a preferred annual dividend payable in stock
at a rate of 4.90%. In addition, the investors were granted five
(5) year warrants to purchase an aggregate of approximately
557,932 shares of the Companys common stock at an
exercise price of $8.12 per share. The fair value of the
warrants was determined to be $1,536,000 using the Black-Scholes
valuation model (see Note 6).

The Company applied the provisions of EITF 98-5
and EITF 00-27 to account for the issuance of the Series B
Convertible Preferred Stock and the resulting reset conversion
features. In accordance with EITF 00-27, the initial proceeds
were allocated first between the Series B Convertible
Preferred Stock and the warrants based upon their respective
fair values.

At the commitment date, the Company performed an
analysis to determine if a beneficial conversion feature
(BCF) existed. It was determined that a BCF existed
and the remaining value (of the amount allocated to
Series B Convertible Preferred Stock after allocations to
the warrants) should be further allocated to the BCF. The amount
of the BCF was measured using the effective conversion method
consistent with paragraph 5 of EITF 00-27. Consistent with
the provisions of paragraph 8 of EITF 98-5, the Company
treated the BCF as a dividend and recognized the BCF immediately
as the stockholders immediately had the ability to convert the
Series B Convertible Preferred Stock.

Computer Motion accounted for the reset
provisions of the conversion price in accordance with EITF
00-27. The Company calculated the amount of the BCF at both the
six and nine month reset dates and recorded the amount of the
BCF.

Pursuant to the Registration Rights Agreement
entered into by the Company in connection with its private
placement of the Series B Convertible Preferred Stock, the
Company agreed to use its best efforts to effect the
registration of the shares of common stock issuable upon
conversion of the Series B Convertible Preferred Stock and
the exercise of the warrants (the Resale Shares) by
May 17, 2001 (the Effectiveness Deadline) or be
subject to penalties of 2% of the initial purchase price of the
Series B Shares for each month delay. The Company filed a
registration statement on Form S-3 (File
No. 333-58962), which was subject to a lengthy review by
the Securities and Exchange Commission (the SEC).
Due to this extended review process, the registration statement
for the Resale Shares was not declared effective until
September 24, 2001. Since effectiveness of the registration
statement exceeded the Effectiveness Deadline by four months and
seven days, the investors were entitled to receive a penalty
payment of 8.47% of the face amount of the Series B
Convertible Preferred Stock purchased by each investor. The fair
value of the penalty shares issued in satisfaction of the
penalty payment was $849,000 has been recorded as a direct cost
of the Series B Convertible Preferred Stock offering.

In February 2002 the holders of its Series B
Convertible Preferred Stock entered into agreements with the
Company whereby they agreed to convert all of their remaining
shares into common stock, which included a receiving the present
value of the future dividends in stock. Approximately
2,520,000 common shares were issued in connection with the
conversion of the Series B Convertible Preferred Stock.
These agreements also included the reduction of the Warrant
price from $8.12 to $5.00 per share. The present value the
dividends,

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

write off of the unamortized reset provision and
warrant price change was determined to be $4,978,000 and was
recognized as a dividend in the first quarter of fiscal 2002.

Note 8:     Series C
Convertible Preferred Stock

On October 31, 2002, the Company entered
into a Series C Convertible Preferred Stock Purchase
Agreement with certain institutional and accredited investors,
including Robert W. Duggan, the Companys Chairman and
Chief Executive Officer, whereby the Company agreed to issue and
sell 8,797 shares of Series C Convertible Preferred Stock,
including 7,726 shares of Series C-1 Convertible Preferred
Stock and 1,071 shares of Series C-2 Convertible Preferred
Stock, for the aggregate consideration of approximately
$12,315,400. The rights, preferences and privileges of the
Series C-1 and Series C-2 Convertible Preferred Stock
are identical except that the Company has the option to pay
dividends on the Series C-1 Convertible Preferred Stock in
either cash or shares of the Companys common stock, but
must pay the dividends on the Series C-2 Convertible
Preferred Stock in cash. As part of the financing, the Company
agreed to issue one series of warrants to purchase an aggregate
of 1,759,345 shares of Computer Motion common stock at an
initial exercise price of $1.80 per share and another series of
warrants to purchase 1,759,345 shares of Computer Motions
common stock at an initial exercise price of $2.20 per share.

Of the 7,726 shares of Series C-1
Convertible Preferred Stock, the Company sold 6,298 shares on
October 31, 2003, and, subject to and following receipt of
stockholder approval, agreed to sell approximately 1,428 shares
of Series C-1 Convertible Preferred Stock to Robert Duggan
or his designees. On January 27, 2003, the Companys
stockholders approved the purchase and sale of such shares for
an aggregate of approximately $1,999,200, approximately $999,600
of which was paid on January 27, 2003, through the
cancellation of outstanding principal and accrued and unpaid
interest on a promissory note executed by Mr. Duggan in
favor of the Company in September 2002, and the other $999,600
of which was paid in cash and some remaining interest on the
promissory note by Mr. Duggan and his designees on
March 4, 2003. Of the 1,428 shares of Series C
Convertible Preferred Stock Mr. Duggan acquired
1,078 shares and Mr. Duggans designees acquired
350 shares.

On November 19, 2002, the Company closed the
sale of 1,071 shares of Series C-2 Convertible
Preferred Stock in consideration of cash in the amount of
$1,499,000.

