Table of Contents





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


|                                                                                       |  |                                     
|-------------------------------------------------------------------------------------- |  | ------------------------------------
|                                                                                       |  |                                     
|Form10-K                                                                              
|                                                                                       |  |                                     
|þANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF
THE SECURITIES 
EXCHANGE ACT OF 1934
|                                                                                       |  |                                     
|For the fiscal year ended December 31, 2008                                           
|                                                                                       |  |                                     
|Commission file number: 001-33966                                                     
|                                                                                       |  |                                     
|MAKO SURGICAL CORP.(Exact
Name of Registrant as Specified in Its Charter)             
|                                                                                       |  |                                     
|Delaware                                                                               |  | 20-1901148                          
|(State or Other Jurisdiction of Incorporation or
 Organization)                        |  | (I.R.S. Employer Identification No.)
|                                                                                       |  |                                     
|2555 Davie Road, Fort Lauderdale, FL                                                   |  | 33317                               
|(Address of Principal Executive Offices)                                               |  | (Zip
 Code)                         
|                                                                                       |  |                                     
|(954) 927-2044                                                                        
|(Registrants telephone number, including area code)                                  
|                                                                                      
|Securities registered pursuant to Section 12(b) of the
 Act:                          

|                                                                  |  |                                     
|----------------------------------------------------------------- |  | ------------------------------------
|Title of Class                                                    |  | Name of Exchange on Which Registered
|                                                                  |  |                                     
|Common stock, $0.001 par value per share                          |  | The NASDAQ Global Market            
|                                                                  |  |                                     
|Securities
 registered pursuant to Section 12(g) of the Act: None

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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No þ

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o    No þ

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
(the Exchange Act) during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ    No

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

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):

|                         |                                               |                         |                            
|------------------------ | --------------------------------------------- | ----------------------- | ---------------------------
|Large accelerated
filero | Accelerated
filer o                           | Non-accelerated
filer þ | Smaller
reporting company o
|                         | (Do not check if a smaller reporting company)

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o    No þ

The
aggregate market value of the common stock held by non-affiliates of the
registrant as of March 2, 2009 was approximately $111,632,511 (based on a
closing price of $7.74 per share on The NASDAQ Global Market as of such date).

As
of March 2, 2009, the registrant had outstanding 24,984,927 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Companys definitive proxy statement for the 2009 annual meeting of
stockholders will be incorporated by reference into Part III of this Annual
Report on Form 10-K when filed with the Securities and Exchange Commission.





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MAKO Surgical Corp.

INDEX TO FORM 10-K

|                            |  |                                                                                                                |  |    
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---
|Forward-Looking
 Statements |  | Page No.                                                                                                      
|                            |  |                                                                                                                |  |    
|                            |  | Part I                                                                                                         |  |    
|                            |  |                                                                                                                |  |    
|Item 1                      |  | Business                                                                                                       |  | 5  
|Item 1A                     |  | Risk
 Factors                                                                                                  |  | 31 
|Item 1B                     |  | Unresolved
 Staff Comments                                                                                     |  | 57 
|Item 2                      |  | Properties                                                                                                     |  | 57 
|Item 3                      |  | Legal
 Proceedings                                                                                             |  | 57 
|Item 4                      |  | Submission
 of Matters to a Vote of Security Holders                                                           |  | 57 
|                            |  |                                                                                                                |  |    
|                            |  | Part II                                                                                                        |  |    
|                            |  |                                                                                                                |  |    
|Item 5                      |  | Market for
 Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
 of Equity Securities |  | 58 
|Item 6                      |  | Selected
 Financial Data                                                                                       |  | 61 
|Item 7                      |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                         |  | 63 
|Item 7A                     |  | Quantitative
 and Qualitative Disclosure about Market Risk                                                     |  | 76 
|Item 8                      |  | Financial
 Statements and Supplementary Data                                                                   |  | 77 
|Item 9                      |  | Changes in
 and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 109
|Item 9A(T)                  |  | Controls
 and Procedures                                                                                       |  | 109
|Item 9B                     |  | Other
 Information                                                                                             |  | 110
|                            |  |                                                                                                                |  |    
|                            |  | Part III                                                                                                       |  |    
|                            |  |                                                                                                                |  |    
|Item 10                     |  | Directors,
 Executive Officers and Corporate Governance                                                        |  | 111
|Item 11                     |  | Executive
 Compensation                                                                                        |  | 111
|Item 12                     |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters               |  | 111
|Item 13                     |  | Certain
 Relationships and Related Transactions, and Director Independence                                     |  | 111
|Item 14                     |  | Principal
 Accountant Fees and Services                                                                        |  | 112
|                            |  |                                                                                                                |  |    
|                            |  | Part IV                                                                                                        |  |    
|                            |  |                                                                                                                |  |    
|Item 15                     |  | Exhibits
 and Financial Statement Schedules                                                                    |  | 113
|Signatures                  |  |                                                                                                                |  | 116
|Exhibit
 Index              |  |                                                                                                                |  | 117

We
have received or applied for trademark registration of and/or claim trademark
rights, including in the following marks that appear in this report: MAKO
Surgical Corp., MAKOplasty®, RIO, RESTORIS®,
Tactile Guidance System and TGS, as well as in the MAKO Surgical
Corp. MAKO logo, whether standing alone or in connection with the words MAKO
Surgical Corp. All other trademarks, trade names and service marks appearing
in this report are the property of their respective owners. Unless the context
requires otherwise, the terms registrant, company, we, us and
our
refer to MAKO Surgical Corp.

2

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FORWARD-LOOKING STATEMENTS

This
report contains forward-looking statements within the meaning of the U.S.
federal securities laws. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
Forward-looking statements include statements generally preceded by, followed
by or that include the words believe, could, expect, intend,
may,
anticipate, plan, predict, potential, estimate or similar
expressions. These statements include, but are not limited to, statements
related to:

| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and number of
 planned new product introductions;                                                                                                                    
| |   |                                                                                                                                                                                 
| |  | market acceptance of the
 MAKOplasty solution;                                                                                                                                  
| |   |                                                                                                                                                                                 
| |  | the effect of anticipated
 changes in the size, health and activities of population on the demand for
 our products;                                                            
| |   |                                                                                                                                                                                 
| |  | assumptions and estimates regarding the size and growth
 of certain market segments;                                                                                            
| |   |                                                                                                                                                                                 
| |  | our ability and intent to
 expand into international markets;                                                                                                                   
| |   |                                                                                                                                                                                 
| |  | the timing and anticipated
 outcome of clinical studies;                                                                                                                        
| |   |                                                                                                                                                                                 
| |  | assumptions concerning
 anticipated product developments and emerging technologies;                                                                                             
| |   |                                                                                                                                                                                 
| |  | the future availability
 from third-party suppliers, including single source suppliers, of components
 for our robotic arm and implant systems for our knee MAKOplasty solution;
| |   |                                                                                                                                                                                 
| |  | the viability of
 maintaining our licensed intellectual property or our ability to obtain
 additional licenses necessary to our growth;                                         
| |   |                                                                                                                                                                                 
| |  | the anticipated adequacy
 of our capital resources to meet the needs of our business;                                                                                           
| |   |                                                                                                                                                                                 
| |  | our continued investment
 in new products and technologies;                                                                                                                     
| |   |                                                                                                                                                                                 
| |  | the ultimate marketability
 of newly launched products and products currently being developed;                                                                                  
| |   |                                                                                                                                                                                 
| |  | the ability to implement
 new technologies successfully;                                                                                                                        
| |   |                                                                                                                                                                                 
| |  | future declarations of
 cash dividends;                                                                                                                                         
| |   |                                                                                                                                                                                 
| |  | our goals for sales and
 earnings growth;                                                                                                                                       
| |   |                                                                                                                                                                                 
| |  | our ability to sustain
 sales and earnings growth;                                                                                                                              
| |   |                                                                                                                                                                                 
| |  | our success in achieving
 timely approval or clearance of products with domestic and foreign regulatory
 entities;                                                              
| |   |                                                                                                                                                                                 
| |  | the stability of certain
 domestic and foreign economic markets;                                                                                                                
| |   |                                                                                                                                                                                 
| |  | the impact of anticipated
 changes in the medical device industry and our ability to react to and
 capitalize on those changes;                                                 
| |   |                                                                                                                                                                                 
| |  | our ability to take
 advantage of technological advancements; and                                                                                                               
| |   |                                                                                                                                                                                 
| |  | the impact of any managerial changes.                                                                                                                                           

Forward-looking
statements reflect our current expectations and are not guarantees of
performance. These statements are based on managements beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to these forward-looking statements include,
among others, assumptions regarding demand for our products, expected pricing
levels, raw material costs, the timing and cost of planned capital
expenditures, competitive conditions and general economic conditions. You are
cautioned that reliance on any forward-looking statement involves risks and
uncertainties. Although we believe that the assumptions on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate given the inherent uncertainties
as to the occurrence or nonoccurrence

3

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of future events. There can
be no assurance that the forward-looking statements contained in this report
will prove to be accurate. The inclusion of a forward-looking statement in this
report should not be regarded as a representation by us that our objectives
will be achieved.

Forward-looking
statements also involve risks and uncertainties, which could cause actual
results to differ materially from those contained in any forward-looking
statement. Many of these factors are beyond our ability to control or predict
and could, among other things, cause actual results to differ from those
contained in forward-looking statements made in this report. Such factors,
among others, may have a material adverse effect on our business, financial
condition and results of operations and may include, but are not limited to,
factors discussed under Item 1A, Risk Factors, and the following:

| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a further economic downturn
 that may have a significant adverse effect on the ability of our customers to
 secure adequate funding, including access to credit, for the purchase of our
 products or that may cause our customers to delay a purchasing decision;
| |   |                                                                                                                                                                                                                                                                   
| |  | changes in general
 economic conditions and interest rates;                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                   
| |  | changes in the
 availability of capital and financing sources, for our company and our
 customers;                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                   
| |  | changes in competitive
 conditions and prices in our markets;                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                   
| |  | changes in the relationship
 between supply of and demand for our products;                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                   
| |  | fluctuations in costs of
 raw materials and labor;                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                   
| |  | changes in other
 significant operating expenses;                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to product launches, particularly the launch of the RIO Robotic Arm
 Interactive Orthopedic system;                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                   
| |  | decreases in sales of our
 principal product lines;                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                   
| |  | slow downs or
 inefficiencies in our product research and development efforts;                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                   
| |  | increases in expenditures
 related to increased government regulation of our business;                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                   
| |  | unanticipated issues in
 securing regulatory clearance or approvals for upgrades or changes to our
 products;                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                   
| |  | developments adversely
 affecting our potential sales activities outside the United States;                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                   
| |  | increases in cost
 containment efforts by group purchasing organizations;                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                   
| |  | loss of key management and
 other personnel or inability to attract such management and other personnel;                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                   
| |  | increases in costs of
 retaining a direct sales force and building a distributor network;                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to, or unanticipated changes in or difficulties associated with, the
 recruitment of agents and distributors of our products;                                                                                                       
| |   |                                                                                                                                                                                                                                                                   
| |  | unanticipated expenditures
 related to any future litigation; and                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                   
| |  | unanticipated intellectual
 property expenditures required to develop, market and defend our products.                                                                                                                                                            

We
caution you not to place undue reliance on these forward-looking statements, as
they speak only as of the date they were made. We do not undertake any
obligation to release any revisions to these forward-looking statements
publicly to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.

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PART I

|        |         
|------- | --------
|ITEM 1. | BUSINESS

Overview

We
are a medical device company that markets our advanced robotic arm solution and
orthopedic implants for minimally invasive orthopedic knee procedures. We offer
MAKOplasty, an innovative, restorative surgical solution that enables
orthopedic surgeons to consistently, reproducibly and precisely treat patient
specific, early to mid-stage osteoarthritic knee disease.

Z-Kat,
Inc. was formed in 1997 to develop and commercialize computer assisted surgery,
or CAS, applications. Z-Kat acquired, developed and commercialized certain CAS
intellectual property and technology assets and also acquired and developed,
but did not commercialize, certain haptic robotic intellectual property and
technology assets. At the direction of its board of directors and shareholders,
Z-Kat formed MAKO Surgical Corp. and incorporated it in Delaware in November
2004, initially as a wholly owned subsidiary, to develop and commercialize
unique applications combining CAS with haptic robotics in the medical field of
orthopedics. In February 2008, our common stock began trading on The NASDAQ
Global Market under the ticker symbol MAKO and we closed our initial public
offering, or IPO.

MAKOplasty
is performed using our proprietary, U.S. Food and Drug Administration, or
FDA, cleared robotic arm system and proprietary knee resurfacing implants. Our
robotic arm systems, branded as our first generation Tactile Guidance System,
or TGS, and our second generation RIO Robotic Arm Interactive Orthopedic
system, or RIO, utilize tactile guided robotic arm technology and patient
specific visualization to prepare the knee joint for the insertion and
alignment of our resurfacing implants through a small incision in a minimally
invasive, bone preserving and tissue sparing procedure. Our RESTORIS family of
knee implants is designed to enable minimally invasive restoration of one or
two of the diseased compartments of the knee joint. We believe MAKOplasty will
empower physicians to address the needs of the large and growing, yet
underserved population of patients with early to mid-stage osteoarthritic knee
disease who desire a restoration of quality of life and reduction of pain, but
for whom current surgical treatments are not appropriate or desirable due to
the highly invasive nature of such procedures, the slow recovery and the
substantial costs of rehabilitation, medication and hospitalization.

Unlike
conventional knee replacement surgery, which requires extraction and
replacement of the entire joint, MAKOplasty enables resurfacing of one or two
specific diseased compartments of the joint, preserving significantly more soft
tissue and healthy bone of the knee. We believe localized resurfacing can be
optimized using our robotic arm technology, which offers consistently
reproducible precision to surgeons to achieve optimal implant placement and
alignment for smaller, more easily inserted modular implant components. We
believe that the tissue sparing and bone conserving techniques enabled with
MAKOplasty can offer substantial advantages to patients, surgeons and
healthcare providers. Because of the minimally invasive nature of the
procedure, smaller incisions are possible, which lead to less tissue loss and
faster recoveries, thereby reducing the overall costs of rehabilitation,
medication and hospitalization. In addition, because more of the patients
natural anatomy is preserved and less trauma is inflicted on the knee, we
believe that patients who undergo MAKOplasty have the potential to experience
better functionality and more natural knee movements, thereby achieving an
improved post-operative quality of life. Significantly, the expansion of our
RESTORIS family of implants for use in single and bicompartmental knee
resurfacing procedures provides the ability to address a broader range of the
patient population suffering from early to mid-stage osteoarthritis. Finally,
because our robotic arm systems are easy to use, we believe that our MAKOplasty
solution makes resurfacing procedures accessible to orthopedic surgeons with a
broad range of training and skills and has the potential to lead to greater
adoption of knee resurfacing solutions for early to mid-stage osteoarthritis of
the knee.

In
May 2005, we obtained 510(k) marketing clearance from the FDA for a haptic
imageless surgical guidance system. In November 2005, we obtained 510(k)
marketing clearance from the FDA for version 1.0 of our TGS, a CT based patient
specific visualization system with a robotic arm, which was the predecessor
device

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to our RIO
system and enabled MAKOplasty for a single compartment of the knee joint using
a standard unicompartmental implant. In January 2008, we received 510(k)
marketing clearance from the FDA for version 1.2 of our TGS, which allowed for
MAKOplasty using an alternative standard unicompartmental knee implant and
incorporated several software upgrades developed and introduced since the
commercial introduction of version 1.0. We commercially launched version 1.2 in
the first quarter of 2008 and version 1.3 (the modifications to which did not
require 510(k) marketing clearance) in the third quarter of 2008. In the first
quarter of 2006 we received 510(k) clearance for our tibial inlay knee implant
system and in the fourth quarter of 2007 we received 510(k) clearance for our
tibial onlay knee implant system and for our combined inlay and onlay system,
branded as RESTORIS. In the second quarter of 2008, we received 510(k)
clearance for our novel unicompartmental knee implant and 510(k) clearance
for our patellofemoral knee implant, predecessor components of our proprietary
multicompartmental implant system. In the fourth quarter of 2008, we received
510(k) marketing clearance from the FDA for the RIO system, which is version
2.0 of our TGS, and our multicompartmental knee implant system, branded as
RESTORIS MCK. We intend to commercially launch both the RIO system and the
RESTORIS MCK multicompartmental knee implant system in the first half of 2009.

As
part of the TGS sales contracts, TGS customers are entitled to receive an
upgrade of their TGS unit to a RIO system at no additional charge, with the
exception of one customer who had the right to receive it at a discounted
price. Through December 31, 2008, we commercially installed seventeen TGS
units, all of which achieved customer acceptance, and installed one additional
non-commercial unit for research and evaluation purposes. As of December 31,
2008, 782 knee MAKOplasty procedures had been performed since commercial
introduction in June 2006. We currently have 22 post-market studies of
MAKOplasty, either recently completed or in progress, which are aimed at
demonstrating the accuracy of the placement and alignment of our knee implants
and the clinical value of the MAKOplasty procedure. To date, the results of
these studies have been presented internationally as peer-reviewed
presentations at conferences in the United States and abroad. We have an
intellectual property portfolio of more than 250 licensed or owned patents and
patent applications relating to the areas of computer assisted surgery,
robotics, haptics and implants.

We
generate revenue from unit sales of our TGS, sales of our implants and
disposable products and the sale of extended warranty service contracts. We
anticipate generating revenue from future sales of RIO systems. To date, we
have recognized revenue primarily from the sale of implants and disposable
products utilized in MAKOplasty procedures. Recognition of deferred revenue in
our statements of operations associated with the sale of TGS units depends on
delivery of the RIO system, which we intend to commercially launch in the first
half of 2009.

Industry Background

The Growing
Osteoarthritis Problem

Osteoarthritis
is a common medical condition that leads to the degeneration of joints from
aging and repetitive stresses, resulting in a loss of the flexibility,
elasticity and shock-absorbing properties of the joints. As osteoarthritis
disease progresses, the cartilage and other soft tissues protecting the
surfaces of key joints in the body, including knees, hips and shoulders,
deteriorate, resulting in substantial and chronic joint pain, numbness and loss
of motor function. This pain can be overwhelming for patients and can have
significant physical, psychological, quality of life and financial
implications. According to estimates by the National Institutes of Health, or
NIH, 21 million people in the U.S., or 12.1% of the U.S. population
age 25 and older, suffer from osteoarthritis.

Compelling
demographic trends, such as the growing, aging and more active population and
rising obesity rates are expected to be key drivers in the continued growth of
osteoarthritis. The NIH projects that by 2030, 20% of Americans, or
approximately 72 million people, will be 65 years or older and will
be at high risk of developing osteoarthritis. According to Frost &
Sullivan, it is estimated that in 2007 there were 73.7 million obese
people in the U.S. and by 2012, as many as 88 million Americans will
suffer from obesity. According to the American Journal of Epidemiology, obese
women had nearly four times the risk of suffering from osteoarthritis of

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the knee as
non-obese women, and obese men had nearly five times the risk of suffering from
osteoarthritis of the knee as non-obese men.

For
the most severe cases of osteoarthritis, in which patients suffer from extreme
pain, reconstructive joint surgery may be required. Reconstructive joint
surgery involves the removal of the bone area surrounding the affected joint
and the insertion of one or more manufactured implants as a replacement for the
affected bone. According to The Orthopaedic Industry Annual Report for
the year ended June 15, 2008, published by Knowledge Enterprises, Inc., global
sales of joint replacement products in 2007, including knees, hips, elbows,
wrists, digits and shoulders, were $11.6 billion, an increase in sales of
nearly 11% over 2006, of which sales in the United States represented
$6.1 billion. According to Frost & Sullivan, the joint implant market
is expected to grow to nearly
$10 billion by 2013, with knee and hip implant systems representing the
two largest sectors.

Market for
Osteoarthritis of the Knee

The
knee joint consists of the medial, patellofemoral and lateral compartments. As
depicted below by the shaded diseased areas of the knee joint, osteoarthritis
of the knee usually begins with the deterioration of the soft tissue and
cartilage in the medial compartment and progresses to either or both the
patellofemoral and lateral compartments. The progression of osteoarthritis of
the knee can take many years, and even in the early stages, it can result in
substantial pain for the patient and a reduction in the quality of life.

| |  |  |  | 
| |  |  |  | 

(GRAPHIC)

According
to Datamonitor, in 2006 there were approximately 15 million people in the
U.S. with osteoarthritis of the knee. The growth of osteoarthritis of the
knee among the U.S. population is expected to accelerate as the
increasingly active population ages and obesity rates increase. As a result of
this substantial clinical need, the market for orthopedic knee procedures in
the U.S. has experienced tremendous growth over the past decade. According
to data compiled by Orthopedic Network News, the U.S. knee implant market
was greater than $3.3 billion in 2007, which represents growth of 9.3%
from 2006 to 2007. In addition to the substantial costs of the procedure
itself, total knee replacement and resurfacing procedures represent significant
incremental costs to the healthcare system. These include costs associated with
rehabilitation, medication, hospitalization and, over the long-term, costs
incurred as a result of replacements or revisions that may be required due to
wear and tear or improper placement.

Current Orthopedic
Knee Arthroplasty Approaches

Arthroplasty
options for treating osteoarthritis of the knee have historically been limited
to either total knee replacement surgery or knee resurfacing procedures.

Total
Knee Replacement. Currently, most people who choose to
surgically address osteoarthritis of the knee elect to undergo total knee
replacement surgery. Total knee replacement is a highly invasive surgical procedure
in which a patients diseased knee joint is removed and replaced with a
manufactured replacement knee joint comprised of several components that
attempt to mimic the normal function of the knee joint. The procedure requires
a large incision ranging from 4 to 12 inches to accommodate the complex
scaffold of cutting blocks and jigs required to execute the blunt, planar cuts
involved in total knee replacement surgery and to prepare the knee for
insertion of the large implants. Both internal and external soft tissue damage
is significant in this procedure as the entire knee joint is fully exposed and
much of the bone and tissue surrounding it are removed. The bone cuts are also
extensive, presenting a large surface area for bone bleeding. The implants are
typically manufactured out of metal, ceramic or polymers and have an
approximate useful life of between 15 and 20 years before they usually are
revised or replaced.

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The figures
below illustrate a conventional total knee replacement surgery and implant:

|                               |  |                   
|------------------------------ |  | ------------------
|(GRAPHIC)                      |  | (GRAPHIC)         
|Total Knee Replacement Surgery |  | Total Knee Implant

Despite
its long history as an established and effective orthopedic procedure, total
knee replacement surgery is not an ideal option for many patients suffering
from early to mid-stage, unicompartmental or multicompartmental degeneration of
the knee. Some of the principal limitations of total knee replacement surgeries
include:

| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | highly
 invasive nature of the surgical procedure, which requires a large incision
 ranging from 4 to 12 inches to prepare and implant the large implants;
| |   |                                                                                                                                                           
| |  | significant
 damage to the bone and tissue surrounding the joint;                                                                                         
| |   |                                                                                                                                                           
| |  | substantial
 bone bleeding;                                                                                                                               
| |   |                                                                                                                                                           
| |  | required
 removal of all three compartments of the knee, regardless of which compartments
 are actually diseased;                                         
| |   |                                                                                                                                                           
| |  | extended and
 often painful recovery time and rehabilitation;                                                                                             
| |   |                                                                                                                                                           
| |  | reduced
 mobility and range of motion; and                                                                                                                
| |   |                                                                                                                                                           
| |  | likely
 implant replacement or revision in approximately 15 to 20 years when the
 implant reaches the end of its useful life.                             

For
these and other reasons, many people who are eligible for total knee
replacement surgery elect not to undergo or postpone the procedure, choosing
instead to suffer significant pain and limited mobility.

Unicompartmental
and Bicompartmental Knee Resurfacing. Unicompartmental
and bicompartmental knee resurfacing is a less invasive arthroplasty procedure
in which only the arthritic region of the knee is removed and a small implant
is inserted to resurface the diseased compartment of the knee. Unicompartmental
and bicompartmental knee resurfacing procedures are ideal for patients with
early to mid-stage osteoarthritis and are aimed at sparing the healthy bone,
cartilage and other soft tissues typically removed in a conventional total knee
replacement procedure. Today, these procedures are generally performed manually
and require a level of training, expertise and precision that significantly
exceeds what is required for the typical total knee replacement surgery. Orthopedic
Network News has estimated that 47,800 unicompartmental knee resurfacing
procedures were performed in 2007 in the United States, which represents a 3.2%
increase from the estimated 46,300 such procedures performed in 2006 in the
United States.

Unicompartmental
and bicompartmental knee resurfacing are potentially more desirable procedures
than total knee replacement surgery for patients suffering from early to
mid-stage degeneration of the knee because they preserve more of the patients
natural anatomy and result in less trauma to the patient. As a result, patients
experience less tissue loss and faster recoveries. However, despite the
potential clinical, quality of life and cost benefits of these procedures, they
have achieved only limited adoption to date, in part, as a result of the
following limitations that make performing these procedures very difficult:

| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 restricted room to maneuver and impeded line of sight due to the smaller
 incision and minimally invasive nature of the procedures which make it
 difficult to insert, place and align the implant properly; and
| |   |                                                                                                                                                                                                                      
| |  | the complex
 process of removing portions of the bone and resurfacing the knee joint in
 preparation for the implant.                                                                                                

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The
difficulties in manually executing unicompartmental or bicompartmental knee
resurfacing procedures can result in inaccurate implant alignment, which can
lead to reduced range of motion and premature implant failure. In light of the
difficulties, many physicians choose not to recommend these procedures and many
patients choose either to live with the osteoarthritic pain or to undergo total
knee replacement surgery. According to Medtech Insight, LLC, some experts
estimate that between 5% to 20% of patients who underwent total knee replacement
surgeries had osteoarthritis in only one or two compartments of the knee, which
we believe may qualify them as appropriate candidates for a either a
unicompartmental or bicompartmental implant.

Introduction of
Minimally Invasive Surgery

Over
the past thirty years, one of the most significant medical trends has been the
development of minimally invasive methods of performing surgical procedures.
Compared to traditional, open surgical techniques, minimally invasive
techniques that employ image guided surgical systems offer potentially superior
benefits for patients, surgeons and hospitals. For patients, these
techniques result in reduced procedure related pain and less scarring at the
incision site leading to faster recovery times and shorter post-operative
hospital stays, as well as better aesthetic outcomes. For the surgeon, these
techniques reduce procedure related complications and have the potential to
reduce risks associated with more invasive procedures. For the hospital, these
procedures can result in reduced hospital stays from faster recovery times and
lower rates of complications.

Despite
the many benefits of minimally invasive techniques, however, they also present
several notable limitations due to the restricted surgical space, including:

| |   |                                              
| | - | ---------------------------------------------
| |  | restricted
 vision at the anatomical site;   
| |   |                                              
| |  | cumbersome
 handling of surgical instruments;
| |   |                                              
| |  | difficult
 hand eye coordination; and        
| |   |                                              
| |  | limited
 tactile feedback.                   

Minimally
invasive approaches have seen substantial adoption in various surgical fields
where procedures can be performed within existing anatomical cavities of the
human body. However, because of the limitations of minimally invasive
techniques, they have been less successful for complex surgical procedures
requiring cutting and replacement of large anatomical parts that nevertheless
require precision and control.

Introduction of
Robotics into Other Surgical Fields

We
believe that the application of robotics technologies in minimally invasive
surgical procedures represents the next generation in the evolution of the
surgical technique. These technologies are being developed to provide surgeons
with a more precise, repeatable and controlled ability to perform complex
procedures by offering increased visual acuity and greatly improved tactile
feedback. These characteristics empower surgeons to better control their
surgical technique and limit the margin of error.

With
the assistance of robotics technology, an increasing number of surgeons have
been able to perform procedures previously limited to a small subset of highly
skilled surgeons. In addition, robotics technology has allowed these procedures
to be performed in a more minimally invasive manner, requiring only small
incisions, which result in reduced procedure related trauma, fewer infections
and post-procedure complications and reduced recovery and hospitalization
periods.

Robotics
technology has been successfully applied in a variety of diverse fields
including urology, gynecology, cardiothoracic surgery and catheter based
interventional cardiology and radiology. The success of

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robotics
technologies in these applications has led to the growing adoption and
commercialization of these technologies in the medical world.

The Use of Robotics
in Orthopedic Surgical Procedures

Despite
the success of robotics technology in other medical fields, only limited
applications have been commercialized in the field of orthopedics to date,
although we are aware of current orthopedic robotic development by other
companies. Some orthopedic companies have introduced instruments that are
smaller than their predecessors, which are marketed as minimally invasive,
but these instruments still require large incisions, trauma to the soft tissue
and removal of large portions of the bone to perform the surgical procedure.
Orthopedic companies have also introduced CAS systems that are designed for use
in open procedures. However, while these systems do provide a minimally invasive
means of viewing the anatomical site, their benefits are marginal because they
do not improve a surgeons ability to make consistently reproducible and
precise surgical movements through a small incision.

We
believe that the limitations of currently available surgical options for knee
disease have created a sizeable market for treatment of a large, growing and
underserved population of patients with early to mid-stage osteoarthritis of
the knee. We believe that robotics technology is the key to enabling surgeons
to perform the kind of minimally invasive knee surgery that results in
restoration of function and improved post-operative outcomes for such patients.

The MAKO Solution

We
have designed our MAKOplasty solution to provide the consistently reproducible
precision, accuracy and dexterity necessary for a surgeon to successfully
perform minimally invasive orthopedic arthroplasty procedures on the knee
despite a limited field of vision in a confined anatomical space. Our
MAKOplasty solution is composed of two critical components: the robotic arm
system, which consists of the proprietary tactile robotic arm and our patient
specific visualization system that provides both pre-operative and
intra-operative guidance to the surgeon, and the RESTORIS family of knee
implant systems that are designed for minimally invasive restoration of the
diseased compartments of the joint. By integrating robotic arm and patient
specific visualization technology with the touch and feel of the surgeons
skilled hand, MAKOplasty is designed to enable a level of surgical precision
and accuracy that is beyond the scope of the typical surgeons freehand
capabilities, which we believe will result in broad adoption of our
technologies by orthopedic knee surgeons and better outcomes for patients. We
believe MAKOplasty offers the following key benefits to patients, surgeons and
hospitals:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Minimally Invasive Targeted Knee
 Arthroplasty. MAKOplasty enables surgeons to isolate
 and resurface just the diseased compartment or compartments of the knee joint
 through a minimally invasive incision, rather than replacing the entire
 joint. The precision of our robotic arm technology makes such minimally
 invasive targeted treatment possible by eliminating the complex scaffold of cutting
 blocks and jigs that would otherwise be required to execute the blunt, planar
 bone cuts and insert the large implants involved in conventional total knee
 replacement surgery or a manually executed resurfacing procedure. We believe
 that our solution will make minimally invasive orthopedic procedures, like
 unicompartmental and bicompartmental knee resurfacing, a viable option for a
 greatly expanded pool of patients and physicians.                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Consistently Reproducible Precision.
 We believe that MAKOplasty reduces the variability of procedure outcomes and
 increases efficacy through the consistently reproducible precision provided
 by our computer assisted and tactile robotic arm technology. We believe that
 the precision of our cutting process and placement and alignment of implants
 leads to significantly improved and reliable results, compared to
 conventional, manually executed unicompartmental and bicompartmental
 resurfacing procedures. The surgeon retains control of the actual movements
 of the robotic arm within a pre-established volume of space, the tactile
 safety zone, which is tracked and bounded by the robotic arm system. We
 believe that the tactile safety zone enables improved placement and alignment
 of the resurfacing implant, while the visualization enables the procedure to
 be performed through a small incision without direct visualization.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | We believe
 that this consistently reproducible precision enables physicians to be
 trained in the use of MAKOplasty in a relatively short period of time and
 also will increase the number of physicians who are willing and able to
 perform unicompartmental and bicompartmental resurfacing procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Patient Specific Proprietary Implants.We
 believe that our proprietary knee resurfacing implants allow surgeons to
 customize a knee resurfacing solution for individual patients facing early to
 mid-stage osteoarthritis in one or two compartments of the knee joint. Our
 original RESTORIS unicompartmental implant system allows for a choice of
 tibial implant based on patient bone quality. Our RESTORIS MCK implant system
 provides for this same choice for medial unicompartmental disease and allows
 for the resurfacing of the patellofemoral compartment as well, either
 independently or in combination with the medial compartment in a
 bicompartmental knee MAKOplasty. Because all implants are sized and planned
 for based on patient-specific anatomical indications, the potential for
 favorable clinical outcomes is enhanced.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Ease of Use. We
 believe that our robotic arm systems leverage and complement the surgical
 skills and techniques already familiar to the surgeon, while providing
 substantial incremental control and precision that has not previously been
 possible. The customized, patient specific visualization system guides the
 surgeon through each step of the surgical procedure, while the tactile
 safety zone ensures that the surgeon does not apply the bone cutting
 instrument beyond the intended area of the knee joint.                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Improved Restorative Post-Operative Outcomes.
 Due to the minimally invasive nature of the procedure, we believe that
 patients who undergo knee MAKOplasty are likely to experience less tissue
 loss, less visible scarring and a faster recovery, thereby reducing the cost
 of rehabilitation, physical therapy, medication and hospitalization. In
 addition, because more of the patients natural anatomy is preserved and less
 trauma is inflicted on the knee, patients who undergo MAKOplasty have the
 potential to experience better mobility, comfort, range of motion and more
 natural knee movements to achieve an improved post-operative quality of life.                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Reduced Costs for Patients and Hospitals.
 The minimally invasive nature of the knee MAKOplasty solution aids hospitals
 and patients in reducing costs by shortening hospital stays and recovery
 periods and reducing the amount of rehabilitation and medication.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

The
comprehensive nature of the MAKOplasty solution also provides hospitals with
the implants and disposable products necessary to perform the procedures. We
believe that our complete knee arthroplasty solution represents a substantial
improvement over currently available approaches that we hope will lead to rapid
adoption in the marketplace.

The
figure below illustrates a MAKOplasty knee resurfacing procedure.

(GRAPHIC)

Our Strategy

Our
goal is to continue to drive sales of the robotic arm system and generate
recurring revenue through sales of implants, disposable products and service
contracts by establishing MAKOplasty as the preferred surgical procedure for
patients with early to mid-stage, unicompartmental and multicompartmental
degeneration of the knee. We believe that we can achieve this objective by
working with hospitals to demonstrate key benefits of MAKOplasty, such as consistently
reproducible surgical precision, improved post-operative outcomes and reduced
healthcare costs. Our strategy includes the following key elements:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on key physicians and thought leaders
 to encourage adoption of our MAKOplasty solution. We
 plan to continue to focus our marketing efforts on key orthopedic surgeons
 who currently perform the majority of unicompartmental and bicompartmental
 knee procedures or who are actively involved in the development of minimally
 invasive orthopedic approaches. We also plan to continue to focus our

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | marketing
 efforts on the hospitals with which these key surgeons are affiliated and
 engage them to promote the benefits of MAKOplasty. Our strategy is to
 convince hospitals that through early adoption of MAKOplasty and acquisition
 of our robotic arm system, they can reinforce their reputations as leading
 institutions for the treatment of early to mid-stage osteoarthritis of the
 knee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Expand the market for multicompartmental
 knee resurfacing. We plan to expand the market
 for multicompartmental knee resurfacing procedures by encouraging use of the
 MAKOplasty procedure for patients who, given only conventional surgical
 alternatives, would have opted for total knee replacement surgery or no surgery
 at all. Our current FDA cleared application of MAKOplasty is for
 unicompartmental and bicompartmental knee resurfacing procedures using the
 RESTORIS family of knee implant systems, allowing us the potential of
 accommodating varied patient profiles and surgeon preferences. We believe
 that the potential benefits of our MAKOplasty solution and the combination of
 these product offerings will facilitate our efforts to expand and capture the
 market for multicompartmental knee resurfacing.                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Drive volume sales of our RESTORIS family
 of knee implant systems and the disposable products for installed RIO systems. Following
 the commercial launch of our RIO system and installation of the RIO system at
 a given hospital, we intend to expand the number of orthopedic surgeons who
 use robotic arm systems and work with the hospitals and their surgeons to
 promote patient education about the benefits of knee MAKOplasty. Our goal is
 to increase usage per system to drive higher volume sales of our RESTORIS
 family of knee implant systems and the disposable products.                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Demonstrate the clinical and financial
 value proposition of MAKOplasty. We intend to
 continue to collaborate with leading surgeons and early adopting hospitals
 through such programs as the MAKOplasty Center of Excellence to build
 clinical and financial data that support the benefits of knee MAKOplasty. The
 MAKOplasty Center of Excellence is a program developed in conjunction with
 participating hospitals to educate surgeons and patients regarding the benefits
 of knee MAKOplasty. As part of the collaborative program, participating
 hospitals maintain and provide us with certain clinical and financial data
 that we use to support the business case for the MAKOplasty solution. Our
 goal is to obtain clinical data further supporting the value of MAKOplasty
 knee resurfacing procedures, as well as the accuracy and longevity of such
 implant placements, while demonstrating to hospitals the top and bottom line
 financial benefits of our MAKOplasty solution.

Our Products

MAKOplasty
knee resurfacing procedures are enabled through our proprietary technology
consisting of two components: our robotic arm system and our RESTORIS family of
knee implant systems.

The MAKO Robotic Arm
System

The
centerpiece of MAKOplasty is our proprietary robotic arm, interactive,
orthopedic system that provides both pre-operative and intra-operative guidance
to the orthopedic surgeon, enabling minimally invasive, tissue sparing bone
removal and knee implant insertion. The TGS version 1.0 robotic arm system,
introduced in 2005, will be succeeded by the version 2.0 RIO system which we
intend to commercially launch in the first half of 2009. Each system consists
of two elements: a tactile robotic arm utilizing an integrated bone cutting instrument
and a patient specific visualization component.

The
figures below identify the key components of the RIO systems tactile robotic
arm, stereo tracking system and instruments:

(GRAPHIC)

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Tactile
Robotic Arm System. The tactile robotic arm
system consists of the key components identified in the figures above and
incorporates the following specifications, features and benefits:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Tactile Robotic Arm 
 The tactile robotic arm is designed to respond fluidly to movements initiated
 by the surgeon operating the bone cutting instrument. We have designed the
 robotic arm to achieve substantial dexterity and range of movement. The
 robotic arm helps enforce a tactile safety zone that is established by the
 patient specific visualization system by providing tactile resistance when
 the boundaries of the tactile safety zone are reached. This tactile
 resistance helps ensure that the surgeon does not apply the bone cutting
 instrument beyond the intended area of the knee joint.                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Controller 
 The controller is the electronic hardware and firmware component of our
 computing system which interfaces with our proprietary surgical planning and
 execution software to allow the surgeon to safely guide the tactile robotic
 arm. The controller governs the basic, low-level functions of the tactile
 robotic arm, such as the tactile constraints and the safety circuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Stereo Tracking System Camera and
 Instruments  During a MAKOplasty procedure,
 the location of the tactile safety zone is updated continuously based on bone
 tracking data supplied to the computer system by an infrared stereo tracking
 system, which consists of a special camera that is directed toward a series
 of spheres and arrays attached to the patients anatomy by bone pins. The
 tracking system assists the robotic arm system in locating and physically
 tracking the patients anatomy and coordinating its real time position with
 the cutting instrument of the robotic arm. It has a sufficient refresh rate
 to provide the robotic arm system with a sufficient flow of information
 regarding movements by both the patient and the robotic arm to ensure optimal
 cutting and placement. Using the system, the surgeon can freely move the
 robotic arm within the defined space, but encounters tactile resistance as
 the boundaries of such space are reached.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | End Effector 
 The end effector is the mechanical component by which the bone cutting
 instrument is attached to the tactile robotic arm. It is designed to ensure
 the secure placement of the bone cutting instrument, while providing the
 flexibility necessary for the surgeon to manipulate the instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Bone Cutting Instrument with Disposable
 Cutting Tip  The bone cutting instrument is
 integrated into the tactile robotic arm at the end effector. This instrument
 is composed of a high speed motor and a component that houses a variety of
 single use bone cutting tips. The design of the bone cutting instrument
 allows the surgeon to grip it in a manner similar to holding a pen-like
 cutting tool, making it easy to manipulate the instrument in the patients
 anatomy. The cutting tip is the disposable end tip of the bone cutting
 instrument that makes contact with the knee joint and actually removes the
 bone for placement of the implant in accordance with the pre-operative plan.
 In combination with our tactile robotic arm, the bone cutting instrument
 enables the smooth precision and accuracy necessary for resurfacing
 procedures.                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Portable Base Console 
 The base component of our tactile robotic arm is a mobile unit that enables
 the portability of the tactile robotic arm from one operating room to
 another. The base controller houses the controller and various electrical and
 mechanical components that help power the tactile robotic arm. Its design
 enables the console to be situated next to the patient during surgery and the
 tactile robotic arm to be conveniently positioned over the patients anatomy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

The
figure below identifies the key components of the RIO systems patient specific
visualization system:

(GRAPHIC)

Patient
Specific Visualization System.Our patient specific
visualization system is a vital part of our ability to deliver minimally
invasive surgical procedures for the knee. The surgical team uses our system
pre-

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operatively to
plan and intra-operatively to guide the surgical procedure. It consists of the
key components identified in the figure above and incorporates the following
specifications, features and benefits:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Surgical Planning and Execution Software 
 Our surgical planning and execution software, which is integrated into our
 patient specific visualization system, is used during the pre-operative
 surgical planning process to visualize and map the exact portion of bone to
 be removed and resurfaced, define the anatomical boundaries of the tactile
 safety zone and plan the optimal placement and alignment of our implants.
 During the procedure, the visualization system guides the surgeon through
 each specific, well defined surgical technique and displays in real time each
 current and planned surgical activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Tactile Safety Zone 
 While the robotic arm enforces a tactile safety zone by providing tactile
 resistance when the boundaries of the tactile safety zone are reached, our
 patient specific visualization system provides a visual representation of the
 tactile safety zone and provides additional visual and auditory cues when the
 boundaries of such tactile safety zone are reached. The combination of this
 tactile resistance and patient specific visualization helps ensure that the
 surgeon does not apply the bone cutting instrument beyond the intended area
 of the knee joint.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Instrument Locator 
 The instrument locator provides visual guidance on the position of the bone
 cutting instrument and other surgical instruments in relation to the
 patients anatomy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Monitors 
 Prior to surgery, patients undergo a conventional CT scan that captures an
 image of the diseased knee joint. This CT image is uploaded to the patient
 specific visualization system, where a MAKOplasty Specialist processes the
 image for display as a 3-D volume in space corresponding to the implant shape
 and placement overlaid onto the CT image of the patients knee joint. This
 patient specific visualization of our implant overlaid onto an image of the
 patients actual knee joint helps the surgeon to  plan the
 procedure pre-operatively, by providing information which enables the surgeon to determine
 the optimal placement, alignment and sizing of the implant and establishing
 the boundaries of the tactile safety zone. During surgery, each monitor
 projects an active 3-D computer graphics visualization of the patients knee
 joint, showing the areas of the bone that are actually removed as the
 procedure progresses. The user can also change the viewpoint and zoom level
 of the visualization as the procedure progresses to focus on different
 portions of the anatomy.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Mobile Base 
 The base component of our patient specific visualization system is a mobile
 unit that enables the portability of the patient specific visualization
 system from one operating room to another. It houses our computer hardware
 and our surgical planning and execution software and various electrical and
 mechanical components that help power the visualization system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Early Versions of
the Tactile Guidance System

In
November 2005, we obtained 510(k) marketing clearance from the FDA for version
1.0 of our TGS for use with an inlay knee implant system, as described below.
We subsequently developed and introduced several upgrades to our TGS, including
improvements to our surgical planning software as well as changes to certain
instrumentation to make the device easier to use. We determined that these
modifications, embodied in version 1.1 of our TGS, did not require the submission
of a new 510(k) application.

In
January 2008, we obtained 510(k) marketing clearance from the FDA for version
1.2 of our TGS, which became commercially available in the first quarter of
2008. Version 1.2 reflected further refinement of the basic
instrumentation set and featured a customized bone cutting instrument and new
surgical planning software applications necessary to support unicompartmental
resurfacing procedures using a tibial onlay knee implant system. In the third
quarter of 2008, we launched version 1.3 of our TGS, which enabled integration
of components of both our tibial inlay and tibial onlay knee implant systems
into a single MAKO-branded RESTORIS unicompartmental knee implant system, for
use with the TGS. These modifications did not require the submission of a new
510(k) application.

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Version 2.0 of the
TGS  the RIO System

The
RIO system, version 2.0 of the TGS, represents an important expansion from our
first generation TGS, enabling and expanding application of MAKOplasty to
multicompartmental resurfacing procedures, allowing orthopedic surgeons to
treat degenerative osteoarthritis from early-stage, unicompartmental
degeneration through mid-stage, multicompartmental degeneration with a modular
knee implant system. In addition, the RIO system incorporates the following
improvements, which we believe allow us to offer the benefits of knee
MAKOplasty to more patients:

| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improved
 dexterity and range of motion in the robotic arm to allow additional degrees
 of freedom in the movement of the robotic arm;                            
| |   |                                                                                                                                                                   
| |  | more
 efficient physical configuration of the patient specific visualization
 system, robotic arm, customized bone cutting instruments and electronic
 components;
| |   |                                                                                                                                                                   
| |  | support for
 the RESTORIS MCK knee implant system to enable bicompartmental knee
 procedures;                                                                     
| |   |                                                                                                                                                                   
| |  | intelligent
 implant planning features that will aid the surgeon in achieving optimal
 patient specific alignments;                                               
| |   |                                                                                                                                                                   
| |  | redesign of
 system components to reduce operating room set up times;                                                                                             
| |   |                                                                                                                                                                   
| |  | modular
 design of certain components for ease of manufacturability and assembly and
 to make them more accessible for service repairs; and                       
| |   |                                                                                                                                                                   
| |  | sophisticated
 industrial design and state-of-the art user interface.                                                                                             

In
the fourth quarter of 2008, we received 510(k) clearance for the RIO system,
which we intend to commercially launch in the first half of 2009. In the
future, we intend to apply for a European Union CE marking, which is a legal
requirement for medical devices intended for sale in Europe, for the RIO
system.

The RESTORIS Family
of Knee Implant Systems

The
second component of MAKOplasty is the knee implant system that is designed for
insertion and cementation in a minimally invasive manner. Prior to the
development and commercialization of the MAKO-branded, RESTORIS family of knee
implant systems in late 2008, we purchased off-the-shelf unicompartmental
tibial inlay and tibial onlay implants from third-party suppliers. Currently,
we offer the RESTORIS unicompartmental knee implant system, for use with the
TGS and RIO system and the RESTORIS MCK multicompartmental knee implant system,
for use with the RIO system.

The
RESTORIS family of knee implant systems allows an orthopedic surgeon to treat
early through mid-stage degenerative osteoarthritis of the knee with a modular
implant system. We believe that modular components are key to the successful
execution of minimally invasive knee surgeries because they can be more easily
inserted into the knee joint through smaller incisions than a single, complete
device. They can also be positioned independently to better accommodate the
specific contours of the patients anatomy. Because of the technical design and
programming, only the RESTORIS family of knee implant systems may be used
effectively with our robotic arms. In addition, users of the robotic arm
systems are contractually required to purchase all implants and disposable
products used in MAKOplasty procedures from us.

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The
RESTORIS Unicompartmental Knee Implant System

The
classic RESTORIS unicompartmental knee implant system is designed to be used in
MAKOplasty procedures for preserving critical tissue and bone to achieve
improved outcomes. This RESTORIS system is composed of a rounded, anatomically
shaped femoral component that attaches to the sculpted surface of the femur and
either a flat tibial inlay polymer component that fits into a pocket that has
been sculpted in the tibial bone or a tibial onlay insert and baseplate
consisting of a flat polymer component that is backed by a metal support. Both
the femoral and tibial components are offered in multiple sizes to best
accommodate the size and shape of the patients knee.

Patients
with relatively good tibial bone quality, including a sufficiently thick and
appropriately located bed of hardened sclerotic tibial bone, are generally
candidates for our RESTORIS inlay implant system. The RESTORIS onlay implant
system is designed to accommodate patients who lack tibia sclerotic bone beds
of sufficient quality. The metal support is placed horizontally on a planar
surface prepared on the tibia using the robotic arm system, supported by the
tibial cortical rim, rather than fitted into a pocket of the tibia. Some
surgeons also prefer to utilize the tibial cortical rim support in all cases.
In the first quarter of 2006 we received 510(k) clearance for our tibial inlay
knee implant system and in the fourth quarter of 2007 we received 501(k)
clearance for our tibial onlay knee implant system and on our combined inlay
and onlay system, branded as RESTORIS..

|               |  |               
|-------------- |  | --------------
|MESSAGE        |  | MESSAGE       
|Inlay Implant  |  | Onlay Implant 
|               |  |               
|               |  |               
|               |  |               
|               |  |               
|MESSAGE        |  | MESSAGE       
|Post-operative |  | Post-operative
|Inlay Implant  |  | Onlay Implant 
|Placement      |  | Placement     

The RESTORIS MCK Multicompartmental Knee
Implant System

The
RESTORIS MCK multicompartmental knee implant system offers an implant geometry
to support the tissue and bone sparing goals of MAKOplasty. RESTORIS MCK will
be used exclusively with the RIO system, which is expected to be launched in
the first half of 2009. Free from the limitations of manual instrumentation,
RESTORIS MCK is designed to accurately mimic human anatomy, providing better
coverage of diseased compartments while requiring less bone removal and tissue
trauma than with traditional treatments.

The
RESTORIS MCK system enables surgeons to treat patients suffering from
osteoarthritis in one or both of the medial (inner) and patellofemoral
(sub-kneecap) compartments of the knee. Utilizing a modular, bicompartmental
system, a surgeon can use the pre- and intra-operative planning software in the
RIO system to produce a patient specific implant plan, the result of which is
the retention of a greater portion of the knee anatomy than patients treated
with a total knee arthroplasty procedure. Surgeons are able to offer inlay and
onlay implants medial configurations for both their unicompartmental and
bicompartmental procedures. The product offering of the RESTORIS MCK
multicompartmental knee implant system also features a patellofemoral component,
which is inset into the knee compartment between the medial and lateral (outer)
compartments. Additionally, the surgeon has an array of patella buttons to
affix to the back of the kneecap to replace the worn surface. In the second
quarter of 2008 we received a 510(k) clearance for our novel unicompartmental
knee implant and a 510(k) clearance for our patellofemoral knee implant,
predecessor components of our proprietary RESTORIS MCK multicompartmental knee
implant system. In the fourth quarter of 2008, we received 510(k) marketing
clearance from the FDA for the RESTORIS MCK system.

|                                                      |  |                                                          |  |                                                             
|----------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------------------------------
|(GRAPHIC)RESTORIS MCK UnicondylarOnlay Implant        |  | (GRAPHIC)RESTORIS MCK UnicondylarOnlay Implant Placement |  | (GRAPHIC)RESTORIS MCK PatellofemoralImplant and Patella Dome
|                                                      |  |                                                          |  |                                                             
|(GRAPHIC)RESTORIS MCK PatellofemoralImplant Placement |  | (GRAPHIC)RESTORIS MCKBicompartmentalImplant              |  | (GRAPHIC)RESTORIS MCKBicompartmentalImplant Placement       

Disposable Products

The
robotic arm systems utilize disposable products such as bone pins and the
spheres on the arrays used in our tracking system, irrigation clips and tubes
that cool the cutting instruments, drapes to cover the robotic arm and other
items that require disposal after each use. Disposables are not only a
potential source of recurring

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revenue, but
also an opportunity to differentiate our product platform from those of less
comprehensive solutions offered by competitors.

Future Potential
Applications

We
believe that with further research and development, our robotic arm technology
has the potential to serve as a platform technology with applications in other
areas of the body, such as the hip, shoulder and spine, and we are currently
conducting initial research and development to test the viability of MAKOplasty
outside of the knee. Should we elect to commercialize additional potential
applications of MAKOplasty outside of the knee, we would seek the appropriate
marketing clearance from the FDA and any other required regulatory approvals
for such applications.

Sales and Marketing

We
continue to expand the size of our sales and marketing organization, which is
comprised of a direct sales force and a network of independent orthopedic
product agents and distributors, who primarily generate leads for us, to
commercialize and market MAKOplasty in the U.S. As of March 2, 2009, our
sales and marketing group had a total of 55 employees, including 30 direct
sales representatives, who are responsible for sales and marketing activity
throughout the U.S. We continue to increase the number of sales and
marketing personnel as we expand our business.

Our
sales and marketing goals are to continue to drive capital equipment sales of
the robotic arm system and generate recurring revenue through sales of
implants, disposable products and service contracts. To achieve these goals, we
must continue to promote adoption of MAKOplasty by leading surgeons and
hospitals and build demand for the procedure among patients through the
following sales and marketing strategy:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Target High Volume Orthopedic Facilities.
 Our sales representatives actively target hospitals with strong orthopedic
 reputations and significant knee replacement and resurfacing practices. We
 believe that adoption by such leading hospitals helps us to seed the market
 for MAKOplasty and provides the validation and visibility necessary for more
 widespread adoption.                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Establish and Promote MAKOplasty Centers of
 Excellence. The MAKOplasty
 Center of Excellence is a joint marketing program that we promote in
 collaboration with participating hospitals to educate surgeons and patients
 regarding the benefits of MAKOplasty and to coordinate our public relations
 strategy. As part of the program, hospitals agree to maintain and provide us
 with certain clinical and financial data that we use in support of our
 business case for the MAKOplasty solution. As of December 31, 2008, we
 entered into eighteen co-marketing agreements with hospitals to establish
 MAKOplasty Centers of Excellence.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Drive Patient Demand for MAKOplasty. During
 2008, we initiated preliminary marketing efforts to include directly
 educating patients on the benefits of MAKOplasty. We believe that patients
 are becoming increasingly more involved in the healthcare decision making
 process and have the potential to influence the adoption of new procedures
 such as MAKOplasty. Currently, our representatives primarily support
 hospitals participating in the MAKOplasty Center of Excellence program in
 their efforts to publicize the benefits of MAKOplasty and educate patients.                                                                 

The
generation of recurring revenue through sales of our implants, disposable
products and service contracts is an important part of the MAKOplasty business
model. We anticipate that recurring revenue will constitute an increasing
percentage of our total revenue as we leverage each new installation of the RIO
system to generate recurring sales of implants and disposable products. We have
designed our products so that our robotic arm systems only work with our
implant products and we contractually require purchasers of the robotic arm
systems to use only our implants in connection with providing MAKOplasty. We
also offer a four-year

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supplemental
service contract that provides enhanced levels of maintenance and support
services related to the robotic arm system beyond the basic warranty period.

We
provide training to surgeons and hospital staff on the use of the robotic arm
system. Our customers also receive pre-operative and intra-operative support
from our on-site MAKOplasty Specialist, or MPS, who provides clinical and
technical support in connection with each MAKOplasty procedure. The MPS helps
set up the equipment, participates in the pre-operative planning process and is
present in the operating room with the surgeon, facilitating the surgeons use
of the robotic arm system. By increasing familiarity with the system and
helping to provide safe and proper usage of our equipment and products by
surgeons and hospitals, we hope to promote seamless adoption of MAKOplasty. The
presence of an MPS in the surgical theater also provides us with immediate
feedback and understanding of our customers preferences and requirements in
clinical conditions.

Research and Development

Continued
innovation through research and development is critical to our future success.
Substantially all of our research and development activity is performed
internally. As of March 2, 2009, our research and development team, which is
based at our headquarters in Fort Lauderdale, Florida, consisted
of 60 employees. We have assembled an experienced team with recognized
expertise in advanced robotics, software, instrumentation and orthopedic knee
implants. Although we do not currently have plans to increase the size of our
research and development team significantly, we may do so in the future,
depending on the progress of our ongoing research and development efforts.

We
are researching improvements to our current knee MAKOplasty solution, including
customized bone cutting instruments and alternative registration and tracking
systems, which may be more robust, easier to use, fit better into the busy
operating room environment and have improved preoperative registration and
intraoperative tracking performance. We are also conducting early stage
research on alternative applications for the robotic arm system and
corresponding implant systems for the knee and other major joints.

We
have historically spent a significant portion of our capital resources on
research and development. Our research and development expenses were $12.5
million in 2008, $8.3 million in 2007 and $5.2 million in 2006.

Manufacturing and Assembly

The
MAKOplasty solution includes both off-the-shelf and custom made components
produced to our specifications by various third parties. We purchase major
components of the robotic arm system, including the computer hardware, the
camera used in connection with our tracking system, robotic controller
components, high speed bone cutting instrumentation, the molded plastic and
machined metal parts, and the various electro-mechanical components that
support the robotic arm system from a number of third-party suppliers. We
internally develop the software components. We then assemble and integrate
these various hardware components with our proprietary software to complete
each robotic arm system. By assembling the final product at our facility, we
are able to perform stringent quality assurance inspection and testing on each
robotic arm system to best control the quality of the final product prior to
shipment. A portion of our Fort Lauderdale facility is presently dedicated
to these warehousing, assembly, testing and inspection activities.

Other
than our proprietary software, single source suppliers currently provide us
with many of the major components of the robotic arm system, including the bone
cutting instrument. Our RESTORIS family of knee implant systems consists of
implants that are custom made to our specifications by several outside
manufacturers, with which we are currently negotiating long-term contractual
arrangements.

We
generally purchase our components through purchase orders and do not have
long-term contracts with most of our suppliers. We have, however, provided
blanket purchase orders and have entered into long-term pricing arrangements
with the key suppliers of the critical components of our products and with
those suppliers to whom we make significant payments for products and services.
By providing blanket purchase orders and entering into pricing arrangements, we
intend to develop and maintain buffer inventory levels at various points in

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our supply
chain to minimize risk. In addition, we intend to achieve improvements in our
manufacturing operations and in our cost of revenue by continuing to improve our
procurement and third-party manufacturing processes. We have also upgraded our
management information systems and have implemented new quality assurance,
inventory and cost controls to improve the efficiency of our manufacturing
operations, maintain product quality, reduce our cost of sales and increase our
profitability.

Our
operations and those of the third-party suppliers and manufacturers we use are
subject to extensive regulation by the FDA under its Quality System
Regulations, or QSR, as well as numerous post-market requirements. Our
operations and those of third-party suppliers and manufacturers may also be
subject to international regulatory requirements in the event we expand our
operations or business overseas. Our facility is FDA registered and we believe
is compliant with FDAs QSR. We have instituted a quality management system to
evaluate and monitor compliance internally and by our third-party suppliers and
manufacturers. Our facility and the facilities of the third-party suppliers and
manufacturers we use are subject to periodic, announced and unannounced
inspections by regulatory authorities, including the FDA and other governmental
agencies. We were audited by the FDA in January 2009, during which we received
certain inspectional observations. We are addressing the observations and
intend to submit responses to the FDA on a voluntary basis. The FDA inspection
report relating to the audit has not yet been issued. To date, our facilities
have not been inspected by any other regulatory authorities. In November 2008,
BSi, an independent global certification body, conducted an annual assessment
of our quality management system, which concluded that our quality management
system complied with the requirements of ISO13485:2003 in all material
respects. We are scheduled to have a BSi audit in mid-March 2009 in order to
complete the necessary quality system certification needed for achieving the CE
marking required for class III devices, such as orthopedic implants. In
connection with achieving CE marking, which is a legal requirement for medical
devices intended for sale in Europe, we have also submitted design dossiers to
BSi for the purpose of review and approval. We expect that BSi will continue to
conduct annual audits to assess our compliance with BSi certification
standards.

Intellectual Property

We
must develop, maintain and protect the proprietary aspects of our products and
technologies to remain competitive in the marketplace. Our intellectual
property portfolio includes rights to patents, patent applications and other
intellectual property that we wholly own or license from others. We seek patent
and other intellectual property protection in the U.S. and internationally
for our products and technologies where available and when appropriate.

We
also rely on other forms of intellectual property rights, including copyright,
trademark, trade secrets and know-how, to develop, maintain and protect the
proprietary aspects of our products and technologies. We require our employees
and consultants to execute confidentiality agreements in connection with their
employment or consulting relationships with us. We also require our employees
and consultants to disclose and assign to us all inventions conceived during
the term of their employment or engagement while using our property or which
relate to our business.

Despite
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. In addition, our competitors may independently
develop similar technologies. Although patents may provide some degree of
protection for our intellectual property, patent protection involves complex
legal and factual determinations and is therefore uncertain.

Wholly Owned Patent
Applications

As
of March 1, 2009, we held 38 wholly owned pending U.S. patent
applications. All of these patent applications are either used in our current
products or relate to core technologies used in our products, such as CAS,
robotics, haptics and implants. The first of our currently pending patent
applications was filed in October 2003 and should expire in October 2023,
exclusive of any statutory extensions or reductions. None of our patent

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applications
has yet issued. As of March 1, 2009, we also held 49 foreign patent
applications. We are also continuing to pursue additional U.S. and foreign
patent applications on key inventions to enhance our intellectual property
portfolio.

Patents and Patent
Applications Licensed from Third Parties

As
of March 1, 2009, we had licensed rights to 115 U.S. and 48 foreign
third-party granted patents, and we had licensed rights to 22 U.S. and 30
foreign third-party pending patent applications. The majority of these patents
and applications are either used in our current products or relate to core
technologies used in our products, such as CAS, robotics, haptics and implants.
We also have rights to additional third-party patents and intellectual property
that relate to our core technologies, but are not currently used in our
products. Five of the licensed U.S. patents will expire by the end of 2009. Two
of these U.S. patents are method patents related to CAS, and one of these
U.S. patents relates to robotic technology. These three U.S. patents
are considered material to our intellectual property portfolio because they
potentially enable us to exclude others from practicing the claimed technology.
The last licensed patent will expire in 2025.

License Arrangements with Z-Kat

Our
largest licensing arrangement is with Z-Kat, from whom we license or sublicense
core technologies in CAS, haptics and robotics. In connection with our
formation in November 2004, we were granted an exclusive, irrevocable,
non-terminable license or sublicense to all intellectual property owned or
licensed by Z-Kat in the field of medical orthopedic surgery to the extent
Z-Kats licenses from third parties were exclusive. Our license from Z-Kat
includes a limited license to Z-Kats CAS and haptic robotic intellectual
property portfolio for exclusive use in the field of orthopedics, subject to a
prior license to Biomet Manufacturing Corp. to use Z-Kats CAS intellectual
property, but not its haptic robotic intellectual property, in the field of
orthopedics. Because of the prior license to Biomet and pursuant to our license
with Z-Kat, we cannot use the CAS intellectual property on a stand alone basis;
we can only use the CAS intellectual property in combination with robotics
technology. Z-Kats license also granted to us the sole right to prosecute and
maintain all Z-Kat patents and patent applications that are licensed to us. In
2006, we obtained the right to take enforcement action against all third
parties with respect to any intellectual property rights held by Z-Kat in the
field of orthopedics. We have granted back to Z-Kat a fully paid, royalty-free,
nonexclusive sublicense to our intellectual property portfolio in all fields
other than orthopedic surgery. Through these and other arrangements, we have
rights to Z-Kats wholly owned and third-party licensed intellectual property
portfolio, which includes a wide suite of intellectual property in the areas of
haptic robotics and patient specific visualization.

License Arrangements with Other Third Parties

In
September 2005, we entered into a license agreement with Integrated Surgical
Systems, Inc. pursuant to which we obtained an exclusive, worldwide license to
patented technology relating to bone registration and tracking for use in the
field of human interactive robotics in orthopedics and a nonexclusive license
in the field of orthopedics generally. We paid a one time licensing fee that
provides a fully paid, worldwide license for the life of the licensed patents.
We believe that the underlying intellectual property licensed from Integrated
Surgical Systems, Inc. has since been acquired, subject to our license, by
CUREXO Technology Corporation or an affiliate.

In
March 2006, we entered into a license agreement with IBM that covers a number
of technologies related to the application of computers and robotics to
surgery. Under the terms of this agreement, we have a nonexclusive, worldwide
license to any IBM patents and patent applications with effective filing dates
prior to March 31, 2011 in the field of robotic devices primarily designed
for surgery in the medical field of orthopedics and/or primarily designed for
spinal surgery in the medical field of neurology. We are obligated to make
royalty payments based on the sale of each robotic product covered by the IBM
patents. The IBM license agreement will terminate upon the expiration of the
last licensed patent.

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In
May 2006, we entered into a sublicense agreement with SensAble Technologies,
Inc. The sublicense grants nonexclusive rights in the field of CAS to a patent
directed to core haptic technology that SensAble licensed from MIT. The
sublicense also included an option to license or sublicense five additional
patents, which we exercised in May 2007. We paid a one time sublicensing fee
(and a one time option fee) that provides a fully paid, worldwide license for
the life of the licensed patents. A subsequent dispute concerning this
sublicense is discussed in Item 3, Legal Proceedings, and in Part II, Item 8,
Financial Statements and Supplementary Data, Note 7 to the Financial
Statements, of this report.

Competition

Our
success depends on convincing hospitals, surgeons and patients to utilize our
robotic arm technology to perform unicompartmental and bicompartmental
resurfacing of the knee. We face competition from large, well-known companies,
principally Zimmer Holdings, Inc., DePuy Orthopedics, Inc., a Johnson &
Johnson company, Stryker Corporation, and Biomet, Inc., that dominate the
market for orthopedic products. Each of these companies, as well as other
companies like Smith & Nephew, Inc., which introduced the non-modular
Journey Deuce Bi-Compartmental Knee System in July 2007, offers conventional
instruments and implants for use in conventional total and partial knee
replacement surgeries as well as unicompartmental resurfacings procedures,
which may compete with our MAKOplasty solution and negatively impact sales of
our robotic arm systems. A number of these and other companies also offer CAS
systems for use in arthroplasty procedures that provide a minimally invasive
means of viewing the anatomical site. In addition, Biomet has a license from
Z-Kat to intellectual property rights in computer assisted surgery, or CAS
intellectual property, for use in the field of orthopedics. The license is
non-exclusive with respect to use of CAS intellectual property in combination
with robotics technology and exclusive with respect to all other uses within
the field of orthopedics, which could enable them to compete with us.

Currently,
we are not aware of any well-known orthopedic companies that broadly offer
robotics technology in combination with CAS. All of these companies, however,
have the ability to acquire and develop robotics technology that may compete
with our products. We are aware of certain early stage companies developing CAS
and robotic applications in orthopedics and others commercializing customized
implants and instruments for early and mid-stage arthroplasty solutions. For
example, CUREXO Technology Corporation has engaged in marketing in the United
States of its ROBODOC® Surgical System, which received 510(k) clearance from the
FDA in August 2008 for total hip arthroplasty procedures.

We
also face competition from other medical device companies that may seek to
extend robotics technology and minimally invasive approaches and products that
they have developed for use in other parts of the human anatomy to minimally
invasive arthroplasty of the knee. Even if these companies currently do not
have an established presence in the field of minimally invasive surgery for the
knee, they may attempt to apply their robotics technology to the field of knee
replacement and resurfacing procedures to compete directly with us.

Even
if our RIO system is commercially successful and becomes a market leader in the
field of orthopedics with robotic arm technology, our implant products may face
substantial competition from implants offered by the well-known companies
currently in the market for orthopedic products. We have designed our products
so that our robotic arm systems only work with our implant products. We also
contractually require purchasers of our robotic arm systems to use only our
implants in connection with MAKOplasty procedures. We cannot guarantee,
however, that these measures will be effective or that our customers will agree
to such contracts in the future. Accordingly, if use of the RIO system becomes
more prevalent, competitors may attempt to market their implant products for
use with the RIO system and compete directly with our implant products.

We
believe that the principal competitive factors in our market include:

| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | the safety
 and efficacy of the procedure and product offerings, as documented through
 published studies and other clinical reports;

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| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
 benefits, including the ability to offer orthopedic surgeons a complete
 solution for minimally invasive orthopedic knee procedures;                     
| |   |                                                                                                                                                                   
| |  | the strength
 of acceptance and adoption by orthopedic surgeons and hospitals;                                                                                    
| |   |                                                                                                                                                                   
| |  | the ability
 to deliver new product offerings and enhanced technology to expand or improve
 upon existing applications through continued research and development;
| |   |                                                                                                                                                                   
| |  | the quality
 of training, services and clinical support provided to surgeons and
 hospitals;                                                                      
| |   |                                                                                                                                                                   
| |  | the cost of
 product offerings and the availability of product coverage and reimbursement
 from third-party payors, insurance companies and others parties;       
| |   |                                                                                                                                                                   
| |  | the ability
 to provide proprietary products protected by strong intellectual property
 rights; and                                                               
| |   |                                                                                                                                                                   
| |  | the ability
 to offer products that are intuitive and easy to learn and use.                                                                                      

Many
of our competitors have significantly greater financial, human and other
resources than we do, and have established relationships with healthcare
professionals, customers and third-party payors. In addition, many of our
competitors have established sales networks, greater resources for product
development, additional lines of products and the ability to offer financial
incentives such as rebates, bundled products or discounts on other product
lines that we cannot provide. Our products could also be rendered obsolete or
uneconomical by technological advances developed by one or more of our
competitors. These competitive factors may negatively affect our ability to
convince individuals to utilize our robotic arm system and implant products and
result in our inability to acquire technology, products and businesses from
third parties to develop our current and planned versions of the RIO system and
related products.