At December 31, 2002, the fair value of the
warrants issued, exclusive of the warrants allocated to the
1,428 shares of the Series C Convertible Preferred Stock
acquired by Mr. Duggan and his designees subsequent to
December 31, 2002, was $2,507,000. The fair value of the
beneficial conversion feature of the shares of the Series C
Convertible Preferred Stock as of December 31, 2002, was
$3,244,000. At December 31, 2002, the accrued dividends
payable were $179,000.

The Company applied the provisions of
EITF 98-5 and EITF 00-27 to account for the issuance
of the convertible preferred stock and the measurement of the
BCF. In accordance with EITF 00-27, the initial proceeds
were allocated first between the Series C Convertible
Preferred Stock and the warrants based upon their respective
fair values.

At the commitment date the Company performed an
analysis to determine if a BCF existed. It was determined that a
BCF existed and the remaining value (of the amount allocated to
Series C Convertible Preferred Stock after allocations to
the warrants) should be further allocated to the BCF. The amount
of the BCF was measured using the effective conversion rate
consistent with paragraph 5 of EITF 0027. The
effective conversion price was determined by dividing the
proceeds allocated to the Series C Convertible Preferred
Stock based on relative fair values by the number of shares that
would be received upon conversion.

Consistent with the provisions of
paragraph 8 of EITF 09-5, the Company treated the BCF
as a dividend and recognized the BCF immediately as the
stockholders immediately had the ability to convert the
Series C Convertible Preferred Stock.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On March 6, all shares of Series C
Convertible Preferred Stock agreed to exchange their shares for
newly issued shares of Series D Convertible Preferred
Stock. The terms of the Series D Convertible Preferred
Stock eliminated certain provisions that were contained in the
terms of the Series C Convertible Preferred Stock that
could have restricted the ability of the Company to enter into
the merger agreement with Intuitive Surgical.

As set forth in the purchase agreement signed in
connection with the Series C Financing, Mr. Duggan (or
his affiliates or designees) agreed to purchase an aggregate
amount of Series C Convertible Preferred Stock totaling
$1,999,200, $999,600 of which was paid by the conversion of an
outstanding promissory note from the Company to Mr. Duggan.
Following the receipt of shareholder approval on
January 27, 2003, Mr. Duggan and his designees purchased an
additional $999,600 of Series C Convertible Preferred Stock.

In accordance with the Certificate of
Designations and the Side Agreement, the shares of Series C
Convertible Preferred Stock bear a cumulative dividend at a rate
of 12% per annum until January 31, 2003, and 8% per annum
thereafter. In the event shares of Series C Convertible
Preferred Stock are not converted or redeemed in accordance with
the Certificate of Designations by October 31, 2004, the
cumulative dividend rate will be adjusted upward to 12% per
annum thereafter. Dividends on the Series C-1 Convertible
Preferred Stock may be paid by the Company, at its option,
through the issuance of shares of Common Stock or in cash, and
dividends on the Series C-2 Convertible Preferred Stock may
only be paid in cash.

In accordance with the Certificate of
Designations, in the event the Company proposes to enter into a
Change of Control Transaction (as defined below) and if not
previously converted, the holders of shares of Series C
Convertible Preferred Stock may elect to convert such shares of
Series C Convertible Preferred Stock into a number of
common shares equal to 135% of the amount into which such shares
of Series C Convertible Preferred Stock would otherwise be
convertible.

A Change of Control Transaction
means, (i) the sale, conveyance or disposition of all or
substantially all of the assets of the Company, (ii) a
consolidation or merger of the Company with or into any other
Person (as defined in the Exchange Act) (whether or
not the Company is the surviving Person, but other than a
consolidation or merger in which the surviving corporation
(x) is listed on the NASDAQ National Market, the New York
Stock Exchange or the American Stock Exchange and (y) the
value of the consideration to be paid to the stockholders of the
Company is at least $1.40 per share of Common Stock (as adjusted
for stock dividends, stock splits or recapitalizations)), or
(iii) any Person or any group (as such term is
used in Section 13(d) of the Exchange Act), becomes the
beneficial owner or is deemed to beneficially own (as described
in Rule 13d-3 under the Exchange Act without regard to the
60-day exercise period) in excess of 50% of the Companys
voting power of the capital stock of the Company normally
entitled to vote in the election of directors of the Company
(other than (A) any Person or any such group that held such
voting power as of the Initial Issuance Date or (B) any
group that holds such voting power subsequent to the Initial
Issuance Date, provided that the Persons that constitute such
group include the Person or a majority of the members of, and at
least 50% of the voting power held by, a group referenced in the
foregoing clause (A)).

The terms of the Series C Convertible
Preferred Stock provided that a consolidation or merger of the
Company with or into any other corporation or corporations, or a
sale of all or substantially all of the assets of the Company
shall not, however, be deemed to be a liquidation, dissolution
or winding up. Therefore, in the event of a change-in-control
there is not a deemed liquidation. The Company has considered
all of the facts and circumstances and concluded that the proper
classification of the Series C Convertible Preferred Stock
is permanent equity in accordance with EITF D-98.