Regulatory Requirements of the U.S. Food and
Drug Administration

Our
research, development and clinical programs, as well as our manufacturing and
marketing operations, are subject to extensive regulation in the U.S. and other
countries. Most notably, all of our products sold in the U.S. are subject to
regulation as medical devices under the Federal Food, Drug, and Cosmetic Act,
or the FDCA, as implemented and enforced by the FDA. The FDA governs the
following activities that we perform or that are performed on our behalf, to
ensure that medical products we manufacture, promote and distribute
domestically or export internationally are safe and effective for their
intended uses:

| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
 design, preclinical and clinical development and manufacture;                                                                                                      
| |   |                                                                                                                                                                             
| |  | product
 premarket clearance and approval;                                                                                                                                  
| |   |                                                                                                                                                                             
| |  | product
 safety, testing, labeling and storage;                                                                                                                             
| |   |                                                                                                                                                                             
| |  | record
 keeping procedures;                                                                                                                                                 
| |   |                                                                                                                                                                             
| |  | product
 marketing, sales and distribution; and                                                                                                                             
| |   |                                                                                                                                                                             
| |  | post-marketing
 surveillance, complaint handling, medical device reporting, reporting of
 deaths, serious injuries or device malfunctions and repair or recall of
 products.

FDA Premarket
Clearance and Approval Requirements

Unless
an exemption applies, each medical device we wish to commercially distribute in
the U.S. will require either premarket notification, or 510(k), clearance or
approval of a premarket approval application, or

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PMA, from the
FDA. The FDA classifies medical devices into one of three classes. Class I
devices, considered to have the lowest risk, are those for which safety and
effectiveness can be assured by adherence to the FDAs general regulatory
controls for medical devices, which include compliance with the applicable
portions of the FDAs QSR, facility registration and product listing, reporting
of adverse medical events, and appropriate, truthful and non-misleading
labeling, advertising, and promotional materials (General Controls). Class II
devices are subject to the FDAs General Controls, and any other special
controls as deemed necessary by the FDA to ensure the safety and effectiveness
of the device (Special Controls). Manufacturers of most class II and some class
I devices are required to submit to the FDA a premarket notification under
Section 510(k) of the FDCA requesting permission to commercially distribute the
device. This process is generally known as 510(k) clearance. Devices deemed by
the FDA to pose the greatest risks, such as life sustaining, life supporting or
implantable devices, or devices that have a new intended use, or use advanced
technology that is not substantially equivalent to that of a legally marketed
device, are placed in class III, requiring approval of a PMA.

510(k) Clearance
Pathway

To
obtain 510(k) clearance, we must submit a premarket notification demonstrating
that the proposed device is substantially equivalent to a legally marketed
predicate device that is either in class I or class II, or to a class III
device that was in commercial distribution before May 28, 1976 for which the
FDA has not yet called for the submission of a PMA. A Special 510(k) is an abbreviated
510(k) application which can be used to obtain clearance for certain types of
device modification such as modifications that do not affect the intended use
of the device or alter the devices fundamental scientific technology. A
Special 510(k) generally requires less information and data than a complete, or
Traditional 510(k). In addition, a Special 510(k) application often takes a
shorter period of time, which could be as short as 30 days, than a Traditional
510(k) clearance application, which can be used for any type of 510(k) device.
FDAs 510(k) clearance pathway usually takes from three to twelve months, but
may take significantly longer. The FDA may require additional information,
including clinical data, to make a determination regarding substantial
equivalence. There is no guarantee that the FDA will grant 510(k) clearance for
our future products and failure to obtain necessary clearances for our future
products would adversely affect our ability to grow our business.

Medical
devices can be marketed only for the indications for which they are cleared or
approved. After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
new or major change in its intended use, will require a new 510(k) clearance
or, depending on the modification, PMA approval. The FDA requires each
manufacturer to determine whether the proposed change requires submission of a
510(k) or a PMA, but the FDA can review any such decision and can disagree with
a manufacturers determination. If the FDA disagrees with a manufacturers
determination, the FDA can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance or PMA approval is obtained.
Also, in these circumstances, we may be subject to significant regulatory fines
or penalties. We have made and plan to continue to make additional product
enhancements to the RIO system and other products that we believe do not
require new 510(k) clearances. We cannot assure you that the FDA would agree
with any of our decisions not to seek 510(k) clearance or PMA approval.

Certain
of our currently marketed products, such as our TGS and the RIO system, are
class II devices marketed pursuant to 510(k) clearances. In January 2008, we
obtained 510(k) marketing clearance from the FDA for version 1.2 of our TGS. We
originally submitted a Special 510(k) application in September 2007, which the
FDA subsequently indicated was converted to a Traditional 510(k) application.
On November 1, 2007, the FDA provided us with a letter requesting additional
information in which the FDA, among other things, asked us to justify our
proposed use of the terms haptic and robot in the labeling of version 1.2
of our TGS. Through subsequent correspondence and communications, the FDA
indicated that we needed to use the term tactile in lieu of haptic and the
term robotic arm in lieu of robotic, as appropriate, when these terms are
used to market our products and in order to obtain timely clearance of our
510(k) submission. The FDA granted 510(k) clearance for version 1.2 of our TGS
with those terms. See Item 1A, Risk Factors, Risks Related to Our Business 
We are currently required by the FDA to refrain from using certain terms to
label and market our products, which could harm our ability to market and
commercialize our current and future products.

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Version
1.3 of our TGS did not require submission of a 510(k) application. We received
510(k) marketing clearance from the FDA for the RIO system in the fourth
quarter of 2008.

PMA Approval Pathway

A
PMA must be submitted to the FDA if the device cannot be cleared through the
510(k) process, or is not otherwise exempt from the FDAs premarket clearance
and approval requirements. A PMA must generally be supported by extensive data,
including, but not limited to, technical, preclinical, clinical trials,
manufacturing and labeling, to demonstrate to the FDAs satisfaction the safety
and effectiveness of the device for its intended use. No device that we are
marketing to date has required premarket approval. During the review period,
the FDA will typically request additional information or clarification of the
information already provided. Also, an advisory panel of experts from outside
the FDA may be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. The FDA may
or may not accept the panels recommendation. In addition, the FDA will
generally conduct a pre-approval inspection of our or our third-party
manufacturers or suppliers manufacturing facility or facilities to ensure
compliance with the QSR.

New
PMAs or PMA supplements are required for modifications that affect the safety
or effectiveness of the device, including, for example, certain types of
modifications to the devices indication for use, manufacturing process,
labeling and design. PMA supplements often require submission of the same type
of information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel. None of our products is currently approved under a PMA approval.
However, we may in the future develop devices which will require the approval
of a PMA. There is no guarantee that the FDA will grant PMA approval of our
future products and failure to obtain necessary approvals for our future
products would adversely affect our ability to grow our business.

Clinical Trials

Clinical
trials are generally required to support a PMA application and are sometimes
required for 510(k) clearance. Such trials generally require an investigational
device exemption application, or IDE, approved in advance by the FDA for a
specified number of patients and study sites, unless the product is deemed a
non-significant risk device eligible for more abbreviated IDE requirements. A
significant risk device is one that presents a potential for serious risk to
the health, safety or welfare of a patient and either is implanted, used in
supporting or sustaining human life, substantially important in diagnosing,
curing, mitigating or treating disease or otherwise preventing impairment of
human health, or otherwise presents a potential for serious risk to a subject.
Clinical trials are subject to extensive monitoring, recordkeeping and
reporting requirements. Clinical trials must be conducted under the oversight
of an institutional review board, or IRB, for the relevant clinical trial sites
and must comply with FDA regulations, including but not limited to those
relating to good clinical practices. To conduct a clinical trial, we also are
required to obtain the patients informed consent in form and substance that
complies with both FDA requirements and state and federal privacy and human
subject protection regulations. We, the FDA or the IRB could suspend a clinical
trial at any time for various reasons, including a belief that the risks to
study subjects outweigh the anticipated benefits. Even if a trial is completed,
the results of clinical testing may not adequately demonstrate the safety and
efficacy of the device or may otherwise not be sufficient to obtain FDA
clearance or approval to market the product in the U.S. Similarly, in Europe
the clinical study must be approved by a local ethics committee and in some
cases, including studies with high-risk devices, by the ministry of health in
the applicable country.

Post-Market Studies

To
date, none of our submissions to the FDA has required the submission of
clinical data and all of our studies to date have been post-market studies. We
currently have 22 studies either recently completed or in progress. The
studies, many of which are being conducted pursuant to IRB approval, range from
cadaveric biomechanics studies to retrospective chart and radiographic reviews
to prospective functional comparison studies to basic science histology
studies. The results of these studies have been presented internationally as
peer-

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reviewed
presentations at conferences in the United States and abroad, Two MAKOplasty
surgical technique book chapters and eleven peer-reviewed manuscripts on the
technology and early clinical results have been published to date.

Pervasive and
Continuing Regulation

After
a device is placed on the market, numerous regulatory requirements continue to
apply. In addition to the requirements below, the Medical Device Reporting, or
MDR, regulations require that we report to the FDA any incident in which our
products may have caused or contributed to a death or serious injury or in
which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury. MAKO has submitted
sixteen MDRs to the FDA as of March 2, 2009. See Item 1A, Risk Factors, Risks
Related to Regulatory Compliance, for further information regarding our
reporting obligations under MDR regulations. Additional regulatory requirements
include:

| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
 listing and establishment registration, which helps facilitate FDA
 inspections and other regulatory action;                                                                                                                    
| |   |                                                                                                                                                                                                                                          
| |  | QSR, which
 requires manufacturers, including third-party manufacturers, to follow
 stringent design, testing, control, documentation and other quality assurance
 procedures during all aspects of the design and manufacturing process;
| |   |                                                                                                                                                                                                                                          
| |  | labeling
 regulations and FDA prohibitions against the promotion of products for
 uncleared, unapproved or off-label use or indication;                                                                                                  
| |   |                                                                                                                                                                                                                                          
| |  | clearance of
 product modifications that could significantly affect safety or efficacy or
 that would constitute a major change in intended use of one of our cleared
 devices;                                                          
| |   |                                                                                                                                                                                                                                          
| |  | approval of
 product modifications that affect the safety or effectiveness of one of our
 approved devices;                                                                                                                              
| |   |                                                                                                                                                                                                                                          
| |  | post-approval
 restrictions or conditions, including post-approval study commitments;                                                                                                                                                    
| |   |                                                                                                                                                                                                                                          
| |  | post-market
 surveillance regulations, which apply, when necessary, to protect the public
 health or to provide additional safety and effectiveness data for the device;                                                                 
| |   |                                                                                                                                                                                                                                          
| |  | the FDAs
 recall authority, whereby it can ask, or under certain conditions order,
 device manufacturers to recall from the market a product that is in violation
 of governing laws and regulations; and                               
| |   |                                                                                                                                                                                                                                          
| |  | notices of
 corrections or removals.                                                                                                                                                                                                     

We
must also register with the FDA as a medical device manufacturer and must
obtain all necessary state permits or licenses to operate our business. As a
manufacturer, we are subject to announced and unannounced inspections by the
FDA to determine our compliance with FDAs QSR and other regulations. We were
audited by the FDA in January 2009 and have not yet received the inspection
report from the FDA. Failure to comply with applicable regulatory requirements
can result in enforcement action by the FDA, which may include any of the
following sanctions:

| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | untitled
 letters, warning letters, fines, injunctions, consent decrees and civil
 penalties;              
| |   |                                                                                                            
| |  | customer
 notifications or repair, replacement, refunds, recall, detention or seizure
 of our products;    
| |   |                                                                                                            
| |  | operating
 restrictions or partial suspension or total shutdown of production;                             
| |   |                                                                                                            
| |  | refusing or
 delaying requests for 510(k) clearance or PMA approvals of new products or
 modified products;

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| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | withdrawing
 510(k) clearances or PMA approvals that have already been granted;
| |   |                                                                                
| |  | refusal to
 grant export approval for our products; or                         
| |   |                                                                                
| |  | criminal
 prosecution.                                                         

International
Marketing Approvals

International
sales of medical devices are subject to foreign government regulations, which
vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA clearance or approval, and the requirements may differ.

The
European Union has adopted numerous directives and standards regulating the
design, manufacture, clinical trials, labeling and adverse event reporting for
medical devices. Each European Union member state has implemented legislation
applying these directives and standards at the national level. Other countries,
such as Switzerland, have voluntarily adopted laws and regulations that mirror
those of the European Union with respect to medical devices. Devices that
comply with the requirements of the laws of the relevant member state applying
the applicable European Union directive are entitled to bear CE conformity
marking and, accordingly, can be commercially distributed throughout the member
states of the European Union and other countries that comply with or mirror
these directives. The method of assessing conformity varies depending on the
type and class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment by a Notified
Body, an independent and neutral institution appointed to conduct conformity
assessment. This third-party assessment consists of an audit of the
manufacturers quality system and clinical information, as well as technical
review of the manufacturers product. An assessment by a Notified Body in one
country within the European Union is required in order for a manufacturer to
commercially distribute the product throughout the European Union. In addition,
compliance with ISO 13845 on quality systems issued by the International
Organization for Standards, among other standards, establishes the presumption
of conformity with the essential requirements for a CE marking. In addition,
many countries apply requirements in their reimbursement, pricing or health
care systems that affect companies ability to market products.

Health Care Laws and Regulations

Third-Party
Reimbursement

In
the U.S. and elsewhere, health care providers that perform surgical procedures
using medical devices such as ours generally rely on third-party payors,
including governmental payors such as Medicare and Medicaid and private payors,
to cover and reimburse all or part of the cost of the products. Consequently,
sales of medical devices are dependent in part on the availability of
reimbursement to the customer from third-party payors. The manner in which
reimbursement is sought and obtained varies based upon the type of payor
involved and the setting in which the product is furnished and utilized. In
general, third-party payors will provide coverage and reimbursement for
medically reasonable and necessary procedures and tests that utilize medical
devices and may provide separate payments for the implanted or disposable
devices themselves. Most payors, however, will not pay separately for capital
equipment, such as the TGS or RIO system. Instead, payment for the cost of
using the capital equipment is considered to be covered as part of payments
received for performing the procedure. In determining payment rates,
third-party payors are increasingly scrutinizing the prices charged for medical
products and services in comparison to other therapies. Our products, and the
procedures in which our products are used, may not be reimbursed by these
third-party payors at rates sufficient to allow us to sell our products on a
competitive and profitable basis.

In
addition, in many foreign markets, including the countries in the European
Union, pricing of medical devices is subject to governmental control. In the
U.S., there have been, and we expect that there will continue to

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be, a number
of federal and state proposals to limit payments by governmental payors for
medical devices, and the procedures in which medical devices are used. While we
cannot predict whether such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
our business, financial condition and profitability.

Medicare and
Medicaid

The
Medicare program is a federal health benefit program administered by the
Centers for Medicare and Medicaid Services, or CMS, that covers and pays for
certain medical care items and services for eligible elderly, blind and
disabled individuals, and individuals with end stage renal disease. The
Medicaid program is a federal-state partnership under which states receive
matching federal payments to fund healthcare services for the poor. Because we
expect that a significant percentage of MAKOplasty patients will be Medicare
beneficiaries, and because some private commercial health insurers and some
state Medicaid programs may follow the coverage and payment policies for
Medicare, Medicares coverage and payment policies are significant to our
business.

Medicare
coverage for procedures using our technology currently exists in the hospital
inpatient setting, which falls under Part A of the Medicare program. Under
Medicare Part A, Medicare reimburses acute care hospitals a flat prospectively
determined payment amount for beneficiaries receiving covered inpatient
services in an acute care hospital. This method of payment is known as the
prospective payment system, or PPS. Under PPS, the prospective payment for a
patients stay in an acute care hospital is determined by the patients
condition and other patient data and procedures performed during the inpatient
stay using a classification system known as diagnosis related groups, or DRGs.
As of October 1, 2007, CMS implemented a revised version of the DRG system that
uses 745 Medicare Severity DRGs, or MS-DRGs, instead of the approximately 540
DRGs Medicare previously used. The MS-DRGs are intended to account more
accurately for the patients severity of illness when assigning each patients
stay to a payment classification. Medicare pays a fixed amount to the hospital
based on the MS-DRG into which the patients stay is classified, regardless of
the actual cost to the hospital of furnishing the procedures, items and
services that the patients condition requires. Accordingly, acute care
hospitals generally do not receive direct Medicare reimbursement under PPS for
the specific costs incurred in purchasing medical devices. Rather,
reimbursement for these costs is deemed to be included within the MS-DRG based
payments made to hospitals for the services furnished to Medicare eligible
inpatients in which the devices are utilized. For cases involving unusually
high costs, a hospital may receive additional outlier payments above the
pre-determined amount. In addition, there is a mechanism by which new
technology services can apply to Medicare for additional payments above the
pre-determined amount, although such requests have not been granted frequently.

Because
PPS payments are based on predetermined rates and may be less than a hospitals
actual costs in furnishing care, acute care hospitals have incentives to lower
their inpatient operating costs by utilizing products, devices and supplies
that will reduce the length of inpatient stays, decrease labor or otherwise
lower their costs. For each MS-DRG, a relative weight is calculated
representing the average resources required to care for cases grouped in that
particular MS-DRG relative to the average resources used to treat cases in all
MS-DRGs. MS-DRG relative weights are recalculated every year to reflect changes
in technology and medical practice in a budget neutral manner. Under the MS-DRG
payment system, there can be significant delays in obtaining adequate
reimbursement amounts for hospitals for new technologies such that reimbursement
may be insufficient to permit broad acceptance by hospitals.

We
believe that there are existing reimbursement codes that can be used for
MAKOplasty procedures performed in the hospital inpatient setting. Procedures
for hospital inpatient billing are referenced by international classifications
of diseases, clinical modification, or ICD-9-CM, volume 3 procedure codes. Knee
arthroplasty is billed under ICD-9-CM code 81.54 (Total Knee Replacement),
which is assigned to MS-DRG 469 (Major Joint Replacement or Reattachment of
Lower Extremity with Complication or Comorbidity) and MS-DRG 470 (Major Joint
Replacement or Reattachment of Lower Extremity without Major Complication or
Comorbidity). We anticipate that Medicare will continue to reimburse hospitals
under MS-DRGs 469 and 470 for MAKOplasty procedures, but CMS can revise MS-DRG
assignments from year to year.

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In
addition to payments to hospitals for procedures using our technology, Medicare
makes separate payments to physicians for their professional services. The
American Medical Association, or AMA, has developed a coding system known as
the Current Procedural Terminology, or CPT, codes, which have been adopted by
the Medicare program to describe and develop payment amounts for certain
physician services. The Medicare physician fee schedule uses CPT codes (and
other codes) as part of the determination of allowable payment amounts to
physicians. In determining appropriate payment amounts for surgeons, CMS
receives guidance from the AMA regarding the relative technical skill level,
level of resources used, and complexity of a new surgical procedure. Generally,
the FDA approval of a new product is necessary, but not necessarily sufficient,
for the designation of a new procedure code for a new surgical procedure using
that product. Codes are assigned by either the AMA (for CPT codes) or CMS (for
Medicare specific codes) and new codes usually become effective on January 1st
of each year. Physicians performing procedures using our technology submit
bills under CPT code 27446 (Arthroplasty, knee, condyle and plateau; medial OR
lateral compartment). We anticipate that third-party payors will continue to
reimburse physicians under this code for services performed in connection with
MAKOplasty procedures.

Commercial Insurers

In
addition to the Medicare program, many private payors look to CMS policies as a
guideline in setting their coverage policies and payment amounts. The current
coverage policies of these private payors may differ from the Medicare program,
and the payment rates they make may be higher, lower, or the same as the
Medicare program. A decrease of, or limitation on, reimbursement payments for
doctors and hospitals by CMS or other agencies may affect coverage and
reimbursement determinations by many private payors. Additionally, some private
payors do not follow the Medicare guidelines, and those payors may reimburse
only a portion of the costs associated with the use of our products, or not at
all.

Fraud and Abuse Laws

Because
of the significant federal funding involved in Medicare and Medicaid, Congress
and the states have enacted, and actively enforce, a number of laws whose
purpose is to eliminate fraud and abuse in federal health care programs. Our
business is subject to compliance with these laws.

Anti-Kickback Statutes and Federal False
Claims Act

The
federal healthcare programs Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual, or the furnishing or arranging for a good or
service, for which payment may be made under a federal healthcare program such
as Medicare or Medicaid. The definition of remuneration has been broadly
interpreted to include anything of value, including for example gifts, certain
discounts, the furnishing of free supplies, equipment or services, credit
arrangements, payments of cash and waivers of payments. Several courts have
interpreted the statutes intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal
healthcare covered business, the statute has been violated. Penalties for violations
include criminal penalties and civil sanctions such as fines, imprisonment and
possible exclusion from Medicare, Medicaid and other federal healthcare
programs. In addition, some kickback allegations have been claimed to violate
the Federal False Claims Act, discussed in more detail below.

The
Anti-Kickback Statute is broad and prohibits many arrangements and practices
that are lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, Congress authorized the Office of
Inspector General of the U.S. Department of Health and Human Services, or OIG,
to issue a series of regulations, known as safe harbors. These safe harbors,
issued by the OIG beginning in July 1991, set forth provisions that, if all
their applicable requirements are met, will assure healthcare providers and
other parties that they will not be prosecuted under the Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more
safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and

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business
arrangements that do not fully satisfy each applicable safe harbor may result
in increased scrutiny by government enforcement authorities such as the OIG.

Many
states have adopted laws similar to the Anti-Kickback Statute. Some of these
state prohibitions apply to referral of patients for healthcare items or services
reimbursed by any source, not only the Medicare and Medicaid programs.

Government
officials have focused their enforcement efforts on marketing of healthcare
services and products, among other activities, and recently have brought cases
against companies, and certain sales, marketing and executive personnel, for
allegedly offering unlawful inducements to potential or existing customers in
an attempt to procure their business.

Another
development affecting the healthcare industry is the increased use of the
federal Civil False Claims Act and, in particular, actions brought pursuant to
the False Claims Acts whistleblower or qui tam provisions. The False
Claims Act imposes liability on any person or entity that, among other things,
knowingly presents, or causes to be presented, a false or fraudulent claim for
payment by a federal healthcare program. The qui tam provisions of the False
Claims Act allow a private individual to bring actions on behalf of the federal
government alleging that the defendant has submitted a false claim to the
federal government, and to share in any monetary recovery. In recent years, the
number of suits brought against healthcare providers by private individuals has
increased dramatically. In addition, various states have enacted false claim
laws analogous to the Civil False Claims Act, although many of these state laws
apply where a claim is submitted to any third-party payor and not merely a
federal healthcare program.

When
an entity is determined to have violated the False Claims Act, it may be
required to pay up to three times the actual damages sustained by the
government, plus civil penalties of between $5,500 to $11,000 for each separate
false claim. There are many potential bases for liability under the False
Claims Act. Liability arises, primarily, when an entity knowingly submits, or
causes another to submit, a false claim for reimbursement to the federal
government. The False Claims Act has been used to assert liability on the basis
of inadequate care, kickbacks and other improper referrals, and improper use of
Medicare numbers when detailing the provider of services, in addition to the
more predictable allegations as to misrepresentations with respect to the
services rendered. In addition, companies have been prosecuted under the False
Claims Act in connection with alleged off-label promotion of products. Our
future activities relating to the reporting of wholesale or estimated retail
prices for our products, the reporting of discount and rebate information and
other information affecting federal, state and third-party reimbursement of our
products, and the sale and marketing of our products, may be subject to
scrutiny under these laws. We believe our current consulting agreements with physicians
represent legitimate compensation for needed documented services actually
furnished to us. However, engagement of physician consultants by orthopedic
medical device manufacturers has recently been subject to heightened scrutiny,
and has resulted in four of the major orthopedic medical device implant
manufacturers entering deferred prosecution agreements with the federal
government and agreeing to pay substantial amounts to the federal government in
settlement of Anti-Kickback Statute allegations, and all such companies
submitting to supervision by a court appointed monitor throughout the term of
the 18 month agreements. In this environment, our engagement of physician
consultants in product development and product training and education could
subject us to similar scrutiny. We are unable to predict whether we would be
subject to actions under the False Claims Act or a similar state law, or the
impact of such actions. However, the costs of defending such claims, as well as
any sanctions imposed, could have a material adverse effect on our financial
performance.

As
part of our internal compliance program, we review our sales and marketing
materials, contracts and programs with counsel, and require employees and
marketing representatives to participate in regular training. We also have
adopted and train our personnel on the code of conduct for Interactions with
Health Care Professionals promulgated by the Advanced Medical Technology
Association, or AdvaMed, a leading trade association representing medical
device manufacturers. However, we cannot rule out the possibility that the
government or other third parties could interpret these laws differently and
challenge one or more of our activities under these laws.

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HIPAA and Other Fraud and Privacy Regulations

Among
other things, the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, created two new federal crimes: healthcare fraud and false statements
relating to healthcare matters. The HIPAA health care fraud statute prohibits,
among other things, knowingly and willfully executing, or attempting to
execute, a scheme to defraud any healthcare benefit program, including private
payors. A violation of this statute is a felony and may result in fines,
imprisonment and/or exclusion from government sponsored programs. The HIPAA
false statements statute prohibits, among other things, knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially
false, fictitious or fraudulent statement or representation in connection with
the delivery of or payment for healthcare benefits, items or services. A
violation of this statute is a felony and may result in fines and/or
imprisonment.

In
addition to creating the two new federal healthcare crimes, regulations
implementing HIPAA also establish uniform standards governing the conduct of
certain electronic healthcare transactions and protecting the security and
privacy of individually identifiable health information maintained or transmitted
by healthcare providers, health plans and healthcare clearinghouses, which are
referred to as covered entities. Three standards have been promulgated under
HIPAAs regulations: the Standards for Privacy of Individually Identifiable
Health Information, which restrict the use and disclosure of certain
individually identifiable health information, the Standards for Electronic
Transactions, which establish standards for common healthcare transactions,
such as claims information, plan eligibility, payment information and the use
of electronic signatures, and the Security Standards, which require covered
entities to implement and maintain certain security measures to safeguard
certain electronic health information. Although we are not a covered entity and
therefore not directly subject to these standards, we expect that our customers
generally will be covered entities and may ask us to contractually comply with
certain aspects of these standards. While the government intended this
legislation to reduce administrative expenses and burdens for the healthcare
industry, our compliance with certain provisions of these standards entails
significant costs for us.

In
addition to federal regulations issued under HIPAA, some states have enacted
privacy and security statutes or regulations that, in some cases, are more
stringent than those issued under HIPAA. In those cases, it may be necessary to
modify our planned operations and procedures to comply with the more stringent
state laws. If we fail to comply with applicable state laws and regulations, we
could be subject to additional sanctions.

Employees

As
of March 2, 2009, we had 193 employees, 55 of whom were engaged in sales and
marketing, 60 in research and development, 34 in assembly, manufacturing and
service, 21 in regulatory, clinical affairs and quality activities and 23 in
general administrative and accounting activities. None of our employees is
covered by a collective bargaining agreement, and we consider our relationship
with our employees to be good.

Available Information

From
our Internet website,http://www.makosurgical.com, you may obtain additional information
about us including:

| |   |                                                                                                                                                                                                                                                                            |   |                                 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------------------------------
| |  | Our annual
 reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
 8-K, including amendments to these reports, and other documents as soon as
 reasonably practicable after we file them with the Securities and Exchange
 Commission, or the SEC;
| |   |                                                                                                                                                                                                                                                                            |   |                                 
| |  | Beneficial
 ownership reports filed by officers, directors and principal security holders
 under Section 16(a) of the Securities Exchange Act of 1934, as amended, or
 the Exchange Act; and                                                                              
| |   |                                                                                                                                                                                                                                                                            |   |                                 
| |  | Corporate
 governance information that includes our                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                            |   |                                 
| |   |                                                                                                                                                                                                                                                                            | o | Corporate
 Governance Guidelines

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| |  |  |   |                                                                        
| |  |  | - | -----------------------------------------------------------------------
| |  |  | o | Audit
 Committee Charter                                               
| |  |  |   |                                                                        
| |  |  | o | Compensation
 Committee Charter                                        
| |  |  |   |                                                                        
| |  |  | o | Corporate
 Governance and Nominating Committee Charter                 
| |  |  |   |                                                                        
| |  |  | o | Code of
 Business Conduct and Ethics                                   
| |  |  |   |                                                                        
| |  |  | o | Information
 on how to communicate directly with our board of directors

We
will also provide printed copies of any of these documents to any stockholder
upon request. The contents of our Internet website are not intended to be
incorporated by reference into this report or in any other report or document
we file and any references to our website are intended to be inactive textual
references only.

ITEM 1A. RISK FACTORS

The
following risk factors and other information included in this report should be
carefully considered. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently treat as immaterial also may impair our business
operations. If any of the following risks occur, our business, financial
condition, operating results and cash flows could be materially adversely
affected.

Risks Related to Our
Business

Adverse changes in
economic conditions and reduced spending on innovative medical technology may
adversely impact our business.

The
purchase of a robotic arm system is discretionary and requires our customers to
make significant initial commitments of capital and other resources. In
addition, purchase of a robotic arm system requires a commitment to purchase
exclusively from us other products and services, including our proprietary
RESTORIS family of knee implant systems. Continuing weak economic conditions,
or a reduction in healthcare technology spending even if economic conditions
improve, could adversely impact our business, operating results and financial condition
in a number of ways, including longer sales cycles, lower prices for our
products and services and reduced unit sales.

Current credit and
financial market conditions could delay, or prevent our customers from
obtaining financing to purchase a robotic arm system, which would adversely
affect our business, financial condition and results of operations.

Due
to the recent tightening of credit markets and concerns regarding the
availability of credit, particularly in the United States, our customers may be
delayed in obtaining, or may not be able to obtain, necessary financing for
their purchases of the robotic arm system. These delays may in some instances
lead to our customers postponing the shipment and installation of previously
ordered systems, cancelling their system orders, postponing their system
installation or cancelling their agreements with us. An increase in delays and
order cancellations of this nature could adversely affect our product sales and
revenues and, therefore, harm our business and results of operations.

Negative worldwide
economic conditions and the long lead times required by certain suppliers could
prevent us from accurately forecasting demand for our products, which could
adversely affect our operating results.

The
current negative worldwide economic conditions and market instability makes it
increasingly difficult for us, our customers and our suppliers to accurately
forecast future product demand trends, which could cause us to order and/or
produce excess products that can increase our inventory carrying costs and
result in obsolete inventory. Alternatively, this forecasting difficulty could
cause a shortage of products, or materials used in our products, that could
result in an inability to satisfy demand for our products and a resulting
material loss of revenue.

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In
addition, certain of our suppliers may require extensive advance notice of our
requirements in order to produce products in the quantities we desire. This
long lead time may require us to place orders far in advance of the time when
certain products will be offered for sale, thereby also making it difficult for
us to accurately forecast demand for our products, exposing us to risks
relating to shifts in consumer demand and trends and adversely affecting our
operating results.

We may not have
sufficient funding to complete the development and commercialization of our
existing products and the weak worldwide economic conditions may hamper our
efforts to raise additional capital to run our business.

To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
commercialize the RIO system and the RESTORIS MCK multicompartmental knee
implant system and continue to develop the corporate infrastructure required to
sell and market our products and operate as a public company. We also expect to
experience increased cash requirements for inventory and property and equipment
in conjunction with the current commercial launch of the RIO system and the
RESTORIS MCK multicompartmental knee implant system. Given the current weak
economic conditions, we may be unable to obtain additional financing. As a
result, we may be required to reduce the scope of, delay or eliminate some or
all of our planned research, development and commercialization activities. We
also may have to reduce marketing, customer support or other resources devoted
to our products. Any of these factors could materially harm our business and
results of operations.

We
believe our existing cash, cash equivalents and short-term investment balances,
together with the net proceeds of an equity financing with initial gross
proceeds of approximately $40.2 million, which we closed on October 31, 2008,
and interest income we earn on these balances, if any, will be sufficient to
meet our anticipated cash requirements for at least the next 12 months. To the
extent our available cash, cash equivalents and short-term investment balances
are insufficient to satisfy our operating requirements after that period, we
will need to seek additional sources of funds, including selling additional
equity or debt securities or entering into a credit facility. In connection
with the October 2008 equity financing, we obtained a call right, subject to
our satisfaction of certain business milestones, to an additional $20 million
from certain investors in exchange for additional warrants to purchase shares
of our common stock. There is no guarantee that we will satisfy the milestones
or, if we do satisfy them and choose to exercise our call right with respect to
the $20 million, the investors will be able to comply with their obligations.
For more information regarding the equity financing, see Part II, Item 8,
Financial Statements, Note 1 to the Financial Statements below. The sale of
additional equity and debt securities may result in dilution to our current
stockholders or may require us to grant a security interest in our assets. If
we raise additional funds through the issuance of debt securities, these
securities may have rights senior to those of our common stock and could
contain covenants that could restrict our operations. We may require additional
capital beyond our currently forecasted amounts. Any such required additional
capital may not be available on reasonable terms, or at all.

If
the commercial launch of the RIO system is unsuccessful or delayed, it could
have a material adverse impact on our results of operations and financial
position and we may be unable to recognize any revenue associated with sales of
our TGS. No right of return exists on sales of prior versions of our TGS if we
are unable to complete and deliver the RIO system as anticipated.

Because
of the numerous risks and uncertainties associated with the development of
medical devices, such as future versions of the RIO system and the RESTORIS
family of knee systems, we are unable to estimate the exact amounts of capital
outlays and operating expenditures necessary to complete the development of the
products and successfully deliver commercial products to the market. Our future
capital requirements will depend on many factors, including but not limited to
the following:

| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the revenue
 generated by sales of our current and future products;                                 
| |   |                                                                                                     
| |  | the expenses
 we incur in selling and marketing our products;                                       
| |   |                                                                                                     
| |  | the costs
 and timing of regulatory clearance or approvals for upgrades or changes to
 our products;

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| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate of
 progress and cost of on-going development activities;                                                                                                                     
| |   |                                                                                                                                                                                        
| |  | the success
 of our on-going research and development efforts;                                                                                                                         
| |   |                                                                                                                                                                                        
| |  | the
 emergence of competing or complementary technological developments;                                                                                                               
| |   |                                                                                                                                                                                        
| |  | the costs of
 filing, prosecuting, defending and enforcing any patent or license claims and
 other intellectual property rights, or participating in litigation related
 activities;   
| |   |                                                                                                                                                                                        
| |  | the terms
 and timing of any collaborative, licensing, or other arrangements that we may
 establish; and                                                                               
| |   |                                                                                                                                                                                        
| |  | the
 acquisition of businesses, products and technologies, although we currently
 have no understandings, commitments or agreements relating to any material
 transaction of this type.

Our reliance on
third-party suppliers, including single source suppliers, for our implants and
nearly all components of our robotic arm systems could harm our ability to meet
demand for our products in a timely and cost effective manner.

We
rely on third-party suppliers to manufacture and supply our implants and nearly
all components used in our robotic arm systems, other than software. We
currently rely on a number of single source suppliers, such as The Anspach
Effort, Inc., for our bone cutting instrument, Northern Digital Inc., or NDI,
for the stereo tracking camera used in MAKOplasty and Millstone Medical
Outsourcing, LLC, for sterile packaging of our RESTORIS family of knee implant
systems. We currently do not have long-term contracts with any of our suppliers,
although we intend to enter into long-term contractual arrangements with
certain of our suppliers on which our business is dependent, such as Anspach,
NDI and Millstone, until such time as we can identify additional or alternative
suppliers for these products and services. As a result, our suppliers generally
are not required to provide us with any guaranteed minimum production levels,
and we cannot assure you that we will be able to obtain sufficient quantities
of key components in the future. In addition, our reliance on third-party
suppliers involves a number of risks, including, among other things:

| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our
 suppliers may encounter financial hardships as a result of unfavorable
 economic and market conditions unrelated to our demand for components, which
 could inhibit their ability to fulfill our orders and meet our requirements.                                                                             
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | Suppliers
 may fail to comply with regulatory requirements, be subject to lengthy
 compliance, validation or qualification periods, or make errors in
 manufacturing components that could negatively affect the efficacy or safety
 of our products or cause delays in supplying of our products to our
 customers;
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | Newly
 identified suppliers may not qualify under the stringent regulatory standards
 to which our business is subject;                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | We or our
 suppliers may not be able to respond to unanticipated changes in customer
 orders, and if orders do not match forecasts, we or our suppliers may have
 excess or inadequate inventory of materials and components;                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | We may be
 subject to price fluctuations due to a lack of long-term supply arrangements
 for key components;                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | We may
 experience delays in delivery by our suppliers due to changes in demand from
 us or their other customers;                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | We or our
 suppliers may lose access to critical services and components, resulting in
 an interruption in the manufacture, assembly and shipment of our systems;                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | Fluctuations
 in demand for products that our suppliers manufacture for others may affect
 their ability or willingness to deliver components to us in a timely manner;                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | Our
 suppliers may wish to discontinue supplying components or services to us for
 risk management reasons;                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | We may not
 be able to find new or alternative components or reconfigure our system and
 manufacturing processes in a timely manner if the necessary components become
 unavailable; and                                                                                                                            

If
any of these risks materialize, it could significantly increase our costs and
impact our ability to meet demand for our products. If we are unable to satisfy
commercial demand for the RIO system or the RESTORIS family of knee systems in
a timely manner, our ability to generate revenue would be impaired, market
acceptance

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of our
products could be adversely affected, and customers may instead purchase or use
our competitors products. In addition, we could be forced to secure new or
alternative components through a replacement supplier. Securing a replacement
supplier could be difficult, especially for complex components such as motors,
encoders, brakes and certain robotic arm system components that are
manufactured in accordance with our custom specifications. The introduction of
new or alternative components may require design changes to our system that are
subject to FDA and other regulatory clearances or approvals. We may also be
required to assess the new manufacturers compliance with all applicable
regulations and guidelines, which could further impede our ability to
manufacture our products in a timely manner. As a result, we could incur
increased production costs, experience delays in deliveries of our products,
suffer damage to our reputation and experience an adverse effect on our
business and financial results.

We are an
early-stage medical device company with a limited operating history and our
business may not become profitable.

We
are an early-stage medical device company with a limited operating history. Our
only current or planned products with 510(k) marketing clearance from the FDA
are versions 1.0, 1.2 and 1.3 of our Tactile Guidance System, or TGS, the
first version of our RIO Robotic Arm Interactive Orthopedic system, or RIO
system, and inlay and onlay implant systems for use in unicompartmental and
bicompartmental knee resurfacing procedures. The future success of our business
depends on our ability to continue to develop and obtain regulatory clearances
or approvals for innovative and commercially successful products in our field,
which we may be unable to do in a timely manner, or at all. Our success and ability
to generate revenue or be profitable also depends on our ability to establish
our sales and marketing force, generate product sales and control costs, all of
which we may be unable to do. We have a limited history of operations upon
which you can evaluate our business and our operating expenses are increasing.
Our lack of any significant operating history also limits your ability to make
a comparative evaluation of us, our products and our prospects.

We have incurred
significant losses since our inception and anticipate that we will continue to
incur significant losses for at least the next two or three years.

We
have sustained net losses in every fiscal year since our inception in 2004,
including a net loss attributable to common stockholders of $37.6 million for
the year ended December 31, 2008. As of December 31, 2008, we had total
stockholders equity of $66.5 million. We expect to continue to incur
significant operating losses as we increase our sales and marketing activities
and otherwise continue to invest capital in the development of our products and
our business generally. We also expect that our general and administrative
expenses will increase due to additional operational and regulatory burdens
associated with operating as a public company. We are required to defer revenue
associated with the sale of a TGS unit until we have fulfilled our contractual
obligation to deliver the RIO system to the customer. Therefore, we are not
able to recognize any of our deferred revenue until we have satisfied all
obligations for delivery of product upgrades. Our losses have had and will
continue to have an adverse effect on our stockholders equity and working
capital. Any failure to achieve and maintain profitability would continue to
have an adverse effect on our stockholders equity and working capital and
could result in a decline in our stock price or cause us to cease operations.

We rely heavily on
intellectual property that we license from others, and if we are unable to
maintain these licenses or obtain additional licenses that we may need, our
ability to compete will be harmed.

We
rely heavily on intellectual property that we license or sublicense from
others, including patented technology that is integral to our RIO system and
RESTORIS family of knee systems. As of March 1, 2009, we had licensed rights to
115 U.S. and 48 foreign third-party granted patents, and we had licensed rights
to 22 U.S. and 30 foreign third-party pending patent applications. The majority
of these patents and applications are either used in our current products or
relate to core technologies used in our products, such as computer assisted
surgery, or CAS, robotics, haptics and implants. Five of the licensed U.S.
patents will expire by the end of 2009. Two of these U.S. patents are computer
assisted surgery, or CAS, patents, and one of these U.S. patents relates to
robotic technology. These three U.S. patents are considered material to our
intellectual property portfolio because they potentially enable us to exclude
others from practicing the claimed technology. Our portfolio also includes 38

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wholly owned
pending U.S. patent applications, 49 pending foreign applications and other
intellectual property that is wholly owned by us. We are particularly dependent
on our licensing arrangements with Z-Kat, Inc., or Z-Kat, from whom we license
or sublicense, among other things, core technologies in CAS, and haptics and
robotics. Third parties may terminate a license in the event that we fail to
make required payments or for other causes. In the event a third party
terminates a license agreement, we cannot assure you that we could acquire
another license to adequately replace the product, technology or method covered
by the terminated license. If we fail to maintain our current licenses, our
ability to compete in the knee implant market will be harmed.

In
addition, as we enhance our current product offerings and develop new ones,
including the RIO system and the RESTORIS family of knee implant systems, we
may find it advisable or necessary to seek additional licenses from third
parties who hold patents covering technology or methods used in these products.
If we cannot obtain these additional licenses, we could be forced to design
around those patents at additional cost or abandon the product altogether. As a
result, our ability to grow our business and compete in the knee implant market
may be harmed.

We are currently
required by the FDA to refrain from using certain terms to label and market our
products, which could harm our ability to market and commercialize our current
or future products.

On
September 28, 2007, we submitted a Special 510(k) application to the FDA for
version 1.2 of our TGS which the FDA converted to a Traditional 510(k)
application. On November 1, 2007, the FDA provided us with a letter requesting
additional information in which the FDA, among other things, asked us to
justify our proposed use of the terms haptic and robot in the labeling of
version 1.2 of our TGS. Through subsequent correspondence and communications,
the FDA indicated that we needed to use the term tactile in lieu of haptic
and the term robotic arm in lieu of robotic, as appropriate, when these
terms are used to market our products. The FDA granted 510(k) clearance in
January 2008 for version 1.2 of our TGS with those terms. Because the FDA
currently requires us to use the terms tactile or robotic arm, we revised
the promotional and labeling materials for our existing products, including the
RIO system, for which we received 510(k) clearance from the FDA in the fourth
quarter of 2008, and may need to consider the use of modified language for our
future products. As a result, our ability to market and commercialize our
products and our growth may be harmed.

Modifications to our
currently FDA cleared products or the introduction of new products may require
new regulatory clearances or approvals or require us to recall or cease
marketing our current products until clearances or approvals are obtained.

In
November 2005, we obtained 510(k) marketing clearance from the FDA for version
1.0 of our TGS for use with our FDA cleared tibial knee inlay implant system.
We were not required to obtain premarket approval, or PMA. We were also not
required to conduct any clinical trials in support of our application for
510(k) marketing clearance. Modifications to our products, however, may require
new regulatory approvals or clearances or require us to recall or cease
marketing the modified products until these clearances or approvals are
obtained. Any modification to one of our 510(k) cleared products that would
constitute a major change in its intended use, or any change that could
significantly affect the safety or effectiveness of the device would require us
to obtain a new 510(k) clearance and may even, in some circumstances, require
the submission of a PMA, if the change raises complex or novel scientific
issues or the product has a new intended use. The FDA requires every
manufacturer to make the determination regarding the need for a new 510(k)
submission in the first instance, but the FDA may review any manufacturers
decision. Since obtaining 510(k) marketing clearance for version 1.0 of our
TGS, we developed and commercially introduced several upgrades to our TGS that
we believe did not require additional clearances or approvals. Our Special
510(k) application for version 1.2, which the FDA converted to a Traditional
510(k) application and cleared in January 2008, incorporated these upgrades.
Since this 510(k) marketing clearance, we have made additional upgrades to the
system (namely, version 1.3) that we believe were cleared under our most recent
510(k) clearance and therefore did not require additional filings for clearance
or approval. In the fourth quarter of 2008 we received 510(k) marketing
clearance from the FDA for the RIO system and for the RESTORIS MCK
multicompartmental knee implant system, which the RIO system is designed to
support. We may continue to make additional modifications in the future to the
RIO system without seeking additional clearances or approvals if we believe
such clearances or approvals are not necessary. If the FDA disagrees and

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requires new
clearances or approvals for the modifications, we may be required to recall and
stop marketing our products as modified, which could cause us to redesign our
products, conduct clinical trials to support any modifications, and pay
significant regulatory fines or penalties. Any of these actions would harm our
operating results.

Obtaining
clearances and approvals can be a difficult and time consuming process, and we
may not be able to obtain any of these or other clearances or approvals in a
timely manner, or at all. In addition, the FDA may not approve or clear these
products for the indications that are necessary or desirable for successful
commercialization or could require clinical trials to support any
modifications. Any delay or failure in obtaining required clearances or
approvals would adversely affect our ability to introduce new or enhanced
products in a timely manner, which in turn would harm our future growth.

Moreover,
clearances and approvals are subject to continual review, and the later
discovery of previously unknown problems can result in product labeling
restrictions or withdrawal of the product from the market. The loss of
previously received approvals or clearances, or the failure to comply with
existing or future regulatory requirements could reduce our sales,
profitability and future growth prospects.

We depend on the
success of a single line of products for our revenue, which could impair our
ability to achieve profitability.

We
expect to derive most of our revenue from capital sales of our RIO system,
recurring sales of implants and disposable products required for each knee
MAKOplasty procedure, and service plans that are sold with the RIO system.
Currently, the only line of products that has been commercially introduced or
received 510(k) marketing clearance is versions 1.0 and 1.2 of our TGS, the
off-the-shelf inlay and onlay knee implant systems for use in unicompartmental
knee resurfacing procedures, the RIO system and our RESTORIS family of knee
implant systems. Our future growth and success is dependent on the successful
commercialization of the RIO system and the RESTORIS family of knee implant
systems. If we are unable to achieve commercial acceptance of MAKOplasty for
bicompartmental knee resurfacing procedures or obtain regulatory clearances or
approvals for future products, our revenue would be adversely affected and we
would not become profitable.

If our knee
MAKOplasty solution does not gain market acceptance, we will not be able to
generate the revenue necessary to develop a sustainable, profitable business.

Achieving
patient, surgeon and hospital acceptance of MAKOplasty as the preferred method
of treating early to mid-stage osteoarthritis of the knee is crucial to our
success. We believe MAKOplasty represents a fundamentally new way of performing
arthroplasty of the knee, employing computer assisted robotic arm technology
and a patient specific visualization system to resurface only the diseased
areas of the knee joint. The orthopedic market has been traditionally slow to
adopt new products and treatment practices. We believe that if surgeons and
hospitals do not broadly adopt the concept of computer assisted robotics
enabled technology and do not perceive such technology as having significant
advantages over conventional arthroplasty procedures, patients will be less
likely to accept or be offered knee MAKOplasty and we will fail to meet our
business objectives. Surgeons and hospitals perceptions of such technology
having significant advantages are likely to be based on a determination that,
among other factors, our products are safe, cost-effective and represent
acceptable methods of treatment. Even if we can prove the clinical value of
MAKOplasty through clinical use, surgeons may elect not to use our products for
any number of other reasons. For example, surgeons may continue to recommend
total knee replacement surgery simply because such surgery is already widely
accepted. In addition, surgeons may be slow to adopt our products because of
the perceived liability risks arising from the use of new products. Hospitals
may not accept MAKOplasty because the RIO system is a piece of capital
equipment, representing a significant portion of a hospitals budget. The RIO
system may not be cost-efficient if hospitals are not able to perform a
significant volume of knee MAKOplasty procedures. If MAKOplasty fails to
achieve market acceptance for any of these or other reasons, we will not be
able to generate the revenue necessary to develop a sustainable, profitable
business.

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We have only limited
clinical data to support the value of knee MAKOplasty, which may make patients,
surgeons and hospitals reluctant to purchase our products.

We
believe that patients, surgeons and hospitals will only accept MAKOplasty or
purchase our products if they believe that MAKOplasty is a safe and effective
procedure with advantages over competing products and conventional knee
arthroplasty procedures. To date, we have collected only limited, short-term
clinical data with which to assess MAKOplastys clinical value. As of March 2,
2009, 959 MAKOplasty procedures had been performed since commercial
introduction in 2006. As of March 2, 2009, pursuant to the FDA guidelines on
medical device reporting, or MDRs, we have filed sixteen incident reports with
the FDA. See Risks Related to Regulatory Compliance. We have not collected,
and are not aware that others have collected, any long-term clinical data
regarding the clinical value of knee MAKOplasty. The results of short-term
studies, such as our post-market studies, do not necessarily predict long-term
clinical results. If longer-term or more extensive clinical studies that may be
performed by us or others indicate that MAKOplasty is a less safe or less
effective procedure than our current data suggest, patients may choose not to
undergo, and surgeons may choose not to perform, knee MAKOplasty. Furthermore,
unsatisfactory patient outcomes or patient injury could cause negative
publicity for our products, particularly in the early phases of product
introduction. The FDA could also rescind our marketing clearances if future
results and experience indicate that our products cause unexpected or serious
complications or other unforeseen negative effects. See Risks Related to
Regulatory Compliance. Surgeons may be slow to adopt our products if they perceive
liability risks arising from the use of these new products. As a result,
patients, surgeons and hospitals may not accept knee MAKOplasty or our products
and we may fail to become profitable and may be subject to significant legal
liability.

We have limited
sales and marketing experience and capabilities, which could impair our ability
to achieve profitability.

We
have limited experience as a company in the sales and marketing of our
products. We may not be successful in marketing and selling our products in the
U.S. through our direct sales force with assistance from independent orthopedic
product agents and distributors. Our sales and marketing organization is
supported by clinical and technical representatives who provide training, clinical
and technical support and other services to our customers before and during the
surgery. To reach our revenue targets, we need to expand and strengthen our
U.S. direct sales force. Developing a sales and marketing organization is
expensive and time consuming and an inability to develop such an organization
in a timely manner could delay the successful adoption of our products.
Additionally, any sales and marketing organization that we develop may be
competing against the experienced and well funded sales and marketing
organizations of some of our competitors. We will face significant challenges
and risks in developing our sales and marketing organization, including, among
others:

| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability
 to recruit, train and retain adequate numbers of qualified sales and
 marketing personnel;                                   
| |   |                                                                                                                                           
| |  | the ability
 of sales personnel to obtain access to leading surgeons and persuade adequate
 numbers of hospitals to purchase our products;
| |   |                                                                                                                                           
| |  | costs
 associated with hiring, maintaining and expanding a sales and marketing
 organization; and                                         
| |   |                                                                                                                                           
| |  | government
 scrutiny with respect to promotional activities in the healthcare industry.                                                   

If
we are unable to develop and maintain these sales and marketing capabilities,
we may be unable to generate revenue and may not become profitable.

Surgeons, hospitals
and orthopedic product agents and distributors may have existing relationships
with other medical device companies that make it difficult for us to establish
new relationships with them, and as a result, we may not be able to sell and
market our products effectively.

We
believe that to sell and market our products effectively, we must establish
relationships with key surgeons and hospitals in the field of orthopedic knee
surgery. Many of these key surgeons and hospitals already have long-standing
relationships with large, better known companies that dominate the medical
devices industry through collaborative research programs and other
relationships. Because of these existing relationships, some of which may be
contractually enforced, surgeons and hospitals may be reluctant to adopt knee
MAKOplasty,

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particularly
if MAKOplasty competes with or has the potential to compete with products
supported through their own collaborative research program or by these existing
relationships. Even if these surgeons and hospitals purchase our RIO system,
they may be unwilling to enter into collaborative relationships with us to
promote joint marketing programs such as the MAKOplasty Center of Excellence or
to provide us with clinical and financial data.

In
addition to our direct sales force, we work with distributors that primarily
generate sales leads for us. If these distributors believe that their
relationship with us is less beneficial than other relationships they may have
with more established or well known medical device companies, they may be
unwilling to continue their relationships with us, making it more difficult for
us to sell and market our products effectively.

Because the markets
for our products are highly competitive, customers may choose to purchase our
competitors products, resulting in reduced revenue and harm to our financial
results.

MAKOplasty
requires the use of new robotics technology, and we face competition from
large, well known companies, principally Zimmer Holdings, Inc., DePuy
Orthopedics, Inc., a Johnson & Johnson company, Stryker Corporation, and
Biomet, Inc., that dominate the market for orthopedic products. Each of these
companies, as well as other companies like Smith & Nephew, Inc., which
introduced the Journey Deuce Bi-Compartmental Knee System in July 2007, offers
conventional instruments and implants for use in conventional total and partial
knee replacement surgeries as well as unicompartmental resurfacing procedures,
which may compete with our MAKOplasty solution and negatively impact sales of
our robotic arm technology. A number of these and other companies also offer
computer assisted surgery, or CAS, systems for use in arthroplasty procedures
that provide a minimally invasive means of viewing the anatomical site. In
addition, Biomet has a license from Z-Kat to intellectual property rights in
computer assisted surgery, or CAS intellectual property, for use in the field
of orthopedics. The license is non-exclusive with respect to use of CAS
intellectual property in combination with robotics technology and exclusive
with respect to all other uses within the field of orthopedics, which could
enable them to compete with us.

Currently,
we are not aware of any well known orthopedic company that broadly offers
robotics technology in combination with CAS. All of these companies, however,
have the ability to acquire and develop robotics technology that may compete
with our products. We are aware of certain early stage companies developing CAS
and robotic applications in orthopedics and others commercializing customized
implants and instruments for early and mid-stage arthroplasty solutions. For
example, CUREXO Technology Corporation has engaged in marketing in the United
States of its ROBODOC® Surgical System, which received 510(k) clearance from
the FDA in August 2008 for total hip arthroplasty procedures.

We
also may face competition from other medical device companies that may seek to
extend robotics technology and minimally invasive approaches and products that
they have developed for use in other parts of the human anatomy to minimally
invasive arthroplasty of the knee. Even if these other companies currently do
not have an established presence in the field of minimally invasive surgery for
the knee, they may attempt to apply their robotics technology to the field of
knee replacement and resurfacing procedures to compete directly with us.

Many
of these medical device competitors enjoy competitive advantages over us,
including:

| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significantly
 greater name recognition;                                                                                                                                      
| |   |                                                                                                                                                                               
| |  | longer
 operating histories;                                                                                                                                                  
| |   |                                                                                                                                                                               
| |  | established
 exclusive relations with healthcare professionals, customers and third-party
 payors;                                                                            
| |   |                                                                                                                                                                               
| |  | established
 distribution networks;                                                                                                                                           
| |   |                                                                                                                                                                               
| |  | additional
 lines of products and the ability to offer rebates or bundle products to
 offer higher discounts or incentives to gain a competitive advantage;                   
| |   |                                                                                                                                                                               
| |  | greater
 experience in conducting research and development, manufacturing, clinical
 trials, obtaining regulatory clearance for products and marketing approved
 products; and

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| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | greater
 financial and human resources for product development, sales and marketing
 and patent litigation.

Moreover,
our competitors in the medical device industry make significant investments in
research and development, and innovation is rapid and continuous. If new
products or technologies emerge that provide the same or superior benefits as
our products at equal or lesser cost, they could render our products obsolete
or unmarketable. Because our products can have long development and regulatory
clearance or approval cycles, we must anticipate changes in the marketplace and
the direction of technological innovation and customer demands. In addition, we
face increasing competition from well financed orthopedic companies in our
attempts to acquire such new technologies, products and businesses. As a
result, we cannot be certain that surgeons will use our products to replace or
supplement established surgical procedures or that our products will be
competitive with current or future products and technologies resulting in
reduced revenue and harm to our financial results.

If we do not timely
achieve our development goals for new products, the commercialization of these
products will be delayed and our business and financial results may be
adversely affected.

The
success of our business is dependent on our ability to develop new products, to
introduce enhancements to our existing products and to develop these new
products and enhancements within targeted time frames and budgets. The actual
timing of these product releases can vary dramatically compared to our
estimates for reasons that may or may not be within our control, including
clearance or approval by the FDA to market future products. Customers may
forego purchases of our existing products and purchase our competitors
products as a result of delays in the introduction of our new products and
enhancements or failure by us to offer innovative products or enhancements at
competitive prices and in a timely manner. Announcements of new products by us
or by competitors may also result in a delay in or cancellation of purchasing
decisions in anticipation of such new products. Any such losses of new
customers would harm our business and financial results. In addition, until we
deliver the RIO system to the customer, we are required to defer all revenue
associated with the sale of the TGS. Any delay in or failure to deliver the RIO
system to our existing customers could result in the loss of such accounts and
a delay or inability to recognize revenue associated with the initial sale of
the TGS to the customer.

We have limited
experience in assembling and testing our products and may encounter problems or
delays in the assembly of our products or fail to meet certain regulatory
requirements that could result in a material adverse effect on our business and
financial results.

We
have limited experience in assembling and testing our products, including the
RIO system, and no experience in doing so on a large commercial scale. The
current and intended future versions of our robotic arm systems are complex and
require the integration of a number of separate components and processes. To
become profitable, we must assemble and test the RIO system in commercial
quantities in compliance with regulatory requirements and at an acceptable
cost. Increasing our capacity to assemble and test our products on a commercial
scale will require us to improve internal efficiencies. We may encounter a
number of difficulties in increasing our assembly and testing capacity,
including:

| |   |                                                        
| | - | -------------------------------------------------------
| |  | managing
 production yields;                           
| |   |                                                        
| |  | maintaining
 quality control and assurance;            
| |   |                                                        
| |  | providing
 component and service availability;         
| |   |                                                        
| |  | maintaining
 adequate control policies and procedures; 
| |   |                                                        
| |  | hiring and
 retaining qualified personnel; and         
| |   |                                                        
| |  | complying
 with state, federal and foreign regulations.

If
we are unable to satisfy commercial demand for our RIO system due to our
inability to assemble and test the system, our business and financial results,
including our ability to generate revenue, would be impaired, market acceptance
of our products could be materially adversely affected and customers may
instead purchase or use, our competitors products.

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Any failure in our
efforts to train surgeons or hospital staff could result in lower than expected
product sales and potential liabilities.

A
critical component of our sales and marketing efforts is the training of a
sufficient number of surgeons and hospital staff to properly use the knee
MAKOplasty system. We rely on surgeons and hospital staff to devote adequate
time to learn to use our products. Convincing surgeons and hospital staff to
dedicate the time and energy necessary for adequate training in the use of our
system is challenging, and we cannot assure you we will be successful in these
efforts. If surgeons or hospital staff are not properly trained, they may
misuse or ineffectively use our products. If nurses or other members of the
hospital staff are not adequately trained to assist in using our robotic arm
systems, surgeons may be unable to use our products. Insufficient training may
result in reduced system use, unsatisfactory patient outcomes, patient injury
and related liability or negative publicity, which could have an adverse effect
on our product sales or create substantial potential liabilities.

We will likely
continue to experience extended and variable sales cycles, which together with
the unit price of the RIO system, could cause significant variability in our
results of operations for any given quarter.

Our
robotic arm system has a lengthy sales cycle because it involves a major piece
of capital equipment, the purchase of which will generally require the approval
of senior management at hospitals, inclusion in the hospitals budget process
for capital expenditures and, in some instances, a certificate of need from the
state or other regulatory clearance. As a result, a relatively small number of
units are installed each quarter. Based on our limited experience, we estimate
that the sales cycle of the RIO system will continue to take between seven and
eighteen months from the point of initial identification and contact with a
qualified surgeon until closing of the purchase with the hospital. Certain
sales of RIO systems may also be subject to a customer acceptance period,
during which the customer may return the RIO system to us subject to a penalty.
Although we believe that training can be accomplished in a relatively short
period of time, there may be situations where training of physicians and staff
may last an additional month or more after installation. In addition, the
introduction of new products could adversely impact our sales cycle as
customers take additional time to assess the capital products. Because of the
lengthy sales cycle, the unit price of the RIO system and the relatively small
number of systems installed each quarter, each installation of a RIO system can
represent a significant component of our revenue for a particular quarter,
particularly in the near term and during any other periods in which our sales
volume is relatively low.

Certain
factors that may contribute to variability in our operating results may
include:

| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | timing and
 level of expenditures associated with new product development activities;                                                                                 
| |   |                                                                                                                                                                       
| |  | delays in
 shipment due, for example, to cancellations by customers, natural disasters
 or labor disturbances;                                                        
| |   |                                                                                                                                                                       
| |  | delays or
 unexpected difficulties in the manufacturing processes of our suppliers or in
 our assembly process;                                                       
| |   |                                                                                                                                                                       
| |  | timing of
 the announcement, introduction and delivery of new products or product
 upgrades by us and by our competitors;                                             
| |   |                                                                                                                                                                       
| |  | timing and
 level of expenditures associated with expansion of sales and marketing
 activities and our overall operations;                                            
| |   |                                                                                                                                                                       
| |  | disruptions
 in the supply or changes in the costs of raw materials, labor, product
 components or transportation services; and                                       
| |   |                                                                                                                                                                       
| |  | changes in
 third-party coverage and reimbursement, changes in government regulation, or
 a change in a customers financial condition or ability to obtain financing.

These
factors are difficult to forecast and may contribute to substantial fluctuations
in our quarterly revenue and substantial variation from our projections,
particularly during the periods in which our sales volume is low. Moreover,
many of our expenses, such as office leases and certain personnel costs, are
relatively fixed. We may be unable to adjust spending quickly enough to offset
any unexpected revenue shortfall. Accordingly, any shortfall in revenue may
cause significant variation in operating results in any quarter. Based on the
above factors,

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we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. These and other potential fluctuations
also mean that you will not be able to rely upon our operating results in any
particular period as an indication of future performance.

If we receive a
significant number of warranty claims or our robotic arm system units require
significant amounts of service after sale, our costs will increase and our
business and financial results will be adversely affected.

We
currently warrant each robotic arm system against defects in materials and
workmanship for a period of approximately 12 months from the installation of
the initial system at a customers facility. We also provide technical and
other services to customers beyond the warranty period pursuant to a
supplemental service plan sold with each system. We have a limited history of
commercial placements from which to judge our rate of warranty claims. If
product returns or warranty claims are significant or exceed our expectations,
we could incur unanticipated reductions in sales or additional expenditures for
parts and service. In addition, our reputation could be damaged and our
products may not achieve market acceptance. While we have established accruals for
liability associated with product warranties, unforeseen warranty exposure in
excess of those accruals could negatively impact our business and financial
results.

We could become
subject to product liability claims, product actions, including product recalls,
and other field or regulatory actions that could be expensive, divert
managements attention and harm our business.

Our
business exposes us to potential liability risks, product actions and other
field or regulatory actions that are inherent in the manufacturing, marketing
and sale of medical device products. We may be held liable if our TGS or the
RIO system or implants cause injury or death or is found otherwise unsuitable
or defective during usage. These robotic arm systems incorporate mechanical,
electrical and optical parts, complex computer software and other sophisticated
components, any of which can contain errors or failures. Complex computer
software is particularly vulnerable to errors and failures, especially when
first introduced. In addition, new products or enhancements to our existing
products may contain undetected errors or performance problems that, despite
testing, are discovered only after installation.

We
may, from time to time, elect to initiate a product action concerning one or
more of our products for the purpose of improving device performance. If any of
our products are defective, whether due to design or manufacturing defects,
improper use of the product or other reasons, we may voluntarily or involuntarily
undertake a product action to remove, repair, or replace the product at our
expense and, in some circumstances, to notify regulatory authorities of such
product action pursuant to a product recall. As of March 2, 2009, we initiated
five voluntary product actions, one of which was a product recall reportable to
the FDA pursuant to the correction / removal guidelines. We are required to
submit an MDR report to the FDA for any incident in which our product may have
caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or
contribute to death or serious injury. As of March 2, 2009, pursuant to the FDA
guidelines on MDRs, we filed sixteen incident reports with the FDA.

In
the future, we may experience additional events that may require reporting to
the FDA pursuant to the MDR regulations. See Risks Related to Regulatory
Compliance. A required notification to a regulatory authority could result in
an investigation by regulatory authorities of our products, which could in turn
result in product actions, restrictions on the sale of the products, civil or
criminal penalties and other field corrective action. In addition, because our
products are designed to be used to perform complex surgical procedures,
defects could result in a number of complications, some of which could be
serious and could harm or kill patients. The adverse publicity resulting from
any of these events could cause surgeons or hospitals to review and potentially
terminate their relationships with us. Regulatory investigations or product
actions could also result in our incurring substantial costs, losing revenue,
and implementing a change in the design, manufacturing process or the
indications for which our products may be used, each of which would harm our
business.

It
is also possible that defects in the design, manufacture or labeling of our
products could result in a product liability claim. The medical device industry
has historically been subject to extensive litigation over

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product
liability claims. A product liability claim, regardless of its merit or
eventual outcome, could result in significant legal defense costs. Although we
maintain product liability insurance, the coverage is subject to deductibles
and limitations, and may not be adequate to cover future claims. Additionally,
we may be unable to maintain our existing product liability insurance in the
future at satisfactory rates or adequate amounts. A product liability claim,
regardless of its merit or eventual outcome could result in:

| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | decreased
 demand for our products;                                                                   
| |   |                                                                                                       
| |  | injury to
 our reputation;                                                                            
| |   |                                                                                                       
| |  | diversion of
 managements attention;                                                                 
| |   |                                                                                                       
| |  | significant
 costs of related litigation;                                                             
| |   |                                                                                                       
| |  | payment of
 substantial monetary awards by us;                                                        
| |   |                                                                                                       
| |  | product
 actions;                                                                                     
| |   |                                                                                                       
| |  | a change in
 the design, manufacturing process or the indications for which our products
 may be used;
| |   |                                                                                                       
| |  | loss of
 revenue; and                                                                                 
| |   |                                                                                                       
| |  | an inability
 to commercialize our products under development.                                        

If hospitals,
surgeons and other healthcare providers are unable to obtain coverage or
reimbursement from third-party payors for MAKOplasty procedures, hospitals may
not purchase the RIO system and surgeons may not perform knee MAKOplasty, which
would harm our business and financial results.

Our
ability to successfully commercialize MAKOplasty depends significantly on the
availability of coverage and reimbursement from third-party payors, including
governmental programs such as Medicare and Medicaid as well as private
insurance and private health plans. Reimbursement is a significant factor
considered by hospitals in determining whether to acquire new capital equipment
such as our technology. Although our customers have been successful in
obtaining coverage and reimbursement, we cannot assure you that procedures
using our technology will be covered or reimbursed by third-party payors in the
future or that such reimbursements will not be reduced to the extent that they
will adversely affect capital allocations for purchase of our robotic arm
systems.

We
anticipate that in the U.S. our products will be purchased primarily by
hospitals, which bill various third-party payors, including governmental
healthcare programs, such as Medicare, and private insurance plans for
procedures using our technology. Ensuring adequate Medicare reimbursement can
be a lengthy and expensive endeavor and we cannot provide assurance that we
will be successful. In addition, the U.S. Congress may pass laws that impact
coverage and reimbursement for healthcare services, including Medicare
reimbursement to physicians and hospitals. Many private payors look to
Medicares coverage and reimbursement policies in setting their coverage
policies and reimbursement amounts. If the Centers for Medicare and Medicaid
Services, or CMS, the federal agency that administers the Medicare program, or
Medicare contractors limit payments to hospitals or surgeons for knee
MAKOplasty procedures, private payors may similarly limit payments. In
addition, state legislatures may enact laws limiting or otherwise affecting the
level of Medicaid reimbursements. As a result, hospitals may not purchase the
RIO system and surgeons may choose not to perform knee MAKOplasty, and,
as a result, our business and financial results would be adversely affected.