On March 6, 2003, the Company entered into a
Stock Exchange Agreement (the Exchange Agreement)
with all of the holders of outstanding shares of Series C-1
Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock pursuant to which such holders agreed to
exchange their Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and
Series D-2 Convertible Preferred Stock. The shares of the
Series D

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Convertible Preferred Stock will convert into
shares of common stock immediately prior to the consummation of
the merger described above. Pursuant to the terms of the
Exchange Agreement, in the event the Company does not consummate
the merger by September 30, 2003, the Company will file its
Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible
Preferred Stock with the Secretary of State of Delaware, and,
thereupon outstanding shares of Series D-1 Convertible
Preferred Stock and Series D-2 Convertible Preferred Stock
will be exchanged for share of a like number of Series E-1
Convertible Preferred Stock and Series E-2 Convertible
Preferred Stock. As an inducement to the holders of shares of
Series C Convertible Preferred Stock to enter into the
Exchange Agreement, the Company has agreed to lower the exercise
price of all outstanding Series C-1 warrants and
Series C-2 warrants to $1.50 per share, provided that such
holders exercise such warrants prior to 10 days following
the mailing of a proxy statement relating to the Companys
meeting of stockholders to approve the merger.

Note 9:     Income
Tax Provision

Income tax for all years presented consists of
the minimum state income and franchise taxes. Net deferred
income tax assets at December 31, 2002, 2001 and 2000
consisted of the following:

|                                           |  |      |             |      |  |      |             |   |  |   |             |  
|------------------------------------------ |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                           |  | 2002 |             | 2001 |  | 2000
|                                           |  |      |             |      |  |     
|Allowance for doubtful accounts            |  | $    | 311,000     |      |  | $    | 507,000     |   |  | $ | 1,038,000   |  
|Accrued liabilities                        |  |      | 2,507,000   |      |  |      | 955,000     |   |  |   | 685,000     |  
|Depreciation and amortization              |  |      | 658,000     |      |  |      | 708,000     |   |  |   | 477,000     |  
|Net operating loss carryforwards           |  |      | 28,008,000  |      |  |      | 22,877,000  |   |  |   | 17,991,000  |  
|Tax credits                                |  |      | 3,727,000   |      |  |      | 3,790,000   |   |  |   | 2,677,000   |  
|Capitalized research and development costs |  |      | 3,700,000   |      |  |      | 3,122,000   |   |  |   | 2,343,000   |  
|Other                                      |  |      | 355,000     |      |  |      | 377,000     |   |  |   | 263,000     |  
|                                           |  |      |             |      |  |      |             |   |  |   |             |  
|Total deferred income tax asset            |  |      | 39,266,000  |      |  |      | 32,336,000  |   |  |   | 25,474,000  |  
|Valuation reserve                          |  |      | (39,266,000 | )    |  |      | (32,336,000 | ) |  |   | (25,474,000 | )
|                                           |  |      |             |      |  |      |             |   |  |   |             |  
|Net deferred income tax asset              |  | $    |            |      |  | $    |            |   |  | $ |            |  
|                                           |  |      |             |      |  |      |             |   |  |   |             |  

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

|                                                         |  |      |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                         |  | 2002 |            | 2001 |  | 2000
|                                                         |  |      |            |      |  |     
|Expected federal benefit                                 |  | $    | (7,191,000 | )    |  | $    | (5,580,000 | ) |  | $ | (5,559,000 | )
|State income taxes, net of federal income tax
    effect |  |      | 30,000     |      |  |      | 20,000     |   |  |   | 24,000     |  
|Tax benefits not recognized                              |  |      | 7,191,000  |      |  |      | 5,580,000  |   |  |   | 5,559,000  |  
|                                                         |  |      |            |      |  |      |            |   |  |   |            |  
|Income tax provision                                     |  | $    | 30,000     |      |  | $    | 20,000     |   |  | $ | 24,000     |  
|                                                         |  |      |            |      |  |      |            |   |  |   |            |  

At December 31, 2002, the Company had
federal and state net operating loss (NOL) carryforwards of
approximately $78,718,000 and $14,074,000 respectively, and
research and development tax credit carryforwards of
approximately $4,854,000. The federal tax credit and NOL
carryforwards expire between 15 and 20 years from the year
of loss and are restricted if significant changes in ownership
occur. The state NOL carryforwards expire between 5 and
10 years from the year of loss. The Tax Reform Act of 1986
contains provisions that may limit the net operating loss
carryforwards available to be used in any given year in the
event of significant changes in ownership interests. The Company
does not believe that ownership changes to date have had an
impact on its ability to utilize these carryforwards. There can
be no assurance that ownership changes, including the potential
merger as discussed in Note 16, will not significantly
limit the Companys ability to use existing or future net
operating loss or tax credit carryforwards.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Realization of deferred tax assets is dependent
on generating sufficient taxable income during the periods in
which the temporary differences will reverse. Because the
Company is uncertain when it may realize the benefit of its tax
assets, the Company has placed a valuation allowance against the
total amount of the deferred tax assets.

Note 10:     Financial
Instruments and Off-balance Sheet Risk

Financial
Instruments.Marketable securities
consist of bank certificates of deposit, commercial paper and
corporate bonds, all of which by policy must mature within
360 days. Under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, all
marketable securities are classified as held to maturity and are
carried at amortized cost which closely approximates fair market
value. Interest income earned totaled $62,000, $91,000 and
$140,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

The Companys investment portfolios consist
of money market accounts of $2,606,000 and $987,000 at
December 31, 2002 and 2001, respectively. At
December 31, 2002 and 2001, cash of $98,000 and $80,000,
respectively was restricted and pledged as collateral for
various letters of credit.