Medicare
pays acute care hospitals a prospectively determined amount for inpatient
operating costs under the Medicare hospital inpatient prospective payment
system, or PPS. Under the Medicare hospital inpatient PPS, the prospective
payment for a patients stay in an acute care hospital is determined by the
patients condition and other patient data and procedures performed during the
inpatient stay using a classification system known as diagnosis related groups,
or DRGs. As of October 1, 2007, CMS, implemented a revised version of the DRG
system that uses 745 Medicare Severity DRGs, or MS-DRGs, instead of the
approximately 540 DRGs Medicare previously used. The MS-DRGs are intended to
account more accurately for the patients severity of illness when assigning
each patients stay to a payment classification. Medicare pays a fixed amount
to the hospital based on the MS-DRG into which the patients stay is assigned,
regardless of the actual cost to the hospital of furnishing the procedures,
items and services provided. Accordingly, acute care hospitals generally do not
receive direct Medicare reimbursement under PPS for the specific costs incurred
in purchasing medical devices. Rather,

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reimbursement
for these costs is deemed to be included within the MS-DRG based payments made
to hospitals for the services furnished to Medicare eligible inpatients in
which the devices are utilized. Accordingly, a hospital must absorb the cost of
our products as part of the payment it receives for the procedure in which the
device is used. In addition, physicians that perform procedures in hospitals
are paid a set amount by Medicare for performing such services under the
Medicare physician fee schedule. Medicare payment rates for both systems are
established annually.

At
this time, we do not know the extent to which hospitals and physicians would
consider third-party reimbursement levels adequate to cover the cost of our
products. Failure by hospitals and surgeons to receive an amount that they
consider to be adequate reimbursement for procedures in which our products are
used could deter them from purchasing or using our products and limit our sales
growth. In addition, pre-determined MS-DRG payments or Medicare physician fee
schedule payments may decline over time, which could deter hospitals from
purchasing our products or physicians from using them. If hospitals are unable
to justify the costs of our products or physicians are not adequately
compensated for procedures in which our products are utilized, they may refuse
to purchase or use them, which would significantly harm our business.

Notwithstanding
current or future FDA clearances, if granted, third-party payors may deny
reimbursement if the payor determines that a therapeutic medical device is
unnecessary, inappropriate, not cost-effective or experimental, or is used for
a non-approved indication. Although we are not aware of any potential customer
that has declined to purchase our robotic arm system based upon third-party
payors reimbursement policies, cost control measures adopted by third-party
payors may have a significant effect on surgeries performed using MAKOplasty or
as to the levels of reimbursement. All third-party payors, whether governmental
or private, whether inside the U.S. or outside, are developing increasingly
sophisticated methods of controlling healthcare costs. These cost control
methods include prospective payment systems, capitated rates, benefit
redesigns, pre-authorization or second opinion requirements prior to major
surgery, an emphasis on wellness and healthier lifestyle interventions and an
exploration of other cost-effective methods of delivering healthcare. These
cost control methods also potentially limit the amount which healthcare
providers may be willing to pay for medical technology which could, as a
result, adversely affect our business and financial results. In addition, in
the U.S., no uniform policy of coverage and reimbursement for medical
technology exists among all these payors. Therefore, coverage and reimbursement
for medical technology can differ significantly from payor to payor.

There
also can be no assurance that current levels of reimbursement will not be decreased
or eliminated in the future, or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for our products or our ability to sell products on a
profitable basis. Our customers are currently using existing reimbursement
codes for knee arthroplasty. Knee arthroplasty performed in the hospital
inpatient setting is currently assigned to MS-DRG 469 (Major Joint Replacement
or Reattachment of Lower Extremity with Major Complication or Comorbidity) and
MS-DRG 470 (Major Joint Replacement or Reattachment of Lower Extremity without
Major Complication of Comorbidity), and surgeons currently bill Current
Procedural Terminology, or CPT, code 27446 (Arthroplasty, knee, condyle and plateau;
medial OR lateral compartment) for services performed in connection with
procedures using our technology. Our customers also have available CPT codes
27446 and 73700 (CT lower extremity without contrast) for out-patient
procedures and procedures performed in an ambulatory surgery center. If
unicompartmental and bicompartmental knee resurfacing procedures gain market
acceptance and the number of such procedures increases, CMS and other payors
may establish billing codes for unicompartmental and bicompartmental knee
resurfacing procedures that provide for a smaller reimbursement amount than
knee arthroplasty, which could adversely affect our financial results and
business.

In
international markets, market acceptance of our products will likely depend in
large part on the availability of reimbursement within prevailing healthcare
payment systems. Reimbursement and healthcare payment systems in international
markets vary significantly by country, and by region in some countries, and
include both government sponsored healthcare and private insurance. We may not
obtain international reimbursement approvals in a timely manner, if at all. In
addition, even if we do obtain international reimbursement approvals, the level
of reimbursement may not be enough to commercially justify expansion of our
business into the approving jurisdiction. To the extent we or our customers are
unable to obtain coverage or

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reimbursement
for procedures using our technology in major international markets in which we
seek to market and sell our technology, our international revenue growth would
be harmed, and our business and results of operations would be adversely
affected.

We may attempt to
acquire new products or technologies, and if we are unable to successfully complete
these acquisitions or to integrate acquired businesses, products, technologies
or employees, we may fail to realize expected benefits or harm our existing
business.

Our
success will depend, in part, on our ability to expand our product offerings
and grow our business in response to changing technologies, customer demands
and competitive pressures. In some circumstances, we may determine to do so
through the acquisition of complementary businesses, products or technologies
rather than through internal development. The identification of suitable
acquisition candidates can be difficult, time consuming and costly, and we may
not be able to successfully complete identified acquisitions. Furthermore, even
if we successfully complete an acquisition, we may not be able to successfully
integrate newly acquired organizations, products or technologies into our
operations, and the process of integration could be expensive, time consuming
and may strain our resources. Consequently, we may not achieve anticipated
benefits of the acquisitions, which could harm our existing business. In
addition, future acquisitions could result in potentially dilutive issuances of
equity securities or the incurrence of debt, contingent liabilities or
expenses, or other charges such as in-process research and development, any of
which could harm our business and materially adversely affect our financial
results or cause a reduction in the price of our common stock.

We depend on key
employees, and if we fail to attract and retain employees with the expertise
required for our business, we cannot grow or achieve profitability.

We
are highly dependent on members of our senior management, in particular Maurice
R. Ferré, M.D., our President, Chief Executive Officer and Chairman of the
Board. Our future success will depend in part on our ability to retain these
key employees and to identify, hire and retain additional qualified personnel
with expertise in research and development and sales and marketing. Competition
for qualified personnel in the medical device industry is intense, and finding
and retaining qualified personnel with experience in our industry is very
difficult. We believe that there are only a limited number of individuals with
the requisite skills to serve in many of our key positions, and we compete for
key personnel with other medical equipment and software manufacturers and
technology companies, as well as universities and research institutions. It is
often difficult to hire and retain these persons, and we may be unable to
replace key persons if they leave or fill new positions requiring key persons
with appropriate experience. A significant portion of our compensation to our
key employees is in the form of stock option grants. A prolonged depression in
our stock price could make it difficult for us to retain our employees and
recruit additional qualified personnel.

We
do not maintain, and do not currently intend to obtain, key employee life
insurance on any of our personnel other than Dr. Ferré. Although we have
obtained key man insurance covering Dr. Ferré in the amount of $2,000,000, this
would not fully compensate us for the loss of Dr. Ferrés services. Dr Ferré
may terminate his employment at will at any time with 30 days notice. Each of
our other officers and key employees may terminate his or her employment at
will at any time with 60 days notice. The loss of key employees, the failure
of any key employee to perform or our inability to attract and retain skilled
employees, as needed, could harm our business.

If we do not
effectively manage our growth, we may be unable to successfully develop, market
and sell our products.

Our
future revenue and operating results will depend on our ability to manage the
anticipated growth of our business. We have experienced significant growth in
the scope of our operations and the number of our employees since our
inception. This growth has placed significant demands on our management, as
well as our financial and operations resources. In order to achieve our
business objectives, we must continue to grow. However, continued growth
presents numerous challenges, including:

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | implementing
 appropriate operational and financial systems and controls;

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| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | expanding
 manufacturing and assembly capacity and increasing production;               
| |   |                                                                                         
| |  | developing
 our sales and marketing infrastructure and capabilities;                    
| |   |                                                                                         
| |  | improving
 our information systems;                                                     
| |   |                                                                                         
| |  | identifying,
 attracting and retaining qualified personnel in our areas of activity; and
| |   |                                                                                         
| |  | hiring,
 training, managing and supervising our personnel.                              

We
cannot be certain that our systems, controls, infrastructure and personnel will
be adequate to support our future operations. Any failure to effectively manage
our growth could impede our ability to successfully develop, market and sell
our products and our business will be harmed.

If we are successful
in our efforts to market and sell knee MAKOplasty internationally, we will be
subject to various risks relating to our international activities, which could
adversely affect our business and financial results.

We
have begun to pursue international markets for the sale of our products and we
anticipate being exposed to risks separate and distinct from those we face in
our U.S. operations. Our international business may be adversely affected by
changing economic conditions in foreign countries. In addition, because
international sales would most likely be denominated in the functional currency
of the country where the product is being shipped, increases or decreases in
the value of the U.S. dollar relative to foreign currencies could affect our
results of operations. Engaging in international business inherently involves a
number of other difficulties and risks, including:

| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | approval of
 product submissions with healthcare systems outside the United States;                                          
| |   |                                                                                                                              
| |  | gathering
 the clinical data that may be required for product submissions with
 healthcare systems outside the United States;
| |   |                                                                                                                              
| |  | export
 restrictions and controls and other government regulation relating to
 technology;                                   
| |   |                                                                                                                              
| |  | the
 availability and level of reimbursement within prevailing foreign healthcare
 payment systems;                          
| |   |                                                                                                                              
| |  | pricing
 pressures that we may experience internationally;                                                                   
| |   |                                                                                                                              
| |  | compliance
 with existing and changing foreign regulatory laws and requirements;                                             
| |   |                                                                                                                              
| |  | foreign laws
 and business practices favoring local companies;                                                               
| |   |                                                                                                                              
| |  | longer
 payment cycles;                                                                                                      
| |   |                                                                                                                              
| |  | shipping
 delays;                                                                                                            
| |   |                                                                                                                              
| |  | difficulties
 in enforcing agreements and collecting receivables through certain foreign
 legal systems;                     
| |   |                                                                                                                              
| |  | political
 and economic instability;                                                                                         
| |   |                                                                                                                              
| |  | potentially
 adverse tax consequences, tariffs and other trade barriers;                                                     
| |   |                                                                                                                              
| |  | international
 terrorism and anti-American sentiment;                                                                        
| |   |                                                                                                                              
| |  | difficulties
 and costs of staffing and managing foreign operations; and                                                     
| |   |                                                                                                                              
| |  | difficulties
 in enforcing intellectual property rights.                                                                     

Our
exposure to each of these risks may increase our costs, impair our ability to
market and sell our products and require significant management attention,
resulting in harm to our business and financial results.

Our operations are
currently conducted primarily at a single location in Florida, which may be at
risk from hurricanes, storm, fire, terrorist attacks or other disasters.

We
currently conduct all of our management activities, most of our research and
development activities and assemble all of our products at a single location in
Fort Lauderdale, Florida. We have taken various precautions to safeguard our
facilities, such as obtaining insurance, establishing health and safety
protocols and securing off-site storage of computer data. However, a casualty
due to a hurricane, storm or other natural disasters, a fire, terrorist attack,
or other unanticipated problems at this location could cause substantial delays
in our operations, delay or prevent assembly of our RIO systems and shipment of
our implants, damage or destroy our equipment and inventory, and cause us to
incur substantial expenses. Our insurance does not cover losses caused by
certain events such as floods or other activities and may not be adequate to
cover our losses in any

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particular
case. Any damage, loss or delay could seriously harm our business and have an
adverse affect on our financial results.

Certain of our
directors, executive officers and key employees have an interest in Z-Kat that
could pose potential conflicts of interest, which could harm our business.

We
believe that certain of our directors, executive officers and key employees
hold equity interests in Z-Kat, Inc., or Z-Kat. We are dependent on
intellectual property that we license or sublicense from Z-Kat and have entered
into various licensing and related arrangements with Z-Kat. Each of these
individuals may face potential conflicts of interest regarding these licensing
transactions as a result of their interests in Z-Kat. Dr. Ferré may face
additional conflicts of interest regarding these licensing and related
arrangements if he serves on the board of directors of Z-Kat. To address these
potential conflicts of interest, we have adopted a Related Person Transaction
Policy. In addition, the audit committee of our board of directors, under the
terms of its charter, must review and approve all related person transactions.
We cannot, however, assure you that any conflicts will be resolved in our
favor, and as a result, our business could be harmed.

Risks Related to Our
Intellectual Property

If we, or the third
parties from whom we license intellectual property, are unable to secure and
maintain patent or other intellectual property protection for the intellectual
property contained in our products, our ability to compete will be harmed.

Our
commercial success depends, in part, on obtaining patent and other intellectual
property protection for the technologies contained in our products. The patent
positions of medical device companies, including ours, can be highly uncertain
and involve complex and evolving legal and factual questions. Our patent
position is uncertain and complex, in part, because of our dependence on
intellectual property that we license from others. If we, or the third parties
from whom we license intellectual property, fail to obtain adequate patent or
other intellectual property protection for intellectual property contained in
our products, or if any protection is reduced or eliminated, others could use
the intellectual property contained in our products, resulting in harm to our
competitive business position. In addition, patent and other intellectual
property protection may not provide us with a competitive advantage against
competitors that devise ways of making competitive products without infringing
any patents that we own or have rights to.

As
of March 1, 2009, our portfolio included 38 wholly owned pending U.S. patent
applications, 49 pending foreign applications and other intellectual property
that is wholly owned by us. As of March 1, 2009, we had licensed rights to 115
U.S. and 48 foreign third-party granted patents, and we had licensed rights to
22 U.S. and 30 foreign third-party pending patent applications. U.S. patents
and patent applications may be subject to interference proceedings and U.S.
patents may be subject to reexamination proceedings in the U.S. Patent and
Trademark Office. Foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent offices. Any of these
proceedings could result in either loss of the patent or denial of the patent application,
or loss or reduction in the scope of one or more of the claims of the patent or
patent application. Changes in either patent laws or in interpretations of
patent laws may also diminish the value of our intellectual property or narrow
the scope of our protection. Interference, reexamination and opposition
proceedings may be costly and time consuming, and we, or the third parties from
whom we license intellectual property, may be unsuccessful in defending against
such proceedings. Thus, any patents that we own or license may provide limited
or no protection against competitors. In addition, our pending patent
applications and those we may file in the future may have claims narrowed
during prosecution or may not result in patents being issued. Even if any of
our pending or future applications are issued, they may not provide us with
adequate protection or any competitive advantages. Our ability to develop
additional patentable technology is also uncertain.

Non-payment
or delay in payment of patent fees or annuities, whether intentional or
unintentional, may also result in the loss of patents or patent rights
important to our business. Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties. In addition, many countries limit
the enforceability of patents against third parties,

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including
government agencies or government contractors. In these countries, the patent
owner may have limited remedies, which could materially diminish the value of
the patent. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as do the laws of the U.S.,
particularly in the field of medical products and procedures.

If we are unable to
prevent unauthorized use or disclosure of our proprietary trade secrets and
unpatented know-how, our ability to compete will be harmed.

Proprietary
trade secrets, copyrights, trademarks and unpatented know-how are also very
important to our business. We rely on a combination of trade secrets,
copyrights, trademarks, confidentiality agreements and other contractual
provisions and technical security measures to protect certain aspects of our
technology, especially where we do not believe that patent protection is
appropriate or obtainable. We require our employees and consultants to execute
confidentiality agreements in connection with their employment or consulting
relationships with us. We also require our employees and consultants to
disclose and assign to us all inventions conceived during the term of their
employment or engagement while using our property or which relate to our
business. However, these measures may not be adequate to safeguard our
proprietary intellectual property and conflicts may, nonetheless, arise
regarding ownership of inventions. Such conflicts may lead to the loss or
impairment of our intellectual property or to expensive litigation to defend
our rights against competitors who may be better funded and have superior
resources. Our employees, consultants, contractors, outside clinical
collaborators and other advisors may unintentionally or willfully disclose our
confidential information to competitors. In addition, confidentiality agreements
may be unenforceable or may not provide an adequate remedy in the event of
unauthorized disclosure. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time consuming, and
the outcome is unpredictable. Moreover, our competitors may independently
develop equivalent knowledge, methods and know-how. Unauthorized parties may
also attempt to copy or reverse engineer certain aspects of our products that
we consider proprietary. As a result, third parties may be able to use our
proprietary technology or information, and our ability to compete in the market
would be harmed.

We could become
subject to patent and other intellectual property litigation that could be
costly, result in the diversion of managements attention, require us to pay
damages and force us to discontinue selling our products.

The
medical device industry is characterized by competing intellectual property and
a substantial amount of litigation over patent and other intellectual property
rights. In particular, the fields of orthopedic implants, CAS, haptics and
robotics are well established and crowded with the intellectual property of
competitors and others. A number of companies in our market, as well as
universities and research institutions, have issued patents and have filed
patent applications which relate to the use of CAS.

Determining
whether a product infringes a patent involves complex legal and factual issues,
and the outcome of a patent litigation action is often uncertain. We have not
conducted an extensive search of patents issued to third parties, and no
assurance can be given that third-party patents containing claims covering our
products, parts of our products, technology or methods do not exist, have not
been filed or could not be filed or issued. Because of the number of patents
issued and patent applications filed in our technical areas, our competitors or
other third parties, including third parties from whom we license intellectual
property, may assert that our products and the methods we employ in the use of
our products are covered by U.S. or foreign patents held by them. In addition,
because patent applications can take many years to issue and because
publication schedules for pending applications vary by jurisdiction, there may
be applications now pending of which we are unaware and which may result in
issued patents which our current or future products infringe. Also, because the
claims of published patent applications can change between publication and patent
grant, there may be published patent applications that may ultimately issue
with claims that we infringe. There could also be existing patents that one or
more of our products or parts may infringe and of which we are unaware. As the
number of competitors in the market for CAS and robotics assisted knee implant
systems grows, and as the number of patents issued in this area grows, the
possibility of patent infringement claims against us increases. In certain
situations, we or third parties, such as Z-Kat from whom we license
intellectual property, may determine that it is in our best interests or their
best interests to voluntarily challenge a third partys products or patents in
litigation

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or other
proceedings, including patent interferences or reexaminations. Pursuant to our
licensing arrangement with Z-Kat, we have the right to prosecute, control and
maintain all Z-Kat patents and intellectual property rights that are licensed
to us within the field of orthopedic surgery. Z-Kat retains the right to
prosecute, control and maintain its patent and intellectual property rights
outside the field of orthopedic surgery, subject to certain conditions. For
example, Z-Kat must notify us prior to taking any action to enforce their
patent or intellectual property rights. To help ensure that Z-Kat has the
resources necessary for proper prosecution and defense of any litigation
arising from such enforcement action, our agreement with Z-Kat also requires
that it enter into an engagement letter with competent counsel and deposit
funds into an escrow account, for use by us to take over the litigation or
action in the event Z-Kat is unable or unwilling to conduct proper prosecution
and defense of such litigation or action. Despite these arrangements, we may
have no control over Z-Kats decisions regarding enforcement actions outside
the field of orthopedic surgery. As a result, we may become involved in
unwanted litigation that could be costly, result in diversion of managements
attention, require us to pay damages and force us to discontinue selling our
products.

On
November 26, 2007, we received a letter from counsel to SensAble Technologies,
Inc. alleging that we infringed certain of its patents and breached a
confidentiality provision in the Sublicense Agreement, dated May 24, 2006,
pursuant to which we license certain patents from SensAble. In the letter,
SensAble alleged, among other things, that we exceeded the scope of our
licensed field of computer assisted surgery by using the technology for, among
other things, pre-operative planning and post-operative follow-up. SensAble
also alleged that we infringed one or more claims in five U.S. patents that are
not among the patents licensed to us pursuant to the Sublicense Agreement.
Although SensAble has not commenced any legal action against us as of the date
of this report, it may do so in the future and at this time we cannot determine
the ultimate outcome of any such legal action. Any such legal action could
result in our inability to manufacture and commercialize our robotic arm
systems, as currently sold, which could have a material adverse effect on our
company. See also Item 3, Legal Proceedings, and Part II, Item 8, Financial
Statements, Note 7 to the Financial Statements.

Infringement
actions and other intellectual property claims and proceedings, whether with or
without merit, may cause us to incur substantial costs and could place a
significant strain on our financial resources, divert the attention of
management from our business and harm our reputation. Some of our competitors
may be able to sustain the costs of complex patent or intellectual property
litigation more effectively than we can because they have substantially greater
resources.

We
cannot be certain that we will successfully defend against allegations of
infringement of third-party patents and intellectual property rights. In the
event that we become subject to a patent infringement or other intellectual
property lawsuit and if the other partys patents or other intellectual
property were upheld as valid and enforceable and we were found to infringe the
other partys patents or violate the terms of a license to which we are a
party, we could be required to pay damages. We could also be prevented from
selling our products unless we could obtain a license to use technology or
processes covered by such patents or were able to redesign the product to avoid
infringement. A license may not be available at all or on commercially
reasonable terms or we may not be able to redesign our products to avoid
infringement. Modification of our products or development of new products could
require us to conduct clinical trials and to revise our filings with the FDA
and other regulatory bodies, which would be time consuming and expensive. In
these circumstances, we may be unable to sell our products at competitive
prices or at all, our business and operating results could be harmed and our
stock price may decline. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our operations.

We may be subject to
damages resulting from claims that our employees or we have wrongfully used or
disclosed alleged trade secrets of their former employers.

Many
of our employees were previously employed at universities or other medical
device companies, including our competitors or potential competitors. We could
in the future be subject to claims that these employees, or we, have
inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending against such claims, a court
could order us to pay substantial damages and prohibit us from using
technologies or

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features that
are essential to our products and processes, if such technologies or features
are found to incorporate or be derived from the trade secrets or other
proprietary information of the former employers. In addition, we may lose
valuable intellectual property rights or personnel. A loss of key research
personnel or their work product could hamper or prevent our ability to
commercialize certain potential products, which could severely harm our
business. Even if we are successful in defending against these claims, such
litigation could result in substantial costs and be a distraction to
management.

Risks Related to
Regulatory Compliance

If we fail to comply
with the extensive government regulations relating to our business, we may be
subject to fines, injunctions and other penalties that could harm our business.

Our
medical device products and operations are subject to extensive regulation by
the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and
various other federal, state and foreign governmental authorities. Government
regulations and foreign requirements specific to medical devices are wide
ranging and govern, among other things:

| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | design,
 development and manufacturing;                                                                                                                                
| |   |                                                                                                                                                                        
| |  | testing,
 labeling and storage;                                                                                                                                        
| |   |                                                                                                                                                                        
| |  | clinical
 trials;                                                                                                                                                      
| |   |                                                                                                                                                                        
| |  | product
 safety;                                                                                                                                                       
| |   |                                                                                                                                                                        
| |  | marketing,
 sales and distribution;                                                                                                                                    
| |   |                                                                                                                                                                        
| |  | premarket
 clearance or approval;                                                                                                                                      
| |   |                                                                                                                                                                        
| |  | record
 keeping procedures;                                                                                                                                            
| |   |                                                                                                                                                                        
| |  | advertising
 and promotions;                                                                                                                                           
| |   |                                                                                                                                                                        
| |  | recalls and
 field corrective actions;                                                                                                                                 
| |   |                                                                                                                                                                        
| |  | post-market
 surveillance, including reporting of deaths or serious injuries and
 malfunctions that, if they were to recur, could lead to death or serious
 injury; and
| |   |                                                                                                                                                                        
| |  | product
 export.                                                                                                                                                       

In
the U.S., before we can market a new medical device, or a new use of, or claim
for, or significant modification to, an existing product, we must first receive
either premarket clearance under Section 510(k) of the FDCA, or approval of a
PMA from the FDA, unless an exemption applies. In the 510(k) clearance process,
the FDA must determine that a proposed device is substantially equivalent to
a device legally on the market, known as a predicate device, with respect to
intended use, technology and safety and effectiveness, in order to clear the
proposed device for marketing. Clinical data is sometimes required to support
substantial equivalence. The PMA approval pathway requires an applicant to
demonstrate the safety and effectiveness of the device based, in part, on data
obtained in clinical trials. Both of these processes can be expensive and
lengthy and entail significant user fees, unless exempt. The FDAs 510(k)
clearance process usually takes from three to 12 months, but it can last
longer. The process of obtaining PMA approval is much more costly and uncertain
than the 510(k) clearance process. It generally takes from one to three years,
or even longer, from the time the PMA application is submitted to the FDA until
an approval is obtained. There is no assurance that we will be able to obtain
FDA clearance or approval for any of our new products on a timely basis, or at
all.

The
FDA, state, foreign and other governmental authorities have broad enforcement powers.
Our failure to comply with applicable regulatory requirements could result in
governmental agencies or a court taking action, including any of the following
sanctions:

| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | untitled
 letters, warning letters, fines, injunctions, consent decrees and civil
 penalties;              
| |   |                                                                                                            
| |  | customer
 notifications or repair, replacement, refunds, detention or seizure of our
 products;            
| |   |                                                                                                            
| |  | operating
 restrictions or partial suspension or total shutdown of production;                             
| |   |                                                                                                            
| |  | refusing or
 delaying requests for 510(k) clearance or PMA approvals of new products or
 modified products;

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| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | withdrawing
 510(k) clearances or PMA approvals that have already been granted;
| |   |                                                                                
| |  | refusing to
 provide Certificates for Foreign Government (CFG);                
| |   |                                                                                
| |  | refusing to
 grant export approval for our products; or                        
| |   |                                                                                
| |  | pursuing
 criminal prosecution.                                                

Failure to obtain
regulatory approval in additional foreign jurisdictions will prevent us from
expanding the commercialization of our products abroad.

To
be able to market and sell our products in other countries, we must obtain
regulatory approvals and comply with the regulations of those countries. These
regulations, including the requirements for approvals and the time required for
regulatory review, vary from country to country. Obtaining and maintaining
foreign regulatory approvals are expensive, and we cannot be certain that we
will receive regulatory approvals in any foreign country in which we plan to
market our products. If we fail to obtain or maintain regulatory approval in
any foreign country in which we plan to market our products, our ability to
generate revenue will be harmed.

As
we modify existing products or develop new products in the future, including
new instruments, we apply for permission to affix the CE mark to such products.
In addition, we will be subject to annual regulatory audits in order to
maintain those CE mark permissions. We do not know whether we will be able to
obtain permission to affix the CE mark for new or modified products or that we
will continue to meet the quality and safety standards required to maintain the
permissions we have already received. If we are unable to maintain permission
to affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union or other areas of the world
that require CE approval of medical devices.

If we or our
third-party manufacturers or suppliers fail to comply with the FDAs Quality
System Regulation, our manufacturing operations could be interrupted and our
product sales and operating results could suffer.

We
and some of our third-party manufacturers and suppliers are required to comply
with the FDAs Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our products. We
and our manufacturers and suppliers are also subject to the regulations of
foreign jurisdictions regarding the manufacturing process if we market our
products overseas. The FDA enforces the QSR through periodic and unannounced
inspections of manufacturing facilities. In January 2009, the FDA conducted its
first audit of our facility, during which we received certain inspectional
observations. We are addressing the observations and intend to submit responses
to them to the FDA on a voluntary basis. The FDA inspection report relating to
the audit has not yet been issued. To date, our facilities have not been
inspected by any other regulatory authorities. In November 2008, BSi, an
independent global certification body, conducted an annual assessment of our
quality management system, which concluded that our quality management system
complied with the requirements of ISO13485:2003 in all material respects. We
are scheduled to have a BSi audit in mid-March 2009 in order to complete the
necessary quality system certification needed for achieving the CE marking
required for class III devices, such as orthopedic implants. In connection with
achieving CE marking, which is a legal requirement for medical devices intended
for sale in Europe, we have also submitted design dossiers to BSi for the
purpose of review and approval. BSi will continue to conduct annual audits to
assess our compliance with BSi certification standards. We anticipate that we
and certain of our third-party manufacturers and suppliers will be subject to
inspections by regulatory authorities in the future. If our facilities or those
of our manufacturers or suppliers fail to take satisfactory corrective action
in response to an adverse QSR inspection, the FDA could take enforcement
action, including any of the following sanctions:

| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | untitled
 letters, warning letters, fines, injunctions, consent decrees and civil penalties;               
| |   |                                                                                                            
| |  | customer
 notifications or repair, replacement, refunds, detention or seizure of our
 products;            
| |   |                                                                                                            
| |  | operating
 restrictions or partial suspension or total shutdown of production;                             
| |   |                                                                                                            
| |  | refusing or
 delaying requests for 510(k) clearance or PMA approvals of new products or
 modified products;
| |   |                                                                                                            
| |  | withdrawing
 510(k) clearances or PMA approvals that have already been granted;                            

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| |   |                                                               
| | - | --------------------------------------------------------------
| |  | refusing to
 provide Certificates for Foreign Government (CFG)
| |   |                                                               
| |  | refusing to
 grant export approval for our products; or       
| |   |                                                               
| |  | pursuing
 criminal prosecution.                               

Any
of these sanctions could impair our ability to produce our products in a
cost-effective and timely manner in order to meet our customers demands. We
may also be required to bear other costs or take other actions that may have a
negative impact on our future sales and our ability to generate profits.

Our products may in
the future be subject to product actions that could harm our reputation,
business operations and financial results.

Manufacturers
may, on their own initiative, initiate a product action, including a
non-reportable market withdrawal or a reportable product recall, for the
purpose of correcting a material deficiency, improving device performance, or
other reasons. Additionally, the FDA and similar foreign governmental
authorities have the authority to require an involuntary recall of
commercialized products in the event of material deficiencies or defects in
design, or manufacture or labeling. In the case of the FDA, the authority to
require a recall must be based on an FDA finding that there is a reasonable
probability that the device would cause serious injury or death. In addition,
foreign governmental bodies have the authority to require the recall of our
products in the event of material deficiencies or defects in design or
manufacture. Product actions involving any of our products would divert
managerial and financial resources and have an adverse effect on our financial
condition and results of operations. As of March 2, 2009, we initiated five
product actions, one of which was reportable to the FDA pursuant to the
correction / removal guidelines. The reportable recall was associated with two
tracking array instruments for the patient specific visualization of the TGS
and was communicated to the FDA in May 2008. We internally closed the action in
October 2008 and requested that the FDA do the same. Pursuant to an FDA
facility audit in January 2009, we reopened the recall to include subsequent
activities and internally reclosed the recall in January 2009, again requesting
that the FDA do the same. The recall was posted by the FDA on its website in
February 2009.

Companies
are required to maintain certain records of product actions, even if they are
not reportable to the FDA. If we determine that certain of those product
actions do not require notification of the FDA, the FDA may disagree with our
determinations and require us to report those actions as recalls. A future
recall announcement could harm our reputation with customers and negatively
affect our sales. In addition, the FDA could take enforcement action, including
any of the following sanctions for failing to report the recalls when they were
conducted:

| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | untitled
 letters, warning letters, fines, injunctions, consent decrees and civil
 penalties;                  
| |   |                                                                                                                
| |  | customer
 notifications or repair, replacement, refunds, recall, detention or seizure
 of our products;        
| |   |                                                                                                                
| |  | operating
 restrictions or partial suspension or total shutdown of production;                                 
| |   |                                                                                                                
| |  | refusing or
 delaying our requests for 510(k) clearance or PMA approvals of new products
 or modified products;
| |   |                                                                                                                
| |  | withdrawing
 510(k) clearances or PMA approvals that have already been granted;                                
| |   |                                                                                                                
| |  | refusing to
 provide Certificates for Foreign Government (CFG);                                                
| |   |                                                                                                                
| |  | refusing to
 grant export approval for our products; or                                                        
| |   |                                                                                                                
| |  | pursuing
 criminal prosecution.                                                                                

Any
of these sanctions could impair our ability to produce our products in a
cost-effective and timely manner in order to meet our customers demands. We
may also be required to bear other costs or take other actions that may have a
negative impact on our future sales and our ability to generate profits.

If our products, or
malfunction of our products, cause or contribute to a death or a serious
injury, we will be subject to medical device reporting regulations, which can
result in voluntary corrective actions or agency enforcement actions.

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Under
the FDA MDR regulations, we are required to report to the FDA any incident in
which our product may have caused or contributed to a death or serious injury
or in which our product malfunctioned and, if the malfunction were to recur,
would likely cause or contribute to death or serious injury. In addition, all
manufacturers placing medical devices in European Union markets are legally
bound to report any serious or potentially serious incidents involving devices
they produce or sell to the relevant authority in whose jurisdiction the
incident occurred. As of March 2, 2009, pursuant to the FDA guidelines on MDRs,
we filed sixteen incident reports with the FDA. In the future, we may
experience additional events that may require reporting to the FDA pursuant to
the MDR regulations. Any adverse event involving our products could result in
future voluntary corrective actions, such as product actions or customer
notifications, or agency action, such as inspection, mandatory recall or other
enforcement action. As of March 2, 2009, we initiated five product actions, one
of which was reportable to the FDA pursuant to the correction / removal
guidelines. Any corrective action, whether voluntary or involuntary, as well as
defending ourselves in a lawsuit, will require the dedication of our time and
capital, distract management from operating our business, and may harm our
reputation and financial results. In addition, failure to report such adverse
events to appropriate government authorities on a timely basis, or at all,
could result in an enforcement action against us.

We may be subject to
fines, penalties or injunctions if we are determined to be promoting the use of
our products for unapproved or off-label uses, resulting in damage to our
reputation and business.

Our
promotional materials and training methods must comply with FDA and other
applicable laws and regulations, including the prohibition of the promotion of
a medical device for a use that has not been cleared or approved by FDA. Use of
a device outside its cleared or approved indications is known as off-label
use. We believe that the specific surgical procedures for which our products
are marketed fall within the scope of the surgical applications that have been
cleared by the FDA. However, physicians may use our products off-label, as the
FDA does not restrict or regulate a physicians choice of treatment within the
practice of medicine. However, if the FDA determines that our promotional
materials or training constitutes promotion of an off-label use, it could
request that we modify our training or promotional materials or subject us to
regulatory or enforcement actions, including the issuance of an untitled
letter, a warning letter, injunction, seizure, civil fine and criminal
penalties. It is also possible that other federal, state or foreign enforcement
authorities might take action if they consider our promotional or training
materials to constitute promotion of an unapproved use, which could result in
significant fines or penalties under other statutory authorities, such as laws
prohibiting false claims for reimbursement. In that event, our reputation could
be damaged and adoption of the products would be impaired. Although our policy
is to refrain from statements that could be considered off-label promotion of
our products, the FDA or another regulatory agency could disagree and conclude
that we have engaged in off-label promotion. In addition, the off-label use of
our products may increase the risk of injury to patients, and, in turn, the
risk of product liability claims. Product liability claims are expensive to
defend and could divert our managements attention and result in substantial
damage awards against us.

Federal regulatory
reforms may adversely affect our ability to sell our products profitably.

From
time to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted or FDA
regulations, guidance or interpretations changed, and what the impact of such
changes, if any, may be.

Without
limiting the generality of the foregoing, Congress has recently enacted, and
the President has signed into law, the Food and Drug Administration Amendments
Act of 2007, or the Amendments. This law requires, among other things, that the
FDA propose, and ultimately implement, regulations that will require
manufacturers to label medical devices with unique identifiers unless a waiver
is received from the FDA. Once implemented, compliance with those regulations
may require us to take additional steps in the manufacture of our products and
labeling. These steps may require additional resources and could be costly. In
addition, the

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Amendments
will require us to, among other things, pay annual establishment registration
fees to the FDA for each of our FDA registered facilities.

We may be subject,
directly or indirectly, to federal and state healthcare fraud and abuse laws
and regulations and could face substantial penalties if we are unable to fully
comply with such laws.

While
we do not control referrals of healthcare services or bill directly to
Medicare, Medicaid or other third-party payors, many healthcare laws and
regulations apply to our business. For example, we could be subject to
healthcare fraud and abuse and patient privacy regulation and enforcement by
both the federal government and the states in which we conduct our business.
The healthcare laws and regulations that may affect our ability to operate
include:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the federal healthcare programs Anti-Kickback Statute, which
 prohibits, among other things, persons or entities from soliciting,
 receiving, offering or providing remuneration, directly or indirectly, in
 return for or to induce either the referral of an individual for, or the
 purchase order or recommendation of, any item or service for which payment
 may be made under a federal healthcare program such as the Medicare and
 Medicaid programs;                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | federal false claims laws which prohibit, among other things,
 individuals or entities from knowingly presenting, or causing to be
 presented, claims for payment from Medicare, Medicaid, or other third-party
 payors that are false or fraudulent, or are for items or services not
 provided as claimed, and which may apply to entities like us to the extent
 that our interactions with customers may affect their billing or coding
 practices;                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | the federal Health Insurance Portability and Accountability Act of
 1996, or HIPAA, which established new federal crimes for knowingly and
 willfully executing a scheme to defraud any healthcare benefit program or
 making false statements in connection with the delivery of or payment for
 healthcare benefits, items or services, as well as leading to regulations
 imposing certain requirements relating to the privacy, security and
 transmission of individually identifiable health information; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | state law equivalents of each of the above federal laws, such as
 anti-kickback and false claims laws which may apply to items or services
 reimbursed by any third-party payor, including commercial insurers, and state
 laws governing the privacy of health information in certain circumstances,
 many of which differ from each other in significant ways and often are not
 preempted by HIPAA, thus complicating compliance efforts.                                                                       

The
orthopedic medical device industry is, and in recent years has been, under
heightened scrutiny as the subject of government investigations and enforcement
actions involving manufacturers who allegedly offered unlawful inducements to
potential or existing customers in an attempt to procure their business,
specifically including arrangements with physician consultants. We have
arrangements with surgeons, hospitals and other entities which may be subject
to scrutiny. For example, we have consulting agreements with orthopedic
surgeons using or considering the use of our present and future robotic arm
systems and MAKOplasty implants and disposable products, for assistance in
product development, and professional training and education, among other
things. Payment for these consulting services has been or may be in the future
in the form of stock options or royalties rather than per hour or per diem
amounts that would require verification of time worked, or could also take the
form of part time employment. In addition, we sometimes allow hospitals a
period of evaluation of our products at no charge. If our operations are found
to be in violation of any of the laws described above or any other governmental
regulations that apply to us, we may be subject to penalties, including civil
and criminal penalties, damages, fines, exclusion from the Medicare and
Medicaid programs and the curtailment or restructuring of our operations. Any
penalties, damages, fines, exclusions, curtailment or restructuring of our
operations could adversely affect our ability to operate our business and our
financial results. The risk of our being found in violation of these laws is
increased by the fact that many of these laws are broad and their provisions
are open to a variety of interpretations. Any action against us for violation
of these laws, even if we successfully defend against it, could cause us to
incur significant legal expenses and divert our managements attention from the
operation of our business. If the surgeons or other providers or entities with
whom we do

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business are
found to be non-compliant with applicable laws, they may be subject to
sanctions, which could also have a negative impact on our business.

Risks Related to
Ownership of our Common Stock

We expect that the
price of our common stock will fluctuate substantially, which could lead to
losses for stockholders, possibly resulting in class action securities
litigation.

Prior
to our IPO in February 2008, there was no public market for shares of our
common stock. Since the IPO, our common stock has experienced significant price
fluctuations and low trading volumes. An active public trading market may not
develop or, if developed, may not be sustained. The market price for our common
stock will be affected by a number of factors, including:

| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the receipt,
 denial or timing of regulatory clearances or approvals of our products or
 competing products;                                                                            
| |   |                                                                                                                                                                                         
| |  | changes in
 policies affecting third-party coverage and reimbursement in the U.S. and
 other countries;                                                                                 
| |   |                                                                                                                                                                                         
| |  | ability of
 our products, if they receive regulatory clearance, to achieve market
 success;                                                                                             
| |   |                                                                                                                                                                                         
| |  | the
 performance of third-party contract manufacturers and component suppliers;                                                                                                         
| |   |                                                                                                                                                                                         
| |  | our ability
 to develop sales and marketing capabilities;                                                                                                                               
| |   |                                                                                                                                                                                         
| |  | our ability
 to manufacture our products to commercial standards;                                                                                                                       
| |   |                                                                                                                                                                                         
| |  | the success
 of any collaborations we may undertake with other companies;                                                                                                               
| |   |                                                                                                                                                                                         
| |  | our ability
 to develop, introduce and market new or enhanced versions of our products on
 a timely basis;                                                                              
| |   |                                                                                                                                                                                         
| |  | actual or
 anticipated variations in our results of operations or those of our
 competitors;                                                                                            
| |   |                                                                                                                                                                                         
| |  | announcements
 of new products, technological innovations or product advancements by us or
 our competitors;                                                                            
| |   |                                                                                                                                                                                         
| |  | developments
 with respect to patents and other intellectual property rights;                                                                                                           
| |   |                                                                                                                                                                                         
| |  | sales of
 common stock or other securities by us or our stockholders in the future;                                                                                                     
| |   |                                                                                                                                                                                         
| |  | additions or
 departures of key scientific or management personnel;                                                                                                                     
| |   |                                                                                                                                                                                         
| |  | disputes or
 other developments relating to proprietary rights, including patents,
 litigation matters and our ability to obtain patent protection for our
 technologies;               
| |   |                                                                                                                                                                                         
| |  | trading
 volume of our common stock;                                                                                                                                                    
| |   |                                                                                                                                                                                         
| |  | changes in
 earnings estimates or recommendations by securities analysts, failure to obtain
 analyst coverage of our common stock or our failure to achieve analyst
 earnings estimates;
| |   |                                                                                                                                                                                         
| |  | developments
 in our industry; and                                                                                                                                                      
| |   |                                                                                                                                                                                         
| |  | general
 market conditions and other factors unrelated to our operating performance or
 the operating performance of our competitors.                                                   

In
addition, the stock prices of many companies in the medical device industry
have experienced wide fluctuations that have often been unrelated to the
operating performance of these companies. We expect our stock price to be
similarly volatile. These broad market fluctuations may continue and could harm
our stock price. Following periods of volatility in the market price of a
companys securities, stockholders have often instituted class action
securities litigation against those companies. Class action securities
litigation, if instituted against us, could result in substantial costs and a
diversion of our management resources, which could significantly harm our
business.

Securities analysts
may issue negative reports or cease to cover our common stock, which may have a
negative impact on the market price of our common stock.

The
trading market for our common stock may be affected in part by the research and
reports that industry or financial analysts publish about us or our business.
As a result of our smaller market capitalization, it may be difficult for our
company to continue to attract securities analysts that will cover our common
stock. If one or more of
the analysts who elects to cover us downgrades our stock, our stock price would
likely decline rapidly. If

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one or more of these analysts ceases coverage of our
company, we could lose visibility in the market, which in turn could cause our
stock price to decline. This could have a negative effect on the market price
of our stock.

Our principal
stockholders, directors and executive officers own a large percentage of our
voting stock, which allows them to exercise significant influence over matters
subject to stockholder approval.

As
of March 2, 2009, our executive officers, directors and principal stockholders
holding 5% or more of our outstanding common stock beneficially owned or
controlled approximately 60.1% of the outstanding shares of our common stock.
Accordingly, these executive officers, directors and principal stockholders,
acting as a group, have substantial influence over the outcome of corporate
actions requiring stockholder approval, including the election of directors,
any merger, consolidation or sale of all or substantially all of our assets or
any other significant corporate transaction. These stockholders may also delay
or prevent a change of control or otherwise discourage a potential acquirer
from attempting to obtain control of us, even if such a change of control would
benefit our other stockholders. This significant concentration of stock
ownership may adversely affect the trading price of our common stock due to
investors perception that conflicts of interest may exist or arise.

We have not paid
dividends in the past and do not expect to pay dividends in the foreseeable
future.

We
have never declared or paid cash dividends on our capital stock. We currently
intend to retain all future earnings for the operation and expansion of our
business and, therefore, do not anticipate declaring or paying cash dividends
in the foreseeable future. The payment of dividends will be at the discretion
of our board of directors and will depend on our results of operations, capital
requirements, financial condition, prospects, contractual arrangements, any
limitations on payments of dividends present in any of our future debt
agreements, and other factors our board of directors may deem relevant. If we
do not pay dividends, a return on your investment will only occur if our stock
price appreciates.

Sales of a
substantial number of shares of our common stock in the public market, or the
perception that they may occur, may depress the market price of our common
stock.

We
cannot predict the effect, if any, that market sales of shares of our common
stock or the availability of such shares upon the effectiveness of a
registration statement, or upon the expiration of any holding period under Rule
144, will have on the market price prevailing from time to time. The
effectiveness of our registration statement on Form S-1, declared effective by
the SEC on December 9, 2008, under which we registered for resale approximately
13.0 million shares of our common stock sold in the October 2008 equity
financing, issued upon conversion of our previously outstanding convertible
preferred stock, or that may be acquired upon exercise of warrants sold in the
equity financing, and the expiration of the holding periods under Rule 144
create a circumstance commonly referred to as an overhang and could depress
the market price of our common stock. The existence of an overhang, whether or
not sales have occurred or are occurring, also could make more difficult our
ability to raise additional financing through the sale of equity or equity
related securities in the future at a time and price that we deem reasonable or
appropriate.

Approximately
 all of the 25.0 million shares of our common stock currently
outstanding are freely tradable
without registration pursuant to Rule 144 under the Securities Act or have been
registered for resale with the U.S. Securities and Exchange Commission, or SEC,
and the sale of such shares could have a negative impact on the price of our
common stock.

Our recent capital
raising transaction, and our need to raise additional capital in the future,
could have a negative effect on your investment.

We
may need to raise additional capital in the future in order for us to continue
to operate our business. In October 2008, we raised approximately $40.2 million
in gross proceeds through the sale in a private placement of our common stock
and warrants to purchase shares of our common stock. Under the terms of the
private placement, we granted the investors in the private placement additional
warrants to purchase 322,581 shares of our common stock at an exercise price of
$6.20 per share in exchange for a right to require, under certain

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circumstances,
the investors to purchase an additional $20,000,000 in shares of our common stock
and warrants to purchase shares of our common stock. We may, in the future,
also raise additional capital through the public or private sale of common
stock or securities convertible into or exercisable for our common stock. Such
sales could be consummated at a significant discount to the trading price of
our stock.

If
we sell additional shares of our common stock, such sales will further dilute
the percentage of our equity that our existing stockholders own. In addition,
private placement financings could involve the issuance of securities at a
price per share that represents a discount to the trading prices of our common
stock. Further, debt and equity financings may involve the issuance of dilutive
warrants. No assurance can be given that previous or future investors, finders
or placement agents will not claim that they are entitled to additional
anti-dilution adjustments or dispute the calculation of any such adjustments.
Any such claim or dispute could require us to incur material costs and expenses
regardless of the resolution and, if resolved unfavorably to us, to effect
dilutive securities issuances or adjustment to previously issued securities.

The
private placement in October 2008 included, and future financings may include, provisions
requiring us to make additional payments to the investors if we fail to obtain
or maintain the effectiveness of SEC registration statements by specified dates
or take other specified action. Our ability to meet these requirements may
depend on actions by regulators and other third parties, over which we will
have no control. These provisions may require us to make payments or could lead
to costly and disruptive disputes. In addition, these provisions could require
us to record additional non-cash expenses. Such provisions in future financings
could also require us to issue additional dilutive securities, although the
provisions of the private placement in October 2008 include no such
requirement.

We are obligated to
develop and maintain proper and effective internal control over financial
reporting, and we may not complete our analysis of our internal control over
financial reporting in a timely manner or this internal control may not be
determined to be effective, which may adversely affect investor confidence in
our company and, as a result, the value of our common stock.

We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or
Section 404, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting beginning in
this annual report on Form 10-K. This assessment concluded that no material
weaknesses in our internal control over financial reporting have been
identified by our management as of December 31, 2008. If our auditors are
unable to express an opinion on the effectiveness of our internal control over
financial reporting, which, in accordance with SEC rules will be required as of
December 31, 2009, we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have a material adverse
effect on the price of our common stock. Future failure to comply with the
rules might make it more difficult for us to obtain certain types of insurance,
including director and officer liability insurance, and we might be forced to
accept reduced policy limits and coverage and/or incur substantially higher
costs to obtain the same or similar coverage. The impact of these events could
also make it more difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of directors, or as
executive officers.

In
addition, as a public company, we incur significant additional legal,
accounting and other expenses that we did not incur as a private company, and
our administrative staff is required to perform additional tasks. For example,
we have increased the size of our accounting staff, updated our accounting
systems and procedures, revised the roles and duties of our board committees,
retained a transfer agent, adopted an insider trading policy and disclosure
controls and procedures and are bearing all of the internal and external costs
of preparing and distributing periodic public reports in compliance with our
obligations under the securities laws. Changing laws, regulations and standards
relating to corporate governance and public disclosure, and related regulations
implemented by the SEC and The NASDAQ Global Market, are creating uncertainty
for public companies, increasing legal and financial compliance costs and
making some activities more time consuming. These laws, regulations and
standards are subject to varying interpretations, in many cases due to their
lack of specificity, and, as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies. We
are investing resources to comply with evolving laws, regulations and
standards, and this investment will result in increased general and
administrative expenses and a diversion of managements time and

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attention from
revenue generating activities to compliance activities. If our efforts to
comply with new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings against us and
our business may be harmed.

|                 |                          
|---------------- | -------------------------
|ITEM 1B.         | UNRESOLVED STAFF COMMENTS
|                
|Not
 applicable.
|                
|ITEM 2.          | PROPERTIES               

We
lease approximately 36,000 square feet of office and warehouse space in
Fort Lauderdale, Florida, which is used as our headquarters and for the
assembly of our products. Our lease expires on July 31, 2011. Thereafter,
we have the right to renew our lease for two three-year terms upon prior
written notice and the fulfillment of certain conditions. We believe that this
facility will be adequate to meet our needs through at least 2010, but
additional space may be required in the future to accommodate our anticipated
growth.

|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

On
November 26, 2007, we received a letter from counsel to SensAble
Technologies, Inc. alleging that we infringed certain of its patents and
breached a confidentiality provision in the Sublicense Agreement, dated May 24,
2006, pursuant to which we license certain patents from SensAble. In the
letter, SensAble alleged, among other things, that we exceeded the scope of our
licensed field of computer assisted surgery by using the technology for, among
other things, pre-operative planning and post-operative follow-up. SensAble
also alleged that we infringed one or more claims in five U.S. patents
that are not among the patents licensed to us pursuant to the Sublicense
Agreement.

We
have investigated SensAbles allegations, and, based on the opinion of counsel,
we believe that if SensAble initiates a lawsuit against us, a court should find
that our TGS does not infringe any of the SensAble patents identified in the
November 26, 2007 letter. We have communicated our belief to SensAble.
SensAble has not commenced any legal action against us, but may do so in the
future. The letter from counsel to SensAble stated that unless we, among other
things, cease and desist from alleged infringement of its patents or pay additional
licensing fees, including a proposed licensing fee of $30 million for
additional patents not included in the Sublicense Agreement, SensAble intends
to bring a lawsuit against us. We intend to vigorously defend ourselves against
these allegations in the event of a lawsuit. There have been no new material
developments with respect to this matter since the second quarter of 2008. We
cannot predict the outcome of this matter at this time.

|        |                                                     
|------- | ----------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
 HOLDERS
|        |                                                     
|None   

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PART II

|        |                                                                                                              
|------- | -------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY,
 RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our
common stock began trading on The NASDAQ Global Market under the symbol MAKO
on February 14, 2008. Prior to that date, there was no identifiable public
market for our common stock.

The
following table sets forth the range of the high and low intraday prices for
the period of April 1, 2008 through December 31, 2008 as reported by The NASDAQ
Global Market.

|                               |  |   |      |  |     |      |  | 
|------------------------------ |  | - | ---- |  | --- | ---- |  | 
|Year Ended December 31, 2008   |  |   | High |  | Low |     
|                               |  |   |      |  |     |      | 
|October 1 
 December 31, 2008 |  | $ | 9.75 |  | $   | 5.23 | 
|July 1 
 September 30, 2008   |  | $ | 8.45 |  | $   | 6.29 | 
|April 1 
 June 30, 2008       |  | $ | 9.48 |  | $   | 7.00 | 

Our
stock transfer records indicated that as of March 2, 2009, there were
approximately 64 holders of record of our common stock.

Dividend Policy

We
have never declared dividends or paid any cash dividends on our capital stock.
We currently intend to retain all available funds and any future earnings to
support our operations and finance the growth and development of our business.
We do not intend to pay cash dividends on our common stock for the foreseeable
future. Any future determination related to dividend policy will be made at the
discretion of our board of directors.

Reverse Stock Split and Conversion of
Preferred Stock

In
connection with our IPO, we effected a one-for-3.03 reverse split of our common
stock on February 8, 2008. On the effective date of the reverse split, each
3.03 shares of issued and outstanding common stock were combined into one share
of common stock. In accordance with the terms of each series of preferred
stock, all outstanding shares of our preferred stock were converted to common
stock immediately prior to the closing of our IPO on February 20, 2008 at a
conversion price that was adjusted to reflect the reverse split.

All
amounts related to our issued and outstanding common stock and options to
purchase common stock in this report and in the accompanying financial
statements and the related notes have been retroactively adjusted to give
effect to the one-for-3.03 reverse split.

Equity Compensation Plan Information

The
following table summarizes our equity compensation plans as of December 31,
2008 (in thousands, except per share data).

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|                                                                |  |                                                                                                     |     |                                                                     |  |                                                                                                                                                                      |      |  |  |       |     | 
|--------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  |  | ----- | --- | 
|Plan Category                                                   |  | (a)
 Number of Shares of 
 Our Common Stock 
 to be Issued Upon 
 Exercise of 
 Outstanding Options |     | (b)
 Weighted-
 Average 
 Exercise Price of 
 Outstanding 
 Options |  | (c)
 Number of Shares of Our
 Common Stock Remaining 
 Available for Future Issuance
 Under Equity Compensation
 Plans (Exceeding Securities 
 Reflected in Col (a)) |     
|Equity compensation plans approved by our
 security holders     |  | 2,193                                                                                               | (1) |                                                                     |  | $                                                                                                                                                                    | 5.56 |  |  | 1,358 | (2) | 
|Equity compensation plans not approved by
 our security holders |  | None                                                                                                |     |                                                                     |  |                                                                                                                                                                      | None |  |  | None  |     | 
|TOTAL                                                           |  | 2,193                                                                                               | (1) |                                                                     |  | $                                                                                                                                                                    | 5.56 |  |  | 1,358 | (2) | 

(1) This
number includes shares of our common stock to be issued upon exercise of
outstanding options under our 2004 Stock Incentive Plan and our 2008 Omnibus
Incentive Plan. No further awards will be made under the 2004 Stock Incentive
Plan.

(2) This
number includes 625,000 shares available for future issuance under our 2008
Employee Stock Purchase Plan, the initial purchase period of which commenced on
October 1, 2008 and ended on December 31, 2008, the initial purchase date. Of
the 625,000 shares of our common stock that were reserved for issuance under
the plan, 17,784 shares were purchased at a purchase price of $5.68 per share
upon the expiration of the initial purchase period on December 31, 2008.

Unregistered Sales of Equity Securities

Other
than the sale of equity securities in connection with the equity financing
discussed in Item 8, Financial Statements, Notes 1 and 5 to Financial
Statements, the details of which were disclosed in a current report on Form 8-K
filed with the SEC on October 30, 2008, we did not make any unregistered sales
of our equity securities in 2008.

Uses of Proceeds from Sale of Registered
Securities

Our
IPO was effected through a registration statement on Form S-1 (File
No. 333-146162) that was declared effective by the SEC on February 14,
2008. We registered 5,100,000 shares of our common stock with an aggregate
offering price of $51 million, all of which shares we sold. The offering was
completed after the sale of all 5,100,000 shares. J.P. Morgan
Securities Inc. and Morgan Stanley & Co. Incorporated were the joint
book-running managing underwriters of our IPO and Cowen and Company and
Wachovia Securities acted as co-managers. The underwriters elected not to
exercise their over-allotment option. We paid $3.6 million of the proceeds in
underwriting discounts and commissions, and we incurred an additional
$3.6 million of expenses, of which approximately $2.7 million was incurred
during the year ended December 31, 2007 and $908,000 was incurred
subsequent to the 2007 year end. None of the expenses were paid, directly or
indirectly, to directors, officers or persons owning 10% or more of our common
stock, or to our affiliates.

We
have used and currently intend to use the proceeds from the IPO, net of the
payment of the $4.0 million IBM deferred license fee and the underwriting
discounts and commissions, as set forth below. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
Item 8, Financial Statements, Note 7 to Financial Statements, of this report
for more information regarding payment of the IBM license fee.

| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Approximately
 $14.0 - $20.0 million for the expansion of sales and marketing
 activities;                                   
| |   |                                                                                                                              
| |  | Approximately
 $12.0 - $18.0 million for continuation of research and development
 activities; and                           
| |   |                                                                                                                              
| |  | The
 remainder to fund working capital and other general corporate purposes,
 including the expenses associated with the IPO.

Management
has broad discretion over the uses of the proceeds of the IPO. In addition to
payment of the IBM deferred license fee during the first quarter of 2008, as of
December 31, 2008, we had used approximately $7.5 million of the IPO proceeds
for sales and marketing activities, $8.5 million for research and development

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activities and
$7.0 million for working capital and general corporate purposes. The remaining
$16.8 million of the IPO proceeds is invested in highly liquid, short-term,
interest-bearing funds.

Issuer Purchases of Equity Securities

We
did not repurchase any shares of our capital stock during the fourth quarter of
2008.

Performance Graph 1

The
following graph shows a comparison of cumulative total return for our common
stock, the NASDAQ Composite Index, and the NASDAQ Medical Equipment Index. Such
returns are based on historical results and are not intended to suggest future
performance. The graph assumes $100 was invested in our common stock and in
each of the indexes on February 14, 2008, the date our common stock commenced
trading on The NASDAQ Global Market.

Data
for the NASDAQ Composite Index and the NASDAQ Medical Equipment Index assume
reinvestment of dividends. The Company has never paid dividends on its common
stock and has no present plans to do so.

The
stockholder return shown on the graph below is not necessarily indicative of
future performance, and we do not make or endorse any predictions as to future
stockholder returns.

COMPARISON OF 10-MONTH CUMULATIVE TOTAL
RETURN
Among
MAKO Surgical Corp.
The NASDAQ Composite Index
and
The NASDAQ Medical Equipment Index

(LINE GRAPH)

|                          |  |             |   |          |  |         |  |              |       |             |  |  |   |       |  |  |  |   |       |  |  |  |   |       |  | 
|------------------------- |  | ----------- | - | -------- |  | ------- |  | ------------ | ----- | ----------- |  |  | - | ----- |  |  |  | - | ----- |  |  |  | - | ----- |  | 
|                          |  | 2008        |  
|                          |  | February 14 |   | March 31 |  | June 30 |  | September 30 |       | December 31 | 
|MAKO
 Surgical Corp.      |  |             | $ | 100.00   |  |         |  | $            | 97.93 |             |  |  | $ | 79.74 |  |  |  | $ | 78.98 |  |  |  | $ | 72.77 |  | 
|NASDAQ
 Composite         |  |             | $ | 100.00   |  |         |  | $            | 97.71 |             |  |  | $ | 98.30 |  |  |  | $ | 89.27 |  |  |  | $ | 67.61 |  | 
|NASDAQ Medical
 Equipment |  |             | $ | 100.00   |  |         |  | $            | 93.88 |             |  |  | $ | 90.11 |  |  |  | $ | 87.19 |  |  |  | $ | 60.05 |  | 

|                                                                                                                                                                                                                                                                                                                                                                                | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                                                                                                                                                                                                                                | 
|                                                                                                                                                                                                                                                                                                                                                                               
|1 This section is not soliciting
material, is not deemed filed with the SEC and is not to be incorporated by
reference into any of our filings of under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made
before or after the date hereof and irrespective of any general incorporation
language in any such filing.

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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

The
following table sets forth certain financial data with respect to our business.
The information set forth below is not necessarily indicative of results of
future operations and should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 and the financial statements and related notes thereto in Item 8.

We
were formed in November 2004 to be the successor of the computer assisted
surgery, or CAS, and haptic robotics business of Z-Kat, Inc., a company founded
in 1997 to develop CAS technologies. Z-Kat is considered to be our
Predecessor. The statements of operations data for the period from January 1,
2004 through November 11, 2004 refer to the Predecessor and have been
derived from the audited statement of operations of the Predecessor.

The
balance sheet and statements of operations data subsequent to November 11,
2004 refer to operations subsequent to our formation, and these periods are
referred to as the Company.

Because
the Predecessor financial statements were significantly different from our financial statements, the Predecessor and our financial statements are not
comparable and, accordingly, the accompanying selected financial data below are
presented separated by a vertical black line.

|                                                                               |  |                          |         |                                         |   |         |                                         |      |         |   |   |        |   |   |        |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------------ | ------- | --------------------------------------- | - | ------- | --------------------------------------- | ---- | ------- | - | - | ------ | - | - | ------ | - |  | - | ------ | -
|                                                                               |  | The
 Company             |         |                                         |   |         | Predecessor                             |     
|                                                                               |  |                          |         | Nov. 12,
 2004
 Through
 Dec. 31,
 2004 |   |         | Jan.
 1,
 2004
 Through
 Nov. 11,
 2004 |     
|                                                                               |  | Years Ended December 31, |         |                                         |   |        
|(in thousands, except per share data)                                          |  | 2008                     |         | 2007                                    |   | 2006    |                                         | 2005 |         |   |   |       
|Statements of Operations Data                                                  |  |                          |         |                                         |   |         |                                         |      |         |   |   |        |   |   |        |   |  |   |        |  
|Revenue                                                                        |  | $                        | 2,944   |                                         | $ | 771     |                                         | $    | 63      |   | $ | ―      |   | $ | ―      |   |  | $ | 1,648  |  
|Cost of revenue                                                                |  |                          | 3,446   |                                         |   | 583     |                                         |      | 77      |   |   | ―      |   |   | ―      |   |  |   | 1,085  |  
|Gross profit (loss)                                                            |  |                          | (502    | )                                       |   | 188     |                                         |      | (14     | ) |   | ―      |   |   | ―      |   |  |   | 563    |  
|Operating costs and expenses:                                                  |  |                          |         |                                         |   |         |                                         |      |         |   |   |        |   |   |        |   |  |   |        |  
|Selling, general and administrative                                            |  |                          | 23,158  |                                         |   | 12,042  |                                         |      | 5,023   |   |   | 2,736  |   |   | 630    |   |  |   | 2,642  |  
|Research and development                                                       |  |                          | 12,472  |                                         |   | 8,269   |                                         |      | 5,192   |   |   | 2,582  |   |   | 403    |   |  |   | 1,454  |  
|Depreciation and amortization                                                  |  |                          | 1,828   |                                         |   | 1,297   |                                         |      | 644     |   |   | 98     |   |   | 6      |   |  |   | 430    |  
|Total operating costs and expenses                                             |  |                          | 37,458  |                                         |   | 21,608  |                                         |      | 10,859  |   |   | 5,416  |   |   | 1,039  |   |  |   | 4,526  |  
|Loss from operations                                                           |  |                          | (37,960 | )                                       |   | (21,420 | )                                       |      | (10,873 | ) |   | (5,416 | ) |   | (1,039 | ) |  |   | (3,963 | )
|Interest and other income                                                      |  |                          | 988     |                                         |   | 1,073   |                                         |      | 476     |   |   | 269    |   |   | ―      |   |  |   | 1      |  
|Interest and other expenses                                                    |  |                          | (110    | )                                       |   | (311    | )                                       |      | (220    | ) |   | ―      |   |   | ―      |   |  |   | (480   | )
|Net loss                                                                       |  | $                        | (37,082 | )                                       | $ | (20,658 | )                                       | $    | (10,617 | ) | $ | (5,147 | ) | $ | (1,039 | ) |  | $ | (4,442 | )
|Net loss attributable to common stockholders                                   |  | $                        | (37,647 | )                                       | $ | (24,318 | )                                       | $    | (12,493 | ) | $ | (6,288 | ) | $ | (1,061 | ) |  | $ | (5,222 | )
|Net loss per share: Basic and diluted attributable to common
 stockholders (1) |  | $                        | (2.20   | )                                       | $ | (14.75  | )                                       | $    | (8.03   | ) | $ | (4.18  | ) | $ | (2.39  | ) |  | $ | (0.63  | )
|Weighted average common shares outstanding: Basic and diluted
(2)              |  |                          | 17,096  |                                         |   | 1,649   |                                         |      | 1,555   |   |   | 1,503  |   |   | 444    |   |  |   | 8,235  |  

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|                                       |  |                     |         |      |   |         |   |      |         |      |   |        |   |   |        |  
|-------------------------------------- |  | ------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------ | - | - | ------ | -
|                                       |  | The
 Company        |        
|                                      
|(in thousands)                         |  | As
 of December 31, |        
|                                      
|                                       |  | 2008                |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|Balance Sheet Data:                    |  |                     |         |      |   |         |   |      |         |      |   |        |   |   |        |  
|Cash and cash equivalents              |  | $                   | 62,547  |      | $ | 9,615   |   | $    | 2,108   |      | $ | 6,145  |   | $ | 1,959  |  
|Short-term investments                 |  |                     | 1,077   |      |   | 3,084   |   |      | 1,400   |      |   | 10,097 |   |   | ―      |  
|Total assets                           |  |                     | 86,533  |      |   | 29,190  |   |      | 12,754  |      |   | 17,435 |   |   | 2,404  |  
|Long-term debt, net of current portion |  |                     | ―       |      |   | ―       |   |      | ―       |      |   | ―      |   |   | ―      |  
|Redeemable convertible preferred stock |  |                     | ―       |      |   | 59,487  |   |      | 25,911  |      |   | 24,034 |   |   | 2,866  |  
|Accumulated deficit                    |  |                     | (80,172 | )    |   | (42,843 | ) |      | (19,366 | )    |   | (6,820 | ) |   | (1,039 | )
|Total stockholders equity (deficit)   |  |                     | 66,514  |      |   | (42,837 | ) |      | (19,437 | )    |   | (6,888 | ) |   | (700   | )

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The basic and diluted net
 loss per share computation excludes potential common shares upon exercise of
 options and warrants to purchase common stock and unvested restricted stock
 as their effect would be anti-dilutive. See Item 8, Financial Statements and
 Supplementary Data, Note 2 to the Financial Statements, for a detailed
 explanation of the determination of shares used in computing basic and diluted
 loss per share.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | Weighted average common
 shares outstanding and per share amounts have been retroactively adjusted to
 give effect to a one-for-3.03 reverse stock split of our common stock
 effected on February 8, 2008.                                                                                                                                                                                                                                

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

In
this report, MAKO Surgical, MAKO, the Company, we, us and
our refer
to MAKO Surgical Corp.

The
following discussion and analysis of our financial condition and results of
operations should be read together with our financial statements and related
notes appearing elsewhere in this report. This report contains forward-looking
statements regarding, among other things, statements related to expectations,
goals, plans, objectives and future events. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Reform Act of 1995. In some cases, you can identify
forward-looking statements by the following words: may, will, could,
would, should, expect, intend, plan, anticipate,
believe,
estimate, predict, project, potential, continue,
ongoing or the
negative of these terms or other comparable terminology, although not all
forward-looking statements contain these words. Examples of such statements
include, but are not limited to, statements about the timing and number of
planned new product introductions, market acceptance of the MAKOplasty®
solution, the future availability of implants and components of our Tactile
Guidance System, or TGS, and our RIO Robotic Arm Interactive Orthopedic, or
RIO, system, from third-party suppliers, including single source suppliers, the
anticipated adequacy of our capital resources to meet the needs of our
business, our ability to sustain, and our goals for, sales and earnings growth
and our success in achieving timely approval or clearance of products with
domestic and foreign regulatory entities. These statements are based on the
current estimates and assumptions of our management as of the date of this
report and are subject to risks, uncertainties, changes in circumstances,
assumptions and other factors that may cause actual results to differ
materially from those indicated by forward-looking statements, many of which
are beyond our ability to control or predict. Such factors, among others, may
have a material adverse effect on our business, financial condition and results
of operations and may include the potentially significant impact of a further
economic downturn on the ability of our customers to secure adequate funding to
buy our products or cause our customers to delay a purchasing decision, changes
in competitive conditions and prices in our markets, unanticipated issues
relating to product launches, particularly the launch of our RIO system,
decreases in sales of our principal product lines, increases in expenditures
related to increased governmental regulation of our business, unanticipated
issues in securing regulatory clearance or approvals for upgrades or changes to
our products, loss of key management and other personnel or inability to
attract such management and other personnel and unanticipated intellectual
property expenditures required to develop and market our products. These and
other risks are described in greater detail under Item 1A, Risk Factors, of
this report. Given these uncertainties, you should not place undue reliance on
these forward-looking statements. We do not undertake any obligation to release
any revisions to these forward-looking statements publicly to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.