Concentration of
Risk.Trade accounts receivable and
certain marketable securities are financial instruments, which
may subject the Company to concentration of credit risk.
Although the Company does not anticipate collection problems
with its receivables, payment is contingent to a certain extent
upon the economic condition of the hospitals, which purchase the
Companys products. The credit risk associated with
receivables is limited due to the dispersion of the receivables
over a number of customers in a number of geographic areas. The
Company monitors credit worthiness of its customers to which it
grants credit terms in the normal course of business. Marketable
securities are placed with high credit qualified financial
institutions and Company policy limits the credit exposure to
any one financial instrument; therefore, credit loss is reduced.
At December 31, 2002, the Company had $2,505,000 cash in
excess of Federal Deposit Insurance Corporation (FDIC) insurance
coverage.

For the year ended December 31, 2002, no
single customer accounted for more than 10% of revenue. As of
December 31, 2002, the Company had two customers that each
accounted for approximately 14% of accounts receivable, and two
other customers that accounted for 11% and 10% of accounts
receivable. For the year ended and as of December 31, 2001,
the Company had one customer that accounted for approximately
13% of revenue for the year and two other customers that
accounted for approximately 17% and 15% of accounts receivable.
For the year ended and as of December 31, 2000, the Company
had one customer that accounted for approximately 21% of the
revenue for the year and 18% of accounts receivable and a second
customer that accounted for approximately 10% of the revenue for
the year and 15% of accounts receivable.

A sub-assembly of the robotic arms, which are a
major component of the Companys AESOP and ZEUS products,
is purchased from a single supplier. The Company believes that
other suppliers would be available for the sub-assembly, if
necessary (see Note 12).

Note 11:     Note
Payable to Stockholder

During the year ended December 31, 2002, the
Company received a bridge loan advance in the aggregate amount
of $1,000,000 from Robert W. Duggan, the Companys Chairman
and Chief Executive Officer. Interest accrues at 12% per annum
on this loan. Upon stockholder approval, in January 2003,
$999,600 of the note was converted into shares of the
Companys Series C Convertible Preferred Stock (See
Note 16).

Note
12:     Commitments and
Contingencies

Leases.Rent expense
for the years ended December 31, 2002, 2001 and 2000 was
$1,076,000, $1,043,000 and $891,000, respectively. As of
December 31, 2002, the Company had the following minimum

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lease payments for certain facilities and
equipment under operating leases: 2003-$1,032,000;
2004-$1,013,000; 2005-$766,000; 2006-$751,000 and thereafter
$273,000.

Contingencies.The
Company is involved in various claims arising in the normal
course of business. Management is of the opinion that the
ultimate resolution of all such matters will not have a material
effect on the accompanying financial position or operating
results.

On May 10, 2000, the Company filed a lawsuit
in United States District Court alleging that Intuitive
Surgicals da Vinci surgical robot system infringes on its
United States Patent Nos. 5,524,180, 5,878,193, 5,762,458,
6,001,108, 5,815,640, 5,907,664, and 5,855,583. Subsequently,
Computer Motions complaint was amended to add allegations
that Intuitives da Vinci surgical robot infringed three
additional Computer Motion patents, United States Patent Nos.
6,244,809, 6,102,850 and 6,063,095. These patents concern
methods and devices for conducting various aspects of robotic
surgery. Intuitive has served an Answer and Counterclaim
alleging non-infringement of each patent-in-suit, patent
invalidity and unenforceability. Discovery is still underway.
The parties have filed cross motions for summary judgment on the
issue of patent infringement relating to the 664,
809, and 850. The Court recently granted
Intuitives motion for summary judgment of non-infringement
relating to the 850 patent. The Court also recently
granted our motion for partial summary judgment relating to the
809 patent. The Court has not ruled on any of the
remaining motions at this time. Pursuant to the merger agreement
with Intuitive, Computer Motion and Intuitive filed on
March 10, 2003, stipulations to stay this litigation until
August 31, 2003, subject to the stay being lifted if the
merger agreement is terminated, or subject to this case being
dismissed upon consummation of the transactions contemplated by
the merger agreement.

On or about December 7 and 8, 2000, the United
States Patent and Trademark Office (USPTO) granted three of
Intuitives petitions for a declaration of an interference
relating to the Companys 5,878,193, 5,907,664, and
5,855,583 patents. On March 30, 2002, the three judge panel
of the Board of Patent Interferences issued decision orders on
the parties preliminary motions. The Board granted the
Companys motion on Interference No. 104,643 and
issued an order for Intuitive to show cause why judgment should
not be entered against Intuitive on this interference. The Board
denied the Companys motion on the Interference
No. 104,644 and entered judgment against the Company. The
Board denied the Companys motions on the Interference
No. 104,645, deferred decision on two of Intuitives
motions, and granted-in-part, denied-in-part and
deferred-in-part on one of Intuitives motions. The
Boards decision on Interference No. 104,645
invalidated some of the parties claims, affirmed some of
Intuitives claims and provided for further proceedings
related to two of our claims and is therefore not final. On
July 25, 2002, Computer Motion filed a civil action seeking
review of the two adverse decisions in the United States
District Court for the District of California. Pursuant to the
merger agreement with Intuitive, Computer Motion and Intuitive
filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being
lifted if the merger agreement is terminated, or subject to this
case being dismissed upon consummation of the transactions
contemplated by the merger agreement.

On February 21, 2001, Brookhill-Wilk filed
suit against the Company alleging that its ZEUS surgical system
infringed upon Brookhill-Wilks United States Patent
Nos. 5,217,003 and 5,368,015. Brookhill-Wilks
complaint sought damages, attorneys fees and increased
damages alleging willful patent infringement. On March 21,
2001, the Company served its Answer and Counterclaim alleging
non-infringement of each patent-in-suit, patent invalidity and
unenforceability. On November 8, 2001, the United States
District Court for the Southern District of New York in the
co-pending Brookhill-Wilk v. Intuitive Surgical, Inc., Civil
Action No. 00-CV-6599 (NRB), issued an order interpreting
the claims of Brookhill-Wilks Patent No. 5,217,003 in
a way that the Company believed excluded current applications of
its ZEUS surgical system. In light of this decision, on
November 13, 2001, the parties to Brookhill-Wilk v.
Computer Motion, Inc. agreed to dismiss the case without
prejudice.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On March 30, 2001, Intuitive and IBM
Corporation filed suit alleging that the Companys AESOP,
ZEUS and HERMES products infringe United States Patent
No. 6,201,984, which was issued on March 13, 2001. The
complaint seeks damages, a permanent injunction, and costs and
attorneys fees. Each of the asserted claims is limited to a
surgical system employing voice recognition for control of a
surgical instrument and literally read on Computer Motions
current AESOP product and Computer Motions ZEUS and HERMES
products to the extent they are used with AESOP. A jury trial
has been held on the issues of patent invalidity due to lack of
enablement and failure to disclose the best mode in addition to
damages. The Companys defense of unenforceability due to
prosecution laches was tried before the District Court Judge.
The jury returned a verdict finding IBMs United States
Patent No. 6,201,984 valid, and finding Intuitive was
damaged in an amount of $4.4 million. At December 31,
2002, the Company recorded a $4.4 million litigation
provision for this related jury verdict that was recorded within
the litigation provision within the accompanying consolidated
statements of operations and comprehensive income (loss). In
addition, the litigation provision included in the accompanying
consolidated statements of operations and comprehensive income
(loss) includes legal expenses incurred during the three years
ended December 31, 2002. Prior to the jurys verdict,
the court ruled that the Company had not willfully
infringed the patent. On December 10, 2002, the Court
rendered an adverse decision on our prosecution laches defense
and on December 11, 2002, issued a judgment in
Intuitives and IBMs favor based upon the earlier
jury verdict and the Courts December 10, 2002 ruling.
The case has entered the post-trial phase during which we will
be seeking judicial review of the jurys verdict and the
Courts December 10, 2002 ruling. Pursuant to the
merger agreement with Intuitive, Computer Motion and Intuitive
filed on March 10, 2003, stipulations to stay this
litigation until August 31, 2003, subject to the stay being
lifted if the merger agreement is terminated, or subject to this
case being dismissed upon consummation of the transactions
contemplated by the merger agreement.

The Company believes that all of its major
product lines could be affected by this litigation. The patents
subject to this litigation are an integral part of the
technology incorporated in the Companys AESOP, ZEUS and
HERMES product lines which together accounted for approximately
76% of its revenues for the year ended December 31, 2002.
If the stay is lifted and the Company loses the suit brought by
Intuitive and IBM or loses any patent infringement suit refiled
by Brookhill-Wilk, the Company may be prevented from selling its
products as currently configured without first obtaining a
license to the disputed technology from the successful party or
modifying the product. Obtaining a license could be expensive,
or could require that the Company license to the successful
party some of its own proprietary technology, either of which
result could seriously harm the Companys business. In the
event that a successful party is unwilling to grant the Company
a license, the Company will be required to stop selling its
products that are found to infringe the successful partys
patents unless the Company can redesign them so they do not
infringe these patents, which the Company may be unable to do.
Whether or not the Company is successful in these lawsuits, the
litigation could consume substantial amounts of the
Companys financial and managerial resources. Further,
because of the substantial amount of discovery often involved in
connection with this type of litigation, there is a risk that
some of the Companys confidential information could be
compromised by disclosure during the discovery process.

Purchase
Commitments.The Company has purchase
agreements with various suppliers with purchase commitments
totaling $4,551,565 at December 31, 2002.

Note
13:     Financing
Arrangements

The Company can, if leasing arrangements are
requested by the customer, introduce a third party financing
institution to facilitate the transaction. Once the financing
institution and the customer agree upon the financing terms, the
Company sells the product to the financing institution without
recourse. Revenues from product sales to financing institutions
are not recognized by the Company until a purchase order is
received, the product has been shipped and the funding by the
financing institutions has been approved. The

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company recognized revenues from sales to third
party institutions of $933,000, $2,179,000 and $1,379,000 for
the years ended December 31, 2002, 2001 and 2000,
respectively.