We
have received or applied for trademark registration of and/or claim trademark
rights for the following marks: MAKOplasty®, RIO, RESTORIS®, Tactile
Guidance System and TGS, as well as in the MAKO Surgical Corp. MAKO logo,
whether standing alone or in connection with the words MAKO Surgical Corp.

Overview

We
are an emerging medical device company that markets our advanced robotic arm
solution and orthopedic implants for minimally invasive orthopedic knee
procedures. We offer MAKOplasty, an innovative, restorative surgical solution
that enables orthopedic surgeons to consistently, reproducibly and precisely
treat patient specific, early to mid-stage osteoarthritic knee disease. In
February 2008, our common stock began trading on The NASDAQ Global Market under
the ticker symbol MAKO and we closed our initial public offering, or IPO.

Through
December 31, 2008, our recognized revenue was primarily generated from the sale
of our implants and disposable products utilized in knee MAKOplasty procedures.
In accordance with our revenue recognition

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policy as
described in the Critical Accounting Policies and Significant Judgments and
Estimates section below, upon customer acceptance of the sale of our Tactile
Guidance System, or TGS, we deferred recognition of the related revenue and
direct cost of revenue until delivery of the RIO Robotic Arm Interactive
Orthopedic system, or RIO system, which is version 2.0 of the TGS and which we
plan to commercially launch in the first half of 2009. We have incurred net
losses in each year since our inception and, as of December 31, 2008, we had an
accumulated deficit of $80.2 million. We expect to continue to incur
significant operating losses as we increase our sales and marketing activities
and otherwise continue to invest capital in the development and expansion of
our products and our business generally. We also expect that our general and
administrative expenses will increase due to additional operational and
regulatory costs and burdens associated with the rapid expansion of our
operations and operating as a public company and due to the rapid expansion of
our operations.

Recent
key milestones and goals in the development of our business during the year
ended December 31, 2008 include the following:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
 In January 2008, we obtained 510(k) marketing clearance from the U.S. Food
 and Drug Administration, or FDA, for version 1.2 of our TGS and commercially
 launched version 1.2 of our TGS in the first quarter of 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 
 In February 2008, we completed the IPO of our common stock, issuing a total
 of 5.1 million shares at an issue price of $10.00 per share, resulting in net
 proceeds to the Company of approximately $43.8 million, after underwriting
 discounts and commissions of $3.6 million and expenses of approximately $3.6
 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 
 In the second quarter of 2008, we filed a 510(k) submission with the FDA for
 version 2.0 of our TGS. We also received  510(k) clearance for our
 unicompartmental implant and  510(k) clearance for our patellofemoral
 implant, components of our intended multicompartmental implant strategy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 
 In the third quarter of 2008, we finalized development of a TGS software
 application to enable our MAKO-branded RESTORIS unicompartmental knee implant
 system, or RESTORIS, combining our tibial inlay and tibial onlay system. We
 commercially introduced this software, version 1.3 of our TGS, and RESTORIS
 in the third quarter of 2008. TGS version 1.3 did not require  510(k)
 clearance as the indications for use of RESTORIS with the TGS were included
 and cleared as part of version 1.2 of our TGS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 
 In October 2008, we entered into a Securities Purchase Agreement for an
 equity financing of up to $60 million, with initial gross proceeds of
 approximately $40.2 million, which we closed on October 31, 2008, and
 conditional access to an additional $20 million, referred to as the Second
 Closing. In connection with the financing, we issued and sold to the participating
 investors 6,451,613 shares of our common stock at a purchase price of $6.20
 per share and issued at the purchase price of $0.125 per warrant to the
 participating investors warrants to purchase 1,290,323 shares of common stock at an
 exercise price of $7.44 per share. In addition,  at a purchase
 price of $0.125 per warrant, we issued warrants to purchase 322,581 shares of common stock at an
 exercise price of $6.20 per share to investors that agreed to purchase an
 additional $20 million of common stock in the Second Closing. The financing
 resulted in net proceeds of approximately $39.7 million, after expenses of
 approximately $469,000.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 
 In the fourth quarter of 2008, we received 510(k) clearances from the FDA to
 market both our RIO system and our MAKO-branded RESTORIS MCK
 multicompartmental knee implant system, or RESTORIS MCK, both of which we
 intend to commercially launch in the first half of 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

We
believe that the key to growing our business is expanding the application of
MAKOplasty to multicompartmental resurfacing procedures by offering implants
that address mid-stage, multicompartmental knee degeneration. To successfully
commercialize our products and grow our business, we must gain market
acceptance for MAKOplasty.

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Factors Which May Influence Future Results of
Operations

The
following is a description of factors which may influence our future results of
operations, including significant trends and challenges that we believe are
important to an understanding of our business and results of operations.

Revenue

Revenue
is generated from unit sales of our robotic arm systems, including installation
services, training and upgrades and enhancements, from sales of implants and
disposable products and sales of extended warranty service contracts. To date, we
have generated revenue primarily from the sale of implants and disposable
products utilized in knee MAKOplasty procedures. Recognition of revenue
associated with the sale of TGS units in our statements of operations is
dependent upon satisfying all related revenue recognition criteria, which
include the delivery of the RIO system, which we anticipate to commercially
launch in the first half of 2009. Revenue related to future RIO system sales
will be recognized upon delivery and will not be deferred, as described in the
Critical Accounting Policies and Significant Judgments and Estimates section
below.

Future
revenue from sales of our products is difficult to predict and we expect that
it will only modestly reduce our continuing and increasing losses resulting
from selling, general and administrative expenses, research and development and
other activities for at least the next two or three years. Our future revenue
may also be adversely affected by the current general economic downturn and the
resulting tightening of the credit markets, which may cause our customers to
experience difficulties in securing adequate funding to buy our products or
cause purchasing decisions to be delayed.

The
generation of recurring revenue through sales of our knee implants, disposable
products and service contracts are an important part of the MAKOplasty business
model. We anticipate that recurring revenue will constitute an increasing
percentage of our total revenue as we leverage each new installation of our RIO
system to generate recurring sales of implants and disposable products and as
we expand our implant product offering.

Cost of Revenue

Cost
of revenue primarily consists of the direct costs associated with the
manufacture of robotic arm systems, implants and disposable products for which
revenue has been recognized or deferred in accordance with our revenue
recognition policy. Costs associated with providing services are expensed as
incurred. Cost of revenue also includes the cost associated with establishing
at the time of installation an accrual for the TGS standard one-year warranty
liability, royalties related to the sale of products covered by licensing
arrangements and write-offs of obsolete or impaired inventory.

The
cost of revenue associated with the sale of TGS units is deferred until the
recognition of the related revenue. In addition, we expect that deferred costs
of revenue associated with the sale of TGS units will be higher during the
deferral period due to the additional costs associated with providing hardware
enhancements and upgrades through and including the delivery of the RIO system
as described in the Critical Accounting Policies and Significant Judgments and
Estimates section below.

In
the third quarter of 2008, we commercially introduced RESTORIS, our
MAKO-branded unicompartmental implant system. We also developed the RIO system,
which we anticipate commercially launching in the first half of 2009. In
conjunction with the anticipated launch of RESTORIS and the RIO system, we
discontinued portions of our current implant line and the manufacturing of our
TGS. As a result, we wrote off inventory totaling approximately $619,000 during
the year ended December 31, 2008 relating to these product transitions. Depending
on demand for our products and technical obsolescence, additional future
write-offs of our inventory may occur.

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Selling, General and
Administrative Expenses

Our
selling, general and administrative expenses consist primarily of compensation,
including stock-based compensation and benefits, for sales, marketing,
operations, regulatory, quality, executive, finance, legal and administrative
personnel. Other significant expenses include costs associated with sales and
marketing activities, marketing and advertising materials, insurance,
professional fees for legal and accounting services, consulting fees, travel
expenses, facility and related operating costs, and recruiting expenses. Our
selling, general and administrative expenses are expected to continue to
increase due to the cost associated with the commercial launch of our RIO
system and RESTORIS MCK, an increased number of employees necessary to support
our continued growth in operations, and the additional operational and
regulatory burdens and costs associated with operating as a publicly traded
company. In addition, we are currently taking preliminary steps to investigate
the feasibility of establishing clinical sites outside the United States, which
may also increase our selling, general and administrative expenses, and we
expect to incur additional costs associated with securing and protecting our
intellectual property rights as necessary to support our future product
offerings.

Research and
Development Expenses

Costs
related to research, design and development of products are charged to research
and development expense as incurred. These costs include direct salary and
benefit costs for research and development employees including stock-based
compensation, cost for materials used in research and development activities
and costs for outside services. Research and development expenses are expected
to continue to increase as we research potential future products.

Critical Accounting Policies and Significant
Judgments and Estimates

Our
managements discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements as well as the reported expenses during the reporting periods. The
accounting estimates that require our most significant, difficult and
subjective judgments include revenue recognition, allowance for doubtful
accounts, inventory valuation, valuation allowance for deferred tax assets and liabilities,
impairment of long-lived assets and the determination of stock-based
compensation. We evaluate our estimates and judgments on an ongoing basis.
Actual results may differ materially from these estimates under different
assumptions or conditions.

While
our significant accounting policies are more fully described in Item 8,
Financial Statements and Supplementary Data, Note 2 to the Financial
Statements, we believe that the following accounting policies and estimates are
most critical to a full understanding and evaluation of our reported financial
results.

Revenue Recognition

Revenue
is generated from unit sales of our robotic arm systems, including installation
services, training, upgrades and enhancements, from sales of implants and disposable
products and sales of extended warranty service contracts. Because our TGS, as well
as upgrades and enhancements to the TGS, include software that is essential to
the functionality of the product, we account for the sale of the TGS pursuant
to Statement of Position No. 97-2, Software Revenue Recognition
(SOP 97-2), as amended.

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We
recognize product revenue for sales of the TGS when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, collection of the
fee is probable and delivery has occurred as prescribed by SOP 97-2. For
all sales, we use either a signed agreement or a binding purchase order as
evidence of an arrangement. Sales arrangements for sales of our TGS units
through December 31, 2008, required us to provide upgrades and enhancements to
the TGS unit through and including delivery of the RIO system.

For
arrangements with multiple elements, we allocate arrangement consideration to
TGS units, upgrades, enhancements and services based upon vendor specific
objective evidence of fair value, or VSOE, of the respective elements. As of
December 31, 2008, VSOE did not yet exist for all the undelivered elements.
Accordingly, all revenue and direct cost of revenue associated with the sale of
the TGS are deferred until the earlier of (1) delivery of all elements or
(2) establishment of VSOE for all undelivered elements.

Sales
of TGS units are recorded as deferred revenue. The direct cost of revenue
associated with the sale of TGS units is currently recorded as deferred cost of
revenue. Costs associated with establishing an accrual for the TGS standard
one-year warranty liability and royalties related to the sale of TGS units
covered by licensing arrangements are expensed as incurred and included in Cost
of Revenue, Systems, in the statements of operations. We anticipate ultimately
recognizing a positive margin on the sales to date of TGS units, including the
satisfaction of the remaining upgrades through the final deliverable of the RIO
system, which we intend to commercially launch in the first half of 2009. As
recognition of the deferred revenue and deferred cost of revenue balances
associated with sales of TGS units are anticipated to occur within 12 months of
December 31, 2008, we classified these balances as current liabilities and
current assets, respectively, as of December 31, 2008.

Subsequent
to December 31, 2008, we no longer manufacture TGS units, sales arrangements
for which required us to provide upgrades and enhancements, through and
including the delivery of the RIO system. Sales arrangements for future sales
of RIO systems do not require us to provide upgrades and enhancements. Under
such RIO system sales arrangements, we have determined that upon installation of
the RIO system at a customers facility and training of surgeons and surgical
staff, there will be few or no remaining significant undelivered elements and,
as a result, revenues related to future RIO system sales will be recognized and
will not be deferred.

Product
revenue from the sale of implants and disposable products, or Products, is
recognized as revenue in accordance with Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectability is reasonably assured. The Products are a
separate unit of accounting from the robotic arm system as (1) they have
value to the customer on a standalone basis, (2) objective and reliable
evidence of the fair value of the item exists and (3) no right of return
exists once the Products are implanted or consumed. Accordingly, as our
implants and disposable products are sold on a procedural basis, the revenue
and costs associated with the sale of Products are recognized at the time of
sale (i.e., at the time of the completion of the related surgical procedure).

Service
revenue, which is included in other revenue, consists of extended warranty
services on the TGS hardware, is deferred and recognized ratably over the
service period until no further obligation exists. Costs associated with
providing services are expensed when incurred.

Allowance for Doubtful Accounts

The
allowance for doubtful accounts is based on our assessment of the collectability
of customer accounts. We regularly review the allowance by considering factors
such as historical experience, credit quality, the age of the accounts
receivable balances and current economic conditions that may affect a
customers ability to pay. We have not experienced any collectability issues to
date and have no allowance, provision for doubtful accounts receivable or
write-offs to date in the accompanying financial statements included in Item 8,
Financial Statements and Supplementary Data, of this report.

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Inventory Valuation

Inventory
is stated at the lower of cost or market value on a first-in, first-out basis.
Inventory costs include direct materials and direct labor. We review our
inventory periodically to determine net realizable value and consider product
upgrades in our periodic review of realizability. We write down inventory, if
required, based on forecasted demand and technological obsolescence. These
factors are impacted by market and economic conditions, technology changes and
new product introductions and require estimates that may include uncertain
elements.

Valuation Allowance
for Deferred Income Tax Assets and Liabilities

Deferred
income tax assets and liabilities are determined based on the differences
between financial reporting and income tax bases of assets and liabilities,
using income tax rates expected to be in effect when the differences will
reverse. Valuation allowances are established when necessary to reduce the net
deferred tax assets to the amounts expected to be realized. A full valuation
allowance has been recorded in the accompanying financial statements relating
to all our net deferred income tax assets.

Impairment of
Long-Lived Assets

We
evaluate our long-lived assets for indicators of impairment by comparison of
the carrying amounts to future net undiscounted cash flows expected to be
generated by such assets when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Should an impairment exist,
the impairment loss would be measured based on the excess carrying value of the
asset over the assets fair value or discounted estimate of future cash flows.
We have not recorded any such impairment losses to date.

Determination of
Stock-Based Compensation

Effective
January 1, 2006, we adopted the fair value provisions of Statement of
Financial Accounting Standards No. 123 Revised, Share-Based Payment, or SFAS 123(R). SFAS 123(R)
requires the recognition of compensation expense, using a fair-value based
method, for costs related to all share-based payments including stock options.
SFAS 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model.

We
adopted SFAS 123(R) using the modified retrospective transition method,
which requires the restatement of financial statements for prior periods

We
account for stock-based compensation arrangements with non-employees in
accordance with the Emerging Issues Task Force (EITF) Abstract
No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services.We record the expense of such services based on the
estimated fair value of the equity instrument using the Black-Scholes-Merton
pricing model. The value of the equity instrument is charged to expense over
the term of the service agreement.

We
selected the Black-Scholes-Merton pricing model to determine the fair value of
stock options. The determination of the fair value of stock-based payment
awards on the date of grant using an option-pricing model will be affected by
our stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rates, forfeitures and expected
dividends.

During
the year ended December 31, 2008, we recognized $3.3 million of stock-based compensation expense including stock option grants, restricted stock
grants, and compensation expense relating to shares issued under our employee
share purchase plan, leaving $6.6 million to be recognized in future periods.
Total unrecognized compensation cost will be adjusted for future changes in
estimated forfeitures, and is expected to be recognized over a remaining
weighted average period of 1.99 years as of December 31, 2008.

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Results of Operations

Year
Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Revenue.
Revenue was $2.9 million for the year ended December 31, 2008, compared to
$771,000 for the year ended December 31, 2007, and was primarily generated
from the sale of implants and disposable products utilized in knee MAKOplasty
procedures. The increase in revenue of $2.2 million was primarily due to an
increase in MAKOplasty procedures performed during the year ended December 31,
2008 as compared with the year ended December 31, 2007. There were 601 procedures
performed during the year ended December 31, 2008 compared to 168 procedures
performed during the year ended December 31, 2007. Total revenue was also
positively impacted by a $434,000 increase in other revenue, which consists
primarily of service revenue on extended warranty services and net royalty
revenues. The deferred revenue balance was $11.6 million and $3.4
million as of December 31, 2008 and 2007, respectively. The increase
in the deferred revenue balance is primarily related to twelve unit sales of
our TGS. We expect our revenue to increase as (1) the number of knee MAKOplasty
procedures performed increases in future periods, (2) revenues related to
future unit sales of our RIO system are recognized in our statement of
operations, and (3) deferred revenue related to previous unit sales of our TGS
is recognized in our statement of operations upon satisfaction of all the
related revenue recognition criteria, including the delivery of the RIO system,
which we anticipate will be commercially launched in the first half of 2009.

Cost of
Revenue. Cost of revenue was $3.4 million for the year
ended December 31, 2008, compared to $583,000 for the year ended
December 31, 2007. The increase in cost of revenue of $2.9 million was
primarily due to an increase in knee MAKOplasty procedures performed, a
$730,000 write-off of obsolete and discontinued inventory in 2008 primarily due
to the launch of our RESTORIS implant system in 2008 and the anticipated launch
of our RIO system in the first half 2009, the establishment of warranty
accruals on sales of twelve TGS units and royalties incurred on sales of twelve
TGS units during the year ended December 31, 2008. The deferred cost of
revenue balance was $3.6 million and $926,000 as of December 31, 2008 and
2007, respectively. The increase in the deferred cost of revenue balance is
primarily related to twelve unit sales of our TGS. We expect our cost of
revenue to increase as (1) the number of knee MAKOplasty procedures performed
increases in future periods, (2) cost of revenue related to future unit sales
of our RIO system are recognized in our statement of operations, and (3)
deferred cost of revenue related to previous unit sales of our TGS are
recognized in our statement of operations upon satisfaction of all the related
revenue recognition criteria, including the delivery of the RIO system, which
we anticipate will be commercially launched in the first half of 2009.

Selling, General and Administrative.
Selling, general and administrative expense was $23.2 million for the year
ended December 31, 2008, compared to $12.0 million for the year ended
December 31, 2007. The increase of $11.1 million, or 92%, was
primarily due to an increase in sales, marketing and operations costs associated
with the production and commercialization of our products, an increase in
general and administrative costs to support growth and costs associated with
operating as a public company. Selling, general and administrative expense for
the year ended December 31, 2008 also included $1.9 million of stock-based
compensation expense compared with $1.0 million for the year ended December 31,
2007. The increase in stock-based compensation expense was primarily due to
additional option and restricted stock grants made in 2008 and 2007.We expect our selling, general and
administrative expense to continue to increase substantially due to our planned
increase in the number of employees necessary to support the sales and
marketing efforts associated with the growing commercialization of MAKOplasty,
the anticipated commercial launch of the RIO system in the first half of 2009,
the anticipated commercial launch of RESTORIS MCK in the first half of 2009,
continued growth in operations and the costs associated with operating as a
public company.

Research and
Development. Research and development expense was
$12.5 million for the year ended December 31, 2008, compared to
$8.3 million for the year ended December 31, 2007. The increase of
$4.2 million, or 51%, was primarily due to an increase in research and
development activities associated with on-going development of our RIO system
and the RESTORIS and RESTORIS MCK implant systems. Research and development
expense for the year ended December 31, 2008 also included $1.4 million of
stock-based compensation expense compared with $184,000 for the year ended
December 31, 2007. The increase in stock-

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based
compensation expense is due primarily to a nonrecurring charge of $949,000
associated with the vesting in full, upon completion of our IPO in February
2008, of restricted common stock issued pursuant to business consultation
agreements entered into in December 2004. We expect our research and
development expense to continue to increase as we continue to expand our
research and development activities, including the support of existing products
and the research of potential future products.

Depreciation
and Amortization. Depreciation and amortization
expense was $1.8 million for the year ended December 31, 2008, compared to
$1.3 million for the year ended December 31, 2007. The increase of
$531,000, or 41%, was primarily due to an increase in depreciation of property
and equipment as a result of purchases made during 2008 and 2007.

Interest and
Other Income. Interest income was $988,000 for the
year ended December 31, 2008, compared to $1.1 million for the year ended
December 31, 2007. The decrease of $85,000, or 8%, was primarily due to
lower yields realized on our cash, cash equivalents and investments for the
year ended December 31, 2008 compared with the year ended December 31, 2007.

Interest and
Other Expense. Interest and other expense was $110,000
for the year ended December 31, 2008, compared to $311,000 for the year
ended December 31, 2007. Through February 2008, interest and other expense
consisted primarily of the amortization of the $590,000 discount associated
with a deferred payment to IBM of $4.0 million which had been fully amortized
and paid upon the completion of our IPO in February 2008. Interest and other
expense also included a $63,000 write down of our variable auction rate
securities in the first quarter of 2008 as discussed below under the caption,
Liquidity and Capital Resources.

Income Taxes.
No income taxes were recognized for the years ended December 31, 2008 and
2007, due to net operating losses in each period. In addition, no current or
deferred income taxes were recorded for the years ended December 31, 2008
and 2007, as all income tax benefits were fully offset by a valuation allowance
against our net deferred income tax assets.

Year Ended
December 31, 2007 Compared to the Year Ended December 31, 2006

Revenue.
Revenue was $771,000 for the year ended December 31, 2007, compared to $63,000
for the year ended December 31, 2006 and was primarily generated from the
sale of implants and disposable products utilized in knee MAKOplasty
procedures. The increase in revenue of $708,000 was primarily due to an
increase in MAKOplasty procedures performed during the year ended
December 31, 2007. The first MAKOplasty procedure was performed in June
2006, and 168 procedures were performed during the year ended December 31,
2007 compared to 13 procedures performed during the year ended
December 31, 2006. The increase was also attributable to a $53,000
increase in other revenue, which consists primarily of service revenue on
extended warranty services. The deferred revenue balance was $3.4 million and
$700,000 as of December 31, 2007 and 2006, respectively. The increase
in the deferred revenue balance was primarily related to four unit sales of our
TGS.

Cost of
Revenue. Cost of revenue was $583,000 for the year
ended December 31, 2007, compared to $77,000 for the year ended
December 31, 2006. The increase in cost of revenue of $506,000 was
primarily due to an increase in knee MAKOplasty procedures performed, the
establishment of warranty accruals on sales of TGS units and royalties incurred
on sales of TGS units during the year ended December 31, 2007. The
increase was also attributable to a $25,000 increase in other cost of revenue,
which consists primarily of cost of service revenue on extended warranty
services. The deferred cost of revenue balance was $926,000 and $210,000 as of
December 31, 2007 and 2006, respectively. The increase in the deferred cost
of revenue balance was primarily related to four unit sales of our TGS.

Selling,
General and Administrative. Selling, general and
administrative expense was $12.0 million for the year ended
December 31, 2007, compared to $5.0 million for the year ended December 31,
2006. The increase of $7 million, or 140%, was primarily due to an
increase in compensation expense associated with increased selling, marketing
and administrative personnel, including a $929,000 increase in stock-based
compensation due

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primarily to
the modification of the CEOs restricted stock described in Item 8, Financial
Statements and Supplementary Data, Note 5 to the Financial Statements, and
additional option and restricted stock grants made in 2007, an increase in
general overhead costs due to an increase in marketing activities and increases
in facility and travel related costs, a $427,000 increase in recruiting and
relocation costs, and a $770,000 increase in professional fees.

Research and
Development. Research and development expense was
$8.3 million for the year ended December 31, 2007, compared to
$5.2 million for the year ended December 31, 2006. The increase of
$3.1 million, or 59%, was primarily due to an increase in compensation
expense associated with the increased number of research and development
employees and a $1.0 million increase in material, supply and other expenses
used in research and development activities. The increases in compensation
expense and material and supplies were related to the development of versions
1.2 and 2.0 of our TGS and our unicompartmental and multicompartmental implant
systems.

Depreciation
and Amortization. Depreciation and amortization
expense was $1.3 million for the year ended December 31, 2007, compared to
$644,000 for the year ended December 31, 2006. The increase of $653,000,
or 101%, was primarily due to a $478,000 increase in depreciation of property
and equipment due to purchases made in 2007, and a $175,000 increase in
amortization associated with the license of $5.4 million of intangible
assets from a license agreement entered into in March 2006 with IBM. The
license agreement with IBM provides a license in our field of business to IBMs
patent portfolio and is stated net of a discount estimated at $590,000 less
accumulated amortization of the discount to date associated with a deferred
payment of $4.0 million paid upon completion of our IPO in February 2008.

Interest and
Other Income. Interest income was $1.1 million for the
year ended December 31, 2007, compared to $476,000 for the year ended
December 31, 2006. The increase of $597,000, or 125%, was primarily due to
an increase in short-term investments from the net proceeds of the issuance of
our Series C redeemable convertible preferred stock in February 2007.

Interest and
Other Expense. Interest and other expense was $311,000
for the year ended December 31, 2007, compared to $220,000 for the year
ended December 31, 2006. The increase of $91,000, or 41%, was primarily
due to the amortization of the $590,000 discount on the intangible assets
licensed under the IBM license agreement entered into in March 2006 as
discussed above.

Income Taxes.
No income taxes were recognized for the years ended December 31, 2007 and
2006, due to net operating losses in each period. In addition, no current or
deferred income taxes were recorded for the years ended December 31, 2007
and 2006, as all income tax benefits were fully offset by a valuation allowance
against our net deferred income tax assets.

Liquidity and Capital Resources

(in thousands)

|                                                         |  |      |         |        |   |         |   |        |         |      |   |        |   |   |        |  
|-------------------------------------------------------- |  | ---- | ------- | ------ | - | ------- | - | ------ | ------- | ---- | - | ------ | - | - | ------ | -
|                                                         |  | 2008 |         | Change |   | 2007    |   | Change |         | 2006 |  
|Cash and cash equivalents                                |  | $    | 62,547  |        | $ | 52,932  |   |        | 9,615   |      | $ | 7,507  |   | $ | 2,108  |  
|Short-term investments                                   |  |      | 1,077   |        |   | (2,007  | ) |        | 3,084   |      |   | 1,684  |   |   | 1,400  |  
|Total cash, cash equivalents, and short-term
investments |  | $    | 63,624  |        | $ | 50,925  |   | $      | 12,699  |      | $ | 9,191  |   | $ | 3,508  |  
|Cash used in operating activities                        |  | $    | (28,821 | )      | $ | (13,441 | ) | $      | (15,380 | )    | $ | (5,964 | ) | $ | (9,416 | )
|Cash provided by (used in) investing activities          |  |      | (4,548  | )      |   | (637    | ) |        | (3,911  | )    |   | (9,298 | ) |   | 5,387  |  
|Cash provided by (used in) financing activities          |  |      | 86,301  |        |   | 59,503  |   |        | 26,798  |      |   | 26,806 |   |   | (8     | )
|Net increase (decrease) in cash and cash
equivalents     |  | $    | 52,932  |        | $ | 45,425  |   | $      | 7,507   |      | $ | 11,544 |   | $ | (4,037 | )

We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of December 31, 2008, we
had an accumulated deficit of $80.2 million and financed our operations
principally through the sale of Series A, B and C redeemable convertible
preferred stock

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and the
completion of the IPO of our common stock. Through December 31, 2008, we
received net proceeds of $52.2 million from the issuance of Series A,
B and C redeemable convertible preferred stock. In February 2008, we completed
our IPO of common stock, issuing a total of 5.1 million shares at an issue
price of $10.00 per share, resulting in net proceeds to us, after expenses, of
approximately $43.8 million. In conjunction with the closing of the IPO, in
February 2008, all of our outstanding Series A, Series B and
Series C redeemable convertible preferred stock was converted into
10,945,080 shares of common stock, as adjusted for a one-for-3.03 reverse
stock split, which has been retroactively reflected in the accompanying
financial statements.

In
October 2008, we entered into a Securities Purchase Agreement for an equity
financing of up to $60 million, with initial gross proceeds of approximately
$40.2 million, which we closed on October 31, 2008, and conditional access to
an additional $20 million, referred to as the Second Closing. In connection
with the financing, we issued and sold to the participating investors 6,451,613
shares of our common stock at a purchase price of $6.20 per share and issued
warrants to the participating investors to purchase 1,290,323 shares of common
stock at a purchase price of $0.125 per warrant and an exercise price of $7.44
per share. In addition, we issued warrants to purchase 322,581 shares of common
stock at a purchase price of $0.125 per warrant and an exercise price of $6.20
per share to investors that agreed purchase an additional $20 million of common
stock in the Second Closing. The financing resulted in net proceeds of
approximately $39.7 million, after expenses of approximately $469,000.

As
of December 31, 2008, we had approximately $63.6 million in cash, cash
equivalents and short-term investments. Our cash and short-term investment
balances are held in a variety of interest bearing instruments, including
certificates of deposit and variable auction rate securities.

As
of December 31, 2008, we held $1,025,000 par value of variable auction rate
securities issued by two separate funds. In February 2008, the auction rate
securities experienced failed auctions that limited the liquidity of these
securities. Historically, the fair value of auction rate securities
approximated par value due to the frequent resets through the auction rate
process. The uncertainty in the credit markets affected our holdings in auction
rate securities and the liquidity and fair value of these investments were
negatively impacted. An other-than-temporary impairment charge of $63,000 was recorded
in the first quarter of 2008 to reduce the value of our auction rate securities
to the new fair value. Subsequent changes in fair value were included in
accumulated other comprehensive income. As of December 31, 2008, the auction
rate securities were recorded at the estimated fair value of $1,016,000. In
January 2009, all of our outstanding auction rate securities were redeemed at
par value either by the issuing fund or our investment firm. Gains included in
accumulated other comprehensive income as of December 31, 2008 will be
recognized in the statement of operations in the first quarter of 2009.

Although
the Second Closing is conditional upon our achievement of certain business
related milestones before December 31, 2009, we received the necessary
stockholder approval in January 2009 for the potential future issuance of $20
million of common stock along with related warrants as contemplated by the
Securities Purchase Agreement.

Net Cash Used in
Operating Activities

Net
cash used in operating activities primarily reflects the net loss for those
periods, which was reduced in part by depreciation and amortization,
stock-based compensation, inventory write-downs and accrued interest. Net cash
used in operating activities was also affected by changes in operating assets
and liabilities. Included in changes in operating assets for the year ended
December 31, 2008 are approximately $8.2 million of increases to the deferred
revenue balance compared to $2.7 million for the year ended December 31, 2007.
This was partially offset by approximately $2.7 million and $716,000 of
increases to the deferred cost of revenue balance for the year ended December
31, 2008 and 2007, respectively. The increases to the deferred revenue and
deferred cost of revenue balances are primarily related to twelve and four unit
sales of our TGS during the years ended December 31, 2008 and 2007,
respectively. Deferred revenue and deferred cost of revenue related to unit
sales of our TGS will be recognized in the statements of operations upon
satisfaction of all related revenue recognition criteria. Additionally, net
cash used in operating activities in 2008 also increased due to the increase in
inventory necessitated by increased sales of our TGS and sales of implants and
disposable products. The increase in

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inventory is
also attributable to purchases made in 2008 in anticipation of the commercial
launch of the RIO system and the RESTORIS MCK implant system in the first half
of 2009.

Net Cash Provided by
(Used in) Investing Activities

Net
cash used in investing activities for the year ended December 31, 2008 was
primarily attributable to the payment of the $4.0 million deferred license fee
due to IBM upon completion of our IPO, purchases of $2.6 million of property
and equipment as we invested in the infrastructure to support the growth of our
company and $2.0 million for the purchase of investments, which was partially
offset by proceeds of $4.0 million from sales and maturities of investments.
Net cash used in investing activities for the year ended December 31, 2007 was
primarily attributable to the purchases and proceeds of investments as we
managed our investment portfolio to provide interest income and liquidity,
purchases of $1.8 million of property and equipment and $450,000 for the
acquisition of intangible assets.

Net Cash Provided by
Financing Activities

Net
cash provided by our financing activities for the year ended December 31, 2008
was primarily attributable to net proceeds received in connection with our IPO
in February 2008 and to net proceeds received in connection with our equity
financing in October 2008. Net cash provided by our financing activities for
the year ended December 31, 2007, was primarily attributable to the
issuance of Series C redeemable convertible preferred stock in 2007.

Operating Capital
and Capital Expenditure Requirements

To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
commercialize our RIO system and our multicompartmental implant system,
continue research and development of existing and future products and continue
development of the corporate infrastructure required to sell and market our
products and operate as a public company. We also expect to experience
increased cash requirements for inventory and property and equipment in
conjunction with the commercial launch of our RIO system and multicompartmental
implant system.

We
believe our existing cash, cash equivalents and short-term investment balances,
and interest income we earn on these balances will be sufficient to meet our
anticipated cash requirements for at least the next 12 months. To the extent
our available cash, cash equivalents and short-term investment balances are
insufficient to satisfy our operating requirements after that period, we will
need to seek additional sources of funds, including selling additional equity or
debt securities or entering into a credit facility. The sale of additional
equity and debt securities may result in dilution to our current stockholders.
If we raise additional funds through the issuance of debt securities, these
securities may have rights senior to those of our common stock and could
contain covenants that could restrict our operations. We may require additional
capital beyond our currently forecasted amounts. Any such required additional
capital may not be available on reasonable terms, or at all. In connection with
the October 2008 equity financing with initial gross proceeds of approximately
$40.2 million, we obtained a call right, subject to our satisfaction of certain
business milestones, to an additional $20 million from certain investors in
exchange for additional warrants to purchase shares of our common stock. There
is no guarantee that we will satisfy the milestones, or, if we do satisfy them
and choose to exercise our call right, the investors will be able to comply
with their obligations. If we are unable to obtain additional financing, we may
be required to reduce the scope of, delay or eliminate some or all of our
planned research, development and commercialization activities, which could
materially harm our business and results of operations.

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Because
of the numerous risks and uncertainties associated with the development of
medical devices and the current economic situation, we are unable to estimate
the exact amounts of capital outlays and operating expenditures necessary to
complete the development of our products and successfully deliver commercial
products to the market. Our future capital requirements will depend on many
factors, including but not limited to the following:

| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the revenue
 generated by sales of our current and future products;                                                                                                                        
| |   |                                                                                                                                                                                            
| |  | the expenses
 we incur in selling and marketing our products;                                                                                                                              
| |   |                                                                                                                                                                                            
| |  | the costs
 and timing of regulatory clearance or approvals for upgrades or changes to
 our products;                                                                                       
| |   |                                                                                                                                                                                            
| |  | the rate of progress, cost and success of on-going development
 activities;                                                                                                                
| |   |                                                                                                                                                                                            
| |  | the emergence of competing or complementary technological
 developments;                                                                                                                   
| |   |                                                                                                                                                                                            
| |  | the costs of
 filing, prosecuting, defending and enforcing any patent or license claims and
 other intellectual property rights, or participating in litigation related
 activities;       
| |   |                                                                                                                                                                                            
| |  | the
 acquisition of businesses, products and technologies, although we currently
 have no understandings, commitments or agreements relating to any material
 transaction of this type; and
| |   |                                                                                                                                                                                            
| |  | the current
 downturn in general economic conditions and interest rates.                                                                                                                   

Contractual
Obligations

The
following table summarizes our outstanding contractual obligations as of
December 31, 2008 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:

|                                      |  |                       |        |              |   |             |  |           |       |  |   |       |  |   |     | 
|------------------------------------- |  | --------------------- | ------ | ------------ | - | ----------- |  | --------- | ----- |  | - | ----- |  | - | --- | 
|(in thousands)                        |  | Payment Due by Period |       
|                                      |  |                       |        | December 31, |   | After
 2013 | 
|                                      |  | Total                 |        | 2009         |   | 2010-2011   |  | 2012-2013 |       | 
|Contractual
 Obligations              |  |                       |        |              |   |             |  |           |       |  |   |       |  |   |     | 
|Operating lease  real
 estate        |  | $                     | 1,028  |              | $ | 389         |  | $         | 639   |  | $ | ―     |  | $ | ―   | 
|Purchase commitments and
 obligations |  |                       | 7,131  |              |   | 7,131       |  |           | ―     |  |   | ―     |  |   | ―   | 
|Minimum royalty payments 
 licenses  |  |                       | 3,427  |              |   | 660         |  |           | 1,320 |  |   | 1,061 |  |   | 386 | 
|Total                                 |  | $                     | 11,586 |              | $ | 8,180       |  | $         | 1,959 |  | $ | 1,061 |  | $ | 386 | 

Our
commitments for operating leases relate to the lease for our headquarters in
Fort Lauderdale, Florida. Our commitments for purchase commitments and
obligations include an estimate of open purchase orders and contractual
obligations in the ordinary course of business, including commitments with
contract manufacturers and suppliers, for which we have not received the goods
or services. Our commitments for minimum royalty payments relate to payments
under various licenses and sublicenses as discussed in Item 8, Financial
Statements and Supplementary Data, Note 7 to the Financial Statements.

Recent Accounting Pronouncements

Effective
January 1, 2008, we adopted SFAS No. 157, Fair
Value Measurements, or SFAS 157. SFAS 157 defines fair value,
provides a consistent framework for measuring fair value under accounting
principles generally accepted in the United States and expands fair value
financial statement disclosure requirements. SFAS 157 does not require any new
fair value measurements. It only applies to accounting pronouncements that
already require or permit fair value measures, except for standards that relate
to share-based payments.

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SFAS 157s
valuation techniques are based on observable and unobservable inputs. Observable
inputs reflect readily obtainable data from independent sources, while
unobservable inputs reflect our market assumptions. SFAS 157 classifies these
inputs into the following hierarchy:

| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1
 Inputs Quoted prices for identical instruments in active markets.                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                            
| |  | Level 2
 Inputs Quoted prices for similar instruments in active markets; quoted
 prices for identical or similar instruments in markets that are not active;
 and model derived valuations whose inputs are observable or whose significant
 value drivers are observable.
| |   |                                                                                                                                                                                                                                                                            
| |  | Level 3
 Inputs Instruments with primarily unobservable value drivers.                                                                                                                                                                                                    

The
adoption of SFAS 157 did not have a material impact on our results of
operations and financial position.

Effective
January 1, 2008, we adopted SFAS No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115, or SFAS 159, and have not
elected to use fair value measurement on any assets or liabilities under this
statement. We have determined that the adoption of SFAS 159 had no effect on
our results of operations and financial position.

Effective
January 1, 2008, we adopted EITF Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities, or
EITF 07-03. EITF 07-03 requires that nonrefundable advance payments for goods
or services that will be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts should be
recognized as an expense as the related goods are delivered or the related
services are performed. Entities should continue to evaluate whether they
expect the goods to be delivered or services to be rendered. If an entity does
not expect the goods to be delivered or services to be rendered, the
capitalized advance payment should be charged to expense. We have determined
that the adoption of EITF 07-03 had no effect on our results of operations and financial
position.

In
June 2008, the EITF issued Issue No. 07-05, Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock,
or EITF 07-05. EITF 07-05 addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entitys own stock, if an instrument
(or an embedded feature) that has the characteristics of a derivative
instrument is indexed to an entitys own stock, it is still necessary to
evaluate whether it is classified in stockholders equity (or would be
classified in stockholders equity if it were a freestanding instrument). In
addition, for some instruments that are potentially subject to the guidance in
EITF Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, but do not have all the characteristics of a
derivative instrument under paragraphs 6 through 9, it is still necessary to
evaluate whether it is classified in stockholders equity. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
We are currently evaluating the impact of EITF 07-05, but do not expect the
adoption of EITF 07-05 to have a material impact on our results of operations
and financial position.

In
December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 141 (revised 2007), Business
Combinations, or SFAS 141(R). SFAS 141(R) retains the fundamental
requirements of the original pronouncement requiring that the purchase method
be used for all business combinations. SFAS 141(R) defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination, establishes the acquisition date as the date that the acquirer
achieves control and requires the acquirer to recognize the assets acquired,
liabilities assumed and any noncontrolling interest at their fair values as of
the acquisition date. SFAS 141(R) also requires that acquisition related costs
be recognized separately from the acquisition. SFAS 141(R) will become
effective for us on January 1, 2009. We are currently evaluating the impact of
SFAS 141(R), but do not expect the adoption of SFAS 141(R) to have a material
impact on our results of operations and financial position.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, or SFAS 160. SFAS
160 establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent

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and to the
noncontrolling interest, changes in a parents ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
160 will become effective for us beginning in the first quarter of 2009. We are
currently evaluating the impact of SFAS 160, but do not expect the adoption of
SFAS 160 to have a material impact on our results of operations and financial
position.

In
October 2008, the FASB issued Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active, or FSP 157-3 which
clarifies the application of SFAS 157 in an inactive market and illustrates how
an entity would determine fair value when the market for a financial asset is
not active. FSP 157-3 was effective immediately and applies to prior periods
for which financial statements have not been issued, including interim or
annual periods ending on or before September 30, 2008. The adoption of FAS
157-3 did not have a material impact on our results of operations and financial
position.

Off-Balance Sheet Arrangements

We
do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.

|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our
exposure to market risk is confined to our cash, cash equivalents and
short-term investments that have maturities or interest reset dates of less
than one year. The goals of our cash investment policy are the security of the
principal invested and fulfillment of liquidity needs, with the need to
maximize value being an important consideration. To achieve our goals, we
maintain a portfolio of cash equivalents and investments in a variety of
securities. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are generally short-term in nature. We
currently do not hedge interest rate exposure. Because of the short-term
maturities of our investments, we do not believe that a variation in market
rates would have any material impact on the value of our investment portfolio.

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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MAKO SURGICAL CORP.

Index to the Financial Statements

|                                                                                                                                               |  |   
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public
 Accounting Firm                                                                                       |  | 78
|Balance Sheets as of December 31, 2008 and
 2007                                                                                               |  | 79
|Statements of Operations for the years
 ended December 31, 2008, 2007 and 2006                                                                 |  | 80
|Statements of Redeemable Convertible
 Preferred Stock and Stockholders Equity (Deficit) for the years ended
 December 31, 2008, 2007 and 2006 |  | 81
|Statements of Cash Flows for the years
 ended December 31, 2008, 2007 and 2006                                                                 |  | 83
|Notes to Financial Statements                                                                                                                  |  | 84

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Report of Independent
Registered Public Accounting Firm

The Board of
Directors and Stockholders 
MAKO Surgical Corp.

We have audited the accompanying balance sheets of MAKO Surgical Corp.
as of December 31, 2008 and 2007, and the related statements of operations,
redeemable convertible preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2008.
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 standards of the Public
Company Accounting Oversight Board (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. We were not engaged
to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing auditing procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MAKO Surgical Corp.
at December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.

|                                          |                                                    
|----------------------------------------- | ---------------------------------------------------
|                                          | /s/ Ernst & Young LLP
 Certified Public Accountants
|Fort
 Lauderdale, Florida
 March 10, 2009 |                                                    

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MAKO SURGICAL CORP.

Balance Sheets(in thousands, except share and per share data)

|                                                                                                                                                                                                                                                               |  |               |         |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                                                               |  | December
 31, |        
|                                                                                                                                                                                                                                                               |  | 2008          |         | 2007 |  
|ASSETS                                                                                                                                                                                                                                                         |  |               |         |      |   |         |  
|Current Assets:                                                                                                                                                                                                                                                |  |               |         |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                      |  | $             | 62,547  |      | $ | 9,615   |  
|Short-term investments                                                                                                                                                                                                                                         |  |               | 1,077   |      |   | 3,084   |  
|Accounts receivable                                                                                                                                                                                                                                            |  |               | 2,727   |      |   | 2,213   |  
|Inventory                                                                                                                                                                                                                                                      |  |               | 7,673   |      |   | 2,346   |  
|Deferred cost of revenue                                                                                                                                                                                                                                       |  |               | 3,608   |      |   | ―       |  
|Prepaids and other assets                                                                                                                                                                                                                                      |  |               | 483     |      |   | 310     |  
|Total current assets                                                                                                                                                                                                                                           |  |               | 78,115  |      |   | 17,568  |  
|Deferred cost of revenue                                                                                                                                                                                                                                       |  |               | ―       |      |   | 926     |  
|Property and equipment, net                                                                                                                                                                                                                                    |  |               | 3,424   |      |   | 2,321   |  
|Intangible assets, net                                                                                                                                                                                                                                         |  |               | 4,817   |      |   | 5,477   |  
|Other assets                                                                                                                                                                                                                                                   |  |               | 177     |      |   | 170     |  
|Deferred initial public offering costs                                                                                                                                                                                                                         |  |               | ―       |      |   | 2,728   |  
|Total assets                                                                                                                                                                                                                                                   |  | $             | 86,533  |      | $ | 29,190  |  
|                                                                                                                                                                                                                                                               |  |               |         |      |   |         |  
|LIABILITIES AND
 STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                |  |               |         |      |   |         |  
|Current Liabilities:                                                                                                                                                                                                                                           |  |               |         |      |   |         |  
|Accounts payable                                                                                                                                                                                                                                               |  | $             | 1,809   |      | $ | 1,511   |  
|Accrued compensation and employee benefits                                                                                                                                                                                                                     |  |               | 2,338   |      |   | 1,033   |  
|Other accrued liabilities                                                                                                                                                                                                                                      |  |               | 4,283   |      |   | 2,680   |  
|Deferred revenue                                                                                                                                                                                                                                               |  |               | 11,518  |      |   | 50      |  
|Accrued license fee                                                                                                                                                                                                                                            |  |               | ―       |      |   | 3,955   |  
|Total current liabilities                                                                                                                                                                                                                                      |  |               | 19,948  |      |   | 9,229   |  
|                                                                                                                                                                                                                                                               |  |               |         |      |   |         |  
|Deferred revenue                                                                                                                                                                                                                                               |  |               | 71      |      |   | 3,311   |  
|Total liabilities                                                                                                                                                                                                                                              |  |               | 20,019  |      |   | 12,540  |  
|Commitments and contingencies                                                                                                                                                                                                                                  |  |               |         |      |   |         |  
|Series A, B and C redeemable convertible preferred stock                                                                                                                                                                                                       |  |               | ―       |      |   | 59,487  |  
|                                                                                                                                                                                                                                                               |  |               |         |      |   |         |  
|Stockholders equity (deficit):                                                                                                                                                                                                                                |  |               |         |      |   |         |  
|Common stock, $0.001 par value; 135,000,000 authorized as of December
 31, 2008 and 60,000,000 shares authorized as of December 31, 2007; 24,684,786
 and 1,870,603 shares issued and outstanding as of December 31, 2008 and
 December 31, 2007, respectively |  |               | 25      |      |   | 2       |  
|Additional paid-in capital                                                                                                                                                                                                                                     |  |               | 146,607 |      |   | ―       |  
|Accumulated deficit                                                                                                                                                                                                                                            |  |               | (80,172 | )    |   | (42,843 | )
|Accumulated other comprehensive income                                                                                                                                                                                                                         |  |               | 54      |      |   | 4       |  
|Total stockholders equity (deficit)                                                                                                                                                                                                                           |  |               | 66,514  |      |   | (42,837 | )
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                                           |  | $             | 86,533  |      | $ | 29,190  |  

See accompanying notes.

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MAKO SURGICAL CORP.

Statements of Operations(in thousands, except per share data)

|                                                                            |  |                           |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                            |  | Years
 Ended December 31, |        
|                                                                            |  | 2008                      |         | 2007 |   | 2006    |  
|Revenue:                                                                    |  |                           |         |      |   |         |   |   |         |  
|Products                                                                    |  | $                         | 2,457   |      | $ | 718     |   | $ | 63      |  
|Systems                                                                     |  |                           | ―       |      |   | ―       |   |   | ―       |  
|Other                                                                       |  |                           | 487     |      |   | 53      |   |   | ―       |  
|Total revenue                                                               |  |                           | 2,944   |      |   | 771     |   |   | 63      |  
|Cost of revenue:                                                            |  |                           |         |      |   |         |   |   |         |  
|Products                                                                    |  |                           | 1,521   |      |   | 197     |   |   | 19      |  
|Systems                                                                     |  |                           | 1,692   |      |   | 361     |   |   | 58      |  
|Other                                                                       |  |                           | 233     |      |   | 25      |   |   | ―       |  
|Total cost of revenue                                                       |  |                           | 3,446   |      |   | 583     |   |   | 77      |  
|Gross profit (loss)                                                         |  |                           | (502    | )    |   | 188     |   |   | (14     | )
|Operating costs and expenses:                                               |  |                           |         |      |   |         |   |   |         |  
|Selling, general and administrative                                         |  |                           | 23,158  |      |   | 12,042  |   |   | 5,023   |  
|Research and development                                                    |  |                           | 12,472  |      |   | 8,269   |   |   | 5,192   |  
|Depreciation and amortization                                               |  |                           | 1,828   |      |   | 1,297   |   |   | 644     |  
|Total operating costs and expenses                                          |  |                           | 37,458  |      |   | 21,608  |   |   | 10,859  |  
|Loss from operations                                                        |  |                           | (37,960 | )    |   | (21,420 | ) |   | (10,873 | )
|Interest and other income                                                   |  |                           | 988     |      |   | 1,073   |   |   | 476     |  
|Interest and other expenses                                                 |  |                           | (110    | )    |   | (311    | ) |   | (220    | )
|Net loss                                                                    |  |                           | (37,082 | )    |   | (20,658 | ) |   | (10,617 | )
|Accretion of preferred stock                                                |  |                           | (44     | )    |   | (301    | ) |   | (267    | )
|Dividends on preferred stock                                                |  |                           | (521    | )    |   | (3,359  | ) |   | (1,609  | )
|Net loss attributable to common stockholders                                |  | $                         | (37,647 | )    | $ | (24,318 | ) | $ | (12,493 | )
|Net loss per share  Basic and diluted attributable to common
 stockholders |  | $                         | (2.20   | )    | $ | (14.75  | ) | $ | (8.03   | )
|Weighted average common shares outstanding  Basic and
diluted              |  |                           | 17,096  |      |   | 1,649   |   |   | 1,555   |  

See accompanying notes.

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MAKO SURGICAL CORP.

Statements of Redeemable
Convertible Preferred Stock and Stockholders Equity (Deficit)(in thousands)

|                                                                                               |  |                                   |        |                |   |        |  |                              |       |   |   |                                     |                                     |   |                                        |   |   |     |   |   |         |   |   |    |   |   |         |  
|---------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | -------------- | - | ------ |  | ---------------------------- | ----- | - | - | ----------------------------------- | ----------------------------------- | - | -------------------------------------- | - | - | --- | - | - | ------- | - | - | -- | - | - | ------- | -
|                                                                                               |  |                                   |        |                |   |        |  |                              |       |   |   | Note
 Receivable
 from
 Stockholder |                                     |   |                                        |   |   |     |  
|                                                                                               |  | Redeemable
 Convertible Preferred |        | Common
 Shares |   |        |  | Additional
 Paid-in
 Capital |       |   |   |                                     | Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Equity (Deficit) |  
|                                                                                               |  |                                   |        | Stock
 Amount  |   |        |  | Accumulated
 Deficit         |       |   |  
|                                                                                               |  | Shares                            |        | Amount         |   |        |  |                              |       |   |   |                                    
|                                                                                              
|Balance at December 31, 2005                                                                   |  |                                   | 19,650 |                | $ | 24,035 |  |                              | 1,554 |   | $ | 2                                   |                                     | $ |                                       |   | $ | (66 | ) | $ | (6,819  | ) | $ | (4 | ) | $ | (6,887  | )
|Issuance of common stock upon exercise of options                                              |  |                                   |       |                |   |       |  |                              | 2     |   |   |                                    |                                     |   | 1                                      |   |   |    |   |   |        |   |   |   |   |   | 1       |  
|Employee share-based compensation expense                                                      |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   | 170                                    |   |   |    |   |   |        |   |   |   |   |   | 170     |  
|Interest on note receivable from stockholder                                                   |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   | 5                                      |   |   | (5  | ) |   |        |   |   |   |   |   |        |  
|Addendum to asset contribution with Z-Kat                                                      |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   | (176                                   | ) |   |    |   |   | (45     | ) |   |   |   |   | (221    | )
|Stock issuance costs for Series C redeemable convertible preferred
 stock sale                 |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   | (9      | ) |   |   |   |   | (9      | )
|Accretion to redemption value of Series A and B redeemable convertible
 preferred stock        |  |                                   |       |                |   | 267    |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   | (267    | ) |   |   |   |   | (267    | )
|Accrued dividends on Series A and B redeemable convertible preferred
 stock                    |  |                                   |       |                |   | 1,609  |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   | (1,609  | ) |   |   |   |   | (1,609  | )
|Change in unrealized loss on available-for-sale securities                                     |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   |        |   |   | 2  |   |   | 2       |  
|Net loss                                                                                       |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   | (10,617 | ) |   |   |   |   | (10,617 | )
|                                                                                              
|Total comprehensive loss                                                                       |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   |        |   |   |   |   |   | (10,615 | )
|Balance at December 31, 2006                                                                   |  |                                   | 19,650 |                |   | 25,911 |  |                              | 1,556 |   |   | 2                                   |                                     |   |                                       |   |   | (71 | ) |   | (19,366 | ) |   | (2 | ) |   | (19,437 | )
|Issuance of Series C redeemable convertible preferred stock, net of
 issuance costs of $84,000 |  |                                   | 13,514 |                |   | 29,916 |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   |        |   |   |   |   |   |        |  
|Issuance of common stock upon exercise of options                                              |  |                                   |       |                |   |       |  |                              | 1     |   |   |                                    |                                     |   | 2                                      |   |   |    |   |   |        |   |   |   |   |   | 2       |  
|Employee share-based compensation expense                                                      |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   | 531                                    |   |   |    |   |   |        |   |   |   |   |   | 531     |  
|Interest on note receivable from stockholder                                                   |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   | 4                                      |   |   | (4  | ) |   |        |   |   |   |   |   |        |  
|Modification of restricted stock                                                               |  |                                   |       |                |   |       |  |                              | 300   |   |   |                                    |                                     |   | 394                                    |   |   | 75  |   |   |        |   |   |   |   |   | 469     |  
|Return of 35,244 shares due to modification of restricted
stock                                |  |                                   |       |                |   |       |  |                              | (35   | ) |   |                                    |                                     |   | (392                                   | ) |   |    |   |   |        |   |   |   |   |   | (392    | )
|Restricted common stock compensation expense                                                   |  |                                   |       |                |   |       |  |                              | 49    |   |   |                                    |                                     |   | 302                                    |   |   |    |   |   |        |   |   |   |   |   | 302     |  
|Accretion to redemption value of Series A, B and C redeemable
 convertible preferred stock     |  |                                   |       |                |   | 301    |  |                              |      |   |   |                                    |                                     |   | (301                                   | ) |   |    |   |   |        |   |   |   |   |   | (301    | )
|Accrued dividends on Series A, B and C redeemable convertible
 preferred stock                 |  |                                   |       |                |   | 3,359  |  |                              |      |   |   |                                    |                                     |   | (540                                   | ) |   |    |   |   | (2,819  | ) |   |   |   |   | (3,359  | )
|Change in unrealized gain on available-for-sale securities                                     |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   |        |   |   | 6  |   |   | 6       |  
|Net loss                                                                                       |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   | (20,658 | ) |   |   |   |   | (20,658 | )
|Total comprehensive loss                                                                       |  |                                   |       |                |   |       |  |                              |      |   |   |                                    |                                     |   |                                       |   |   |    |   |   |        |   |   |   |   |   | (20,652 | )
|Balance at December 31, 2007                                                                   |  |                                   | 33,164 |                | $ | 59,487 |  |                              | 1,871 |   | $ | 2                                   |                                     | $ |                                       |   | $ |    |   | $ | (42,843 | ) | $ | 4  |   | $ | (42,837 | )

(continued)

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MAKO SURGICAL CORP.

Statements of Redeemable Convertible
Preferred Stock and Stockholders Equity (Deficit)(in thousands)

|                                                                                                               |  |                                   |                |        |               |         |   |                            |        |  |                      |                                     |                                     |   |                                        |   |   |   |  |   |         |   |   |    |  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------------- | ------ | ------------- | ------- | - | -------------------------- | ------ |  | -------------------- | ----------------------------------- | ----------------------------------- | - | -------------------------------------- | - | - | - |  | - | ------- | - | - | -- |  | - | ------- | -
|                                                                                                               |  |                                   |                |        |               |         |   |                            |        |  |                      | Note
 Receivable
 from
 Stockholder |                                     |   |                                        |   |   |   | 
|                                                                                                               |  | Redeemable
 Convertible Preferred |                |        |               |         |   | Additional
 Paid-inCapital |        |  | Accumulated
 Deficit |                                     | Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Equity (Deficit) |  
|                                                                                                               |  |                                   | Common
 Shares |        | Stock
 Amount |         |   |                            |        |  |                     
|                                                                                                               |  | Shares                            |                | Amount |               |         |   |                            |        |  |                      |                                    
|                                                                                                              
|Balance at December 31, 2007                                                                                   |  |                                   | 33,164         |        | $             | 59,487  |   |                            | 1,871  |  | $                    | 2                                   |                                     | $ |                                       |   | $ |  |  | $ | (42,843 | ) | $ | 4  |  | $ | (42,837 | )
|Issuance of common stock in initial public offering                                                            |  |                                   |               |        |               |        |   |                            | 5,100  |  |                      | 5                                   |                                     |   | 43,789                                 |   |   |  |  |   |        |   |   |   |  |   | 43,794  |  
|Issuance of common stock in equity financing                                                                   |  |                                   |               |        |               |        |   |                            | 6,451  |  |                      | 7                                   |                                     |   | 39,726                                 |   |   |  |  |   |        |   |   |   |  |   | 39,733  |  
|Issuance of common stock upon exercise of options                                                              |  |                                   |               |        |               |        |   |                            | 62     |  |                      |                                    |                                     |   | 46                                     |   |   |  |  |   |        |   |   |   |  |   | 46      |  
|Employee share-based compensation expense                                                                      |  |                                   |               |        |               |        |   |                            |       |  |                      |                                    |                                     |   | 1,467                                  |   |   |  |  |   |        |   |   |   |  |   | 1,467   |  
|Restricted common stock compensation expense                                                                   |  |                                   |               |        |               |        |   |                            | 256    |  |                      |                                    |                                     |   | 1,856                                  |   |   |  |  |   |        |   |   |   |  |   | 1,856   |  
|Accretion to redemption value of Series A, B and C redeemable
 convertible preferred stock                     |  |                                   |               |        |               | 44      |   |                            |       |  |                      |                                    |                                     |   | (44                                    | ) |   |  |  |   |        |   |   |   |  |   | (44     | )
|Accrued dividends on Series A, B and C redeemable convertible
 preferred stock                                 |  |                                   |               |        |               | 521     |   |                            |       |  |                      |                                    |                                     |   | (274                                   | ) |   |  |  |   | (247    | ) |   |   |  |   | (521    | )
|Conversion of Series A, B and C redeemable convertible preferred
 shares into common shares                    |  |                                   | (33,164        | )      |               | (53,667 | ) |                            | 10,945 |  |                      | 11                                  |                                     |   | 53,656                                 |   |   |  |  |   |        |   |   |   |  |   | 53,667  |  
|Reclassification of accrued dividends on redeemable convertible
 preferred stock to additional paid-in capital |  |                                   |               |        |               | (6,385  | ) |                            |       |  |                      |                                    |                                     |   | 6,385                                  |   |   |  |  |   |        |   |   |   |  |   | 6,385   |  
|Change in unrealized gain on available-for-sale securities                                                     |  |                                   |               |        |               |        |   |                            |       |  |                      |                                    |                                     |   |                                       |   |   |  |  |   |        |   |   | 50 |  |   | 50      |  
|Net loss                                                                                                       |  |                                   |               |        |               |        |   |                            |       |  |                      |                                    |                                     |   |                                       |   |   |  |  |   | (37,082 | ) |   |   |  |   | (37,082 | )
|                                                                                                              
|Total comprehensive loss                                                                                       |  |                                   |               |        |               |        |   |                            |       |  |                      |                                    |                                     |   |                                       |   |   |  |  |   |        |   |   |   |  |   | (37,032 | )
|Balance at December 31, 2008                                                                                   |  |                                   |               |        | $             |        |   |                            | 24,685 |  | $                    | 25                                  |                                     | $ | 146,607                                |   | $ |  |  | $ | (80,172 | ) | $ | 54 |  | $ | 66,514  |  

See accompanying notes.

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MAKO SURGICAL CORP.

Statements of Cash Flows(in thousands)

|                                                                                                               |  |                           |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                               |  | Years
 Ended December 31, |        
|                                                                                                               |  | 2008                      |         | 2007 |   | 2006    |  
|Operating activities:                                                                                          |  |                           |         |      |   |         |   |   |         |  
|Net loss                                                                                                       |  | $                         | (37,082 | )    | $ | (20,658 | ) | $ | (10,617 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                                   |  |                           |         |      |   |         |   |   |         |  
|Depreciation                                                                                                   |  |                           | 1,502   |      |   | 678     |   |   | 174     |  
|Amortization of intangible assets                                                                              |  |                           | 660     |      |   | 645     |   |   | 470     |  
|Stock-based compensation                                                                                       |  |                           | 3,323   |      |   | 1,227   |   |   | 170     |  
|Inventory write-down                                                                                           |  |                           | 730     |      |   | 8       |   |   | 36      |  
|Loss on disposal of assets                                                                                     |  |                           | ―       |      |   | ―       |   |   | 3       |  
|Loss on asset impairment                                                                                       |  |                           | ―       |      |   | 14      |   |   | ―       |  
|Accrued interest expense on deferred license fee                                                               |  |                           | 45      |      |   | 305     |   |   | 211     |  
|Changes in operating assets and liabilities:                                                                   |  |                           |         |      |   |         |   |   |         |  
|Accounts receivable                                                                                            |  |                           | (514    | )    |   | (1,634  | ) |   | (578    | )
|Inventory                                                                                                      |  |                           | (6,057  | )    |   | (1,428  | ) |   | (605    | )
|Prepaid and other assets                                                                                       |  |                           | (173    | )    |   | 97      |   |   | (108    | )
|Other assets                                                                                                   |  |                           | (7      | )    |   | 156     |   |   | (195    | )
|Accounts payable                                                                                               |  |                           | 298     |      |   | 1,078   |   |   | 353     |  
|Accrued compensation and employee benefits                                                                     |  |                           | 1,305   |      |   | 523     |   |   | 385     |  
|Other accrued liabilities                                                                                      |  |                           | 1,603   |      |   | 1,664   |   |   | 395     |  
|Deferred cost of revenue                                                                                       |  |                           | (2,682  | )    |   | (716    | ) |   | (210    | )
|Deferred revenue                                                                                               |  |                           | 8,228   |      |   | 2,661   |   |   | 700     |  
|Net cash used in operating activities                                                                          |  |                           | (28,821 | )    |   | (15,380 | ) |   | (9,416  | )
|Investing activities:                                                                                          |  |                           |         |      |   |         |   |   |         |  
|Purchase of investments                                                                                        |  |                           | (1,990  | )    |   | (15,159 | ) |   | (600    | )
|Proceeds from sales and maturities of investments                                                              |  |                           | 4,047   |      |   | 13,480  |   |   | 9,300   |  
|Acquisition of property and equipment                                                                          |  |                           | (2,605  | )    |   | (1,782  | ) |   | (1,193  | )
|Payment of deferred license fee on IBM license                                                                 |  |                           | (4,000  | )    |   | ―       |   |   | ―       |  
|Acquisition of intangible assets                                                                               |  |                           | ―       |      |   | (450    | ) |   | (2,120  | )
|Net cash provided by (used in) investing activities                                                            |  |                           | (4,548  | )    |   | (3,911  | ) |   | 5,387   |  
|Financing activities:                                                                                          |  |                           |         |      |   |         |   |   |         |  
|Proceeds from initial public offering of common stock, net of
 underwriting fees of $3,570                     |  |                           | 47,430  |      |   | ―       |   |   | ―       |  
|Proceeds from issuance of common stock in equity financing                                                     |  |                           | 40,202  |      |   | ―       |   |   | ―       |  
|Deferred initial public offering costs                                                                         |  |                           | (908    | )    |   | (2,728  | ) |   | ―       |  
|Deferred equity financing costs                                                                                |  |                           | (469    | )    |   | ―       |   |   | ―       |  
|Proceeds from issuance of Series C redeemable convertible preferred
 stock, net of stock issuance costs        |  |                           | ―       |      |   | 29,916  |   |   | (9      | )
|Exercise of common stock options for cash                                                                      |  |                           | 46      |      |   | 2       |   |   | 1       |  
|Payment of CEO payroll taxes relating to restricted common stock
 modification                                 |  |                           | ―       |      |   | (392    | ) |   | ―       |  
|Net cash provided by (used in) financing activities                                                            |  |                           | 86,301  |      |   | 26,798  |   |   | (8      | )
|                                                                                                              
|Net increase (decrease) in cash and cash equivalents                                                           |  |                           | 52,932  |      |   | 7,507   |   |   | (4,037  | )
|Cash and cash equivalents at beginning of year                                                                 |  |                           | 9,615   |      |   | 2,108   |   |   | 6,145   |  
|                                                                                                               |  |                           |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                                       |  | $                         | 62,547  |      | $ | 9,615   |   | $ | 2,108   |  
|Supplemental disclosures of cash flow information                                                              |  |                           |         |      |   |         |   |   |         |  
|Interest paid                                                                                                  |  | $                         | 2       |      | $ | 7       |   | $ | 7       |  
|Non-cash investing and financing activities:                                                                   |  |                           |         |      |   |         |   |   |         |  
|Accretion of redeemable convertible preferred stock                                                            |  | $                         | 44      |      | $ | 301     |   | $ | 267     |  
|Accrued dividends on redeemable convertible preferred stock                                                    |  |                           | 521     |      |   | 3,359   |   |   | 1,609   |  
|Conversion of redeemable convertible preferred stock into 10,945,080
 common shares                            |  |                           | 53,667  |      |   | ―       |   |   | ―       |  
|Reclassification of accrued dividends on redeemable convertible
 preferred stock to additional paid-in capital |  |                           | 6,385   |      |   | ―       |   |   | ―       |  
|Reclassification of deferred initial public offering costs to
additional
 paid-in capital                      |  |                           | 3,636   |      |   | ―       |   |   | ―       |  
|Licensing of intellectual property                                                                             |  |                           | ―       |      |   | 30      |   |   | 3,410   |  
|Deferred license fee payable                                                                                   |  |                           | ―       |      |   | 30      |   |   | 3,410   |  
|Interest on note receivable for common stock                                                                   |  |                           | ―       |      |   | 4       |   |   | 5       |  
|Receipt of 35,244 shares of restricted common stock as reimbursement
 for payment of CEO payroll taxes         |  |                           | ―       |      |   | 392     |   |   | ―       |  
|Acquisition of note receivable from affiliate                                                                  |  |                           | ―       |      |   | ―       |   |   | 56      |  

See accompanying notes.

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MAKO SURGICAL CORP.

Notes to Financial
Statements

1. Description of the Business

MAKO
Surgical Corp. (the Company or MAKO) is an emerging medical device company
providing innovative surgical solutions to the orthopedic knee arthroplasty
market. The Company was incorporated in the State of Delaware on
November 12, 2004 and is headquartered in Fort Lauderdale, Florida.

In
February 2008, the Company effected a one for 3.03 reverse split of its
issued and outstanding common stock, which has been retroactively reflected in
these financial statements and accompanying notes. Also, in February 2008, the
Company completed its initial public offering (IPO) of common stock, issuing
a total of 5.1 million shares at an issue price of $10.00 per share, resulting
in net proceeds to the Company, after expenses, of approximately $43.8 million.

In
conjunction with the completion of the Companys IPO in February 2008, all of
the Companys outstanding Series A, B and C redeemable convertible preferred
stock was converted into 10,945,080 shares of common stock, adjusted for
the February 2008 reverse stock split. In connection therewith, all remaining
redeemable convertible preferred stock discounts and accrued dividends were
reclassified to additional paid-in capital and were not paid.

In
October 2008, the Company entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) for an equity financing of up to $60 million,
with initial gross proceeds of approximately $40.2 million, which the Company
closed on October 31, 2008, and conditional access to an additional $20 million
(the Second Closing). The financing resulted in net proceeds to the Company
of approximately $39.7 million, after expenses of approximately $469,000. See
Note 5 for further discussion of the Securities Purchase Agreement.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The 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. The accounting estimates that require managements most
significant, difficult and subjective judgments include revenue recognition,
allowance for doubtful accounts, accrual for warranty costs, inventory
impairment charges, valuation allowance for deferred income tax assets,
impairment of long-lived assets and the determination of stock-based
compensation. Actual results could differ significantly from these estimates.

Liquidity and Operations

The
Company believes its existing cash, cash equivalents