Note 14:     Profit
Sharing Plan

The Companys defined contribution profit
sharing plan (the Plan) includes features under
Section 401(k) of the Internal Revenue code. All employees
are eligible to participate in the Plan after meeting certain
minimum service requirements. Employees may make discretionary
contributions to the Plan subject to Internal Revenue Service
limitations. Employer contributions to the Plan were $62,000,
$66,000 and $69,000 for the years ending December 31, 2002,
2001 and 2000, respectively.

Note 15:     Segments
of Business

The Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial
statements and requires selected information for those segments
to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or
decision-making group, in making decisions how to allocate
resources and assess performance. The Companys chief
decision-making group, as defined under SFAS 131 is the
Executive Staff. To date, the Executive Staff has viewed the
Companys operations as principally one market: proprietary
robotic and computerized surgical systems for the medical device
industry. Sales by product lines within this segment are as
follows:

|                                   |  |                                  |        |      |  |      |        |  |  |   |        | 
|---------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                   |  |                                 
|                                   |  | For the Years Ended December 31,
|                                   |  |                                 
|                                   |  | 2002                             |        | 2001 |  | 2000
|                                   |  |                                  |        |      |  |     
|ZEUS robotic and surgical systems  |  | $                                | 7,127  |      |  | $    | 9,226  |  |  | $ | 11,382 | 
|AESOP robotic and surgical systems |  |                                  | 6,420  |      |  |      | 8,295  |  |  |   | 5,596  | 
|HERMES voice control center        |  |                                  | 4,706  |      |  |      | 4,078  |  |  |   | 2,140  | 
|Socrates telementoring systems     |  |                                  | 1,162  |      |  |      | 832    |  |  |   |       | 
|Grant Revenue                      |  |                                  | 450    |      |  |      | 44     |  |  |   |       | 
|Development revenue                |  |                                  |        |      |  |      | 765    |  |  |   | 929    | 
|Recurring revenue                  |  |                                  | 4,246  |      |  |      | 2,291  |  |  |   | 1,685  | 
|                                   |  |                                  |        |      |  |      |        |  |  |   |        | 
|                                   |  | $                                | 24,111 |      |  | $    | 25,531 |  |  | $ | 21,732 | 

Export sales are made by the United States
operations to the following geographic locations:

|                           |  |                                  |       |      |  |      |        |   |  |   |       |  
|-------------------------- |  | -------------------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                           |  |                                 
|                           |  | For the Years Ended December 31,
|                           |  |                                 
|                           |  | 2002                             |       | 2001 |  | 2000
|                           |  |                                  |       |      |  |     
|Canada                     |  | $                                | 1,734 |      |  | $    | 385    |   |  | $ | 260   |  
|Europe and the Middle East |  |                                  | 2,240 |      |  |      | 7,156  |   |  |   | 3,986 |  
|Asia                       |  |                                  | 1,927 |      |  |      | 2,622  |   |  |   | 4,802 |  
|South America              |  |                                  | 459   |      |  |      | 110    |   |  |   | 242   |  
|                           |  |                                  |       |      |  |      |        |   |  |   |       |  
|                           |  | $                                | 6,360 |      |  | $    | 10,217 |   |  | $ | 9,290 |  
|                           |  |                                  | 26    | %    |  |      | 40     | % |  |   | 43    | %

The relative impact of foreign currency
fluctuations on export sales is not significant as
product-pricing and cash payments are generally based on the
U.S. dollar.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
16:     Subsequent Events

On January 27, 2003 the Company received
stockholder approval to convert $999,600 of the outstanding
promissory note from the Company to Robert W. Duggan, the
Companys Chairman and Chief Executive Officer, into shares
of the Companys Series C Convertible Preferred Stock.
On January 29, 2003 the Company issued 714 shares of
Series C Convertible Preferred Stock in exchange for the
note. In addition, the stockholders approved the purchase of an
additional $999,200 of Series C Convertible Preferred Stock
by Mr. Duggan, or his designees, which was received in
March 2003.

On February 13, 2003, the Company entered
into a Loan and Security Agreement with Agility Capital, LLC,
for a short-term bridge loan in the aggregate principal amount
of $2,300,000. In connection with the bridge loan, the Company
issued warrants to purchase up to an aggregate of 520,000 shares
of the Companys common stock at an exercise price of $.97
per share. The Company valued the warrants using the
Black-Scholes option pricing model. The fair value of the
warrants was recorded as a debt issuance cost and was recorded
as deferred interest expense and additional paid-in capital in
accordance with APB 14. The deferred interest expense is
being amortized to interest expense over the life of the loan.

On March 7, 2003, the Company entered into
an Agreement and Plan of Merger with Intuitive Surgical, Inc. At
the effective time of the merger, Intuitive Merger Corporation,
Inc., formerly known as Iron Acquisition corporation, a newly
formed subsidiary of Intuitive Surgical, Inc., will be merged
with and into Computer Motion, Inc., with Computer Motion, Inc.
surviving the merger and continuing as a wholly owned subsidiary
of Intuitive Surgical. Upon completion of the merger, each share
of Computer Motion common stock will be converted into the right
to receive a fraction of a share of Intuitive Surgical common
stock. The fraction of a share of Intuitive Surgical common
stock to be issued with respect to each share of Computer Motion
common stock will be determined by a formula described in the
merger agreement. Based on the capitalization of Intuitive
Surgical and Computer Motion and the market price of Computer
Motion common stock as of the date of this report and assuming
that the merger is completed on June 30, 2003, we estimate
that the exchange ratio will be approximately 0.52. The exchange
ratio will be adjusted proportionately in the event that the
proposed reverse split of Intuitive Surgicals common stock
is approved by Intuitive Surgicals stockholders and
implemented by Intuitive Surgicals board of directors.

The final exchange ratio will be calculated based
on the total number of fully diluted shares outstanding for
Intuitive Surgical and Computer Motion immediately prior to the
effective time of the merger. The number of Computer
Motions fully diluted shares will vary based on the number
of shares of Computer Motion common stock into which Computer
Motions Series D Convertible Preferred Stock will be
convertible and the number of shares of Computer Motion common
stock which may be issued to pay accrued dividends on the
Series D Convertible Preferred Stock upon conversion. All
shares of Computer Motion Series D Convertible Preferred
Stock will convert into shares of Computer Motion common stock
immediately prior to the effective time of the merger. Under the
terms of the Series D Convertible Preferred Stock, in the
event that the average of the closing bid prices of Computer
Motions common stock for the 20 consecutive trading days
ending 15 days prior to the Computer Motion special meeting
is below $1.86 per share, the conversion ratio for Computer
Motions Series D Convertible Preferred Stock could
increase. As a result, the exchange ratio in the merger may
decrease and, therefore, Computer Motion common stockholders
would receive a lesser number of Intuitive Surgical shares, and
Computer Motion preferred stockholders would receive a greater
number of Intuitive Surgical shares, in the merger. After June
9, 2003, stockholders may visit Intuitive Surgicals
website, www.intuitivesurgical.com, or Computer Motions
website, www.computermotion.com, for announcements regarding the
exchange ratio. Computer Motion stockholders will receive cash
in lieu of any fractional shares of Intuitive Surgical common
stock.

In connection with the proposed merger, Computer
Motion and Intuitive Surgical have entered into a Loan and
Security Agreement, under which Intuitive Surgical has agreed to
provide a short-term secured bridge loan of up to $7.3 million.
The loan will terminate and all outstanding amounts will become
due and

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

payable 120 days following termination of
the merger agreement (the Maturity Date). Interest
on the loan will accrue at a rate of 8% per annum and will be
payable on the Maturity Date.

Additionally, pursuant to the merger agreement,
Computer Motion and Intuitive Surgical filed stipulations on
March 10, 2003 to immediately stay all pending litigation
proceedings between them until August 31, 2003, subject to
the stay being lifted if the merger agreement is terminated, or
subject to the cases being dismissed upon consummation of the
transaction contemplated by the merger agreement.

On March 6, 2003, the Company entered into a
Stock Exchange Agreement (the Exchange Agreement)
with all of the holders of outstanding shares of Series C-1
Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock pursuant to which such holders agreed to
exchange their Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock for a like number of
shares of the Series D-1 Convertible Preferred Stock and
Series D-2 Convertible Preferred Stock. The shares of the
Series D Convertible Preferred Stock will convert into
shares of common stock immediately prior to the consummation of
the merger described above. Pursuant to the terms of the
Exchange Agreement, in the event the Company does not consummate
the merger by September 30, 2003, the Company will file its
Certificate of Designations Setting Forth the Preferences,
Rights and Limitations of the Series E Convertible
Preferred Stock with the Secretary of State of Delaware, and,
thereupon outstanding shares of Series D-1 Convertible
Preferred Stock and Series D-2 Convertible Preferred Stock
will be exchanged for share of a like number of Series E-1
Convertible Preferred Stock and Series E-2 Convertible
Preferred Stock. As an inducement to the holders of shares of
Series C Convertible Preferred Stock to enter into the
Exchange Agreement, the Company has agreed to lower the exercise
price of all outstanding Series C-1 warrants and
Series C-2 warrants to $1.50 per share, provided that such
holders exercise such warrants prior to 10 days following
the mailing of a proxy statement relating to the Companys
meeting of stockholders to approve the merger. The Company
accounted for the reduction of the exercise price as a
significant modification and a new measurement date. The Company
valued the warrants using the option pricing model as of
March 6, 2003, the date of the repricing, noting that the
fair value was less than the original value of the warrants as
calculated on the issuance date during the fourth quarter of
2002. As such, no additional expense was recorded for the
warrants as of the date of the conversion.

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COMPUTER MOTION, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
17:     Quarterly Financial Data
(Unaudited)

Quarterly data for the years ended
December 31, 2002, 2001 and 2000, respectively was as
follows:

|                              |                |         |   |            |   |         |   |            |   |  |   |            |   |  |   |            |  
|----------------------------- | -------------- | ------- | - | ---------- | - | ------- | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                              |                | First   |   | Second     |   | Third   |   | Fourth    
|                              |                | Quarter |   | Quarter    |   | Quarter |   | Quarter(A)
|                              |                |         |   |            |   |         |   |           
|Year ending December 31, 2002 |                |         |   |            |   |         |   |            |   |  |   |            |   |  |   |           
|                              | Revenue        |         | $ | 5,691,000  |   |         | $ | 5,064,000  |   |  | $ | 4,534,000  |   |  | $ | 8,822,000  |  
|                              | Gross profit   |         | $ | 3,046,000  |   |         | $ | 2,847,000  |   |  | $ | 2,537,000  |   |  | $ | 5,821,000  |  
|                              | Net loss       |         | $ | (4,458,000 | ) |         | $ | (4,934,000 | ) |  | $ | (5,526,000 | ) |  | $ | (6,233,000 | )
|                              | Loss per share |         | $ | (0.65      | ) |         | $ | (0.29      | ) |  |   | (0.32      | ) |  |   | (0.70      | )
|Year ending December 31, 2001 |                |         |   |            |   |         |   |            |   |  |   |            |   |  |   |           
|                              | Revenue        |         | $ | 5,716,000  |   |         | $ | 4,003,000  |   |  | $ | 7,158,000  |   |  | $ | 8,654,000  |  
|                              | Gross profit   |         | $ | 3,276,000  |   |         | $ | 2,121,000  |   |  | $ | 4,219,000  |   |  | $ | 5,328,000  |  
|                              | Net loss       |         | $ | (4,200,000 | ) |         | $ | (5,300,000 | ) |  | $ | (2,937,000 | ) |  | $ | (3,976,000 | )
|                              | Loss per share |         | $ | (0.65      | ) |         | $ | (0.53      | ) |  | $ | (0.31      | ) |  | $ | (0.43      | )
|Year ending December 31, 2000 |                |         |   |            |   |         |   |            |   |  |   |            |   |  |   |           
|                              | Revenue        |         | $ | 1,368,000  |   |         | $ | 5,962,000  |   |  | $ | 6,211,000  |   |  | $ | 8,191,000  |  
|                              | Gross profit   |         | $ | 679,000    |   |         | $ | 3,580,000  |   |  | $ | 3,666,000  |   |  | $ | 5,230,000  |  
|                              | Net loss       |         | $ | (5,019,000 | ) |         | $ | (3,609,000 | ) |  | $ | (3,597,000 | ) |  | $ | (4,124,000 | )
|                              | Loss per share |         | $ | (0.57      | ) |         | $ | (0.41      | ) |  | $ | (0.52      | ) |  | $ | (0.41      | )



---



|    |                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | In the fourth quarter 2002 the Company recorded a
    $4,400,000 litigation provision for the Intuitive suit (see
    Note 12), along with actual litigation expenses of $599,000.

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COMPUTER MOTION, INC.

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                                |  |            |           |              |  |            |         |            |  |   |         |  |  |   |           | 
|------------------------------- |  | ---------- | --------- | ------------ |  | ---------- | ------- | ---------- |  | - | ------- |  |  | - | --------- | 
|                                |  | Balance At |           |              |  |            |         | Balance At
|                                |  | Beginning  |           |              |  |            |         | End Of    
|Allowance for Doubtful Accounts |  | Of Period  |           | Additions(1) |  | Deductions |         | Period    
|                                |  |            |           |              |  |            |         |           
|Year ended December 31, 2002    |  | $          | 807,000   |              |  | $          | 284,000 |            |  | $ | 930,000 |  |  | $ | 161,000   | 
|Year ended December 31, 2001    |  | $          | 1,374,000 |              |  | $          | 250,000 |            |  | $ | 817,000 |  |  | $ | 807,000   | 
|Year ended December 31, 2000    |  | $          | 1,203,000 |              |  | $          | 931,000 |            |  | $ | 760,000 |  |  | $ | 1,374,000 | 

|                             |  |            |           |              |  |            |           |            |  |   |         |  |  |   |           | 
|---------------------------- |  | ---------- | --------- | ------------ |  | ---------- | --------- | ---------- |  | - | ------- |  |  | - | --------- | 
|                             |  | Balance At |           |              |  |            |           | Balance At
|                             |  | Beginning  |           |              |  |            |           | End Of    
|Allowance for Sales Returns  |  | Of Period  |           | Additions(2) |  | Deductions |           | Period    
|                             |  |            |           |              |  |            |           |           
|Year ended December 31, 2002 |  | $          | 377,000   |              |  | $          | 306,000   |            |  | $ | 63,000  |  |  | $ | 620,000   | 
|Year ended December 31, 2001 |  | $          | 1,048,000 |              |  | $          | 169,000   |            |  | $ | 840,000 |  |  | $ | 377,000   | 
|Year ended December 31, 2000 |  | $          | 25,000    |              |  | $          | 1,033,000 |            |  | $ | 10,000  |  |  | $ | 1,048,000 | 



---



|    |                                           
|--- | ------------------------------------------
|(1) | This is charged to bad debt expense       
|   
|(2) | This is recorded as a reduction to revenue

81



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##### Table of Contents






EXHIBIT INDEX

|            |       |             |  |                                                                                                                                                          
|----------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description
|            |       |            
|            | 10.29 |             |  | Form of Stock Exchange Agreement, dated
    March 6, 2003, by and between the Company and the investors
    signatory thereto.                           
|            | 16.1  |             |  | Letter of Arthur Andersen LLP.                                                                                                                           
|            | 21.1  |             |  | Subsidiaries of Computer Motion, Inc.                                                                                                                    
|            | 23.1  |             |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                  
|            | 23.2  |             |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                         
|            | 99.1  |             |  | Certification of Robert W. Duggan, the
    Companys Chairman and Chief Executive Officer, pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 99.2  |             |  | Certification of Larry Redfern, the
    Companys Chief Accounting Officer, pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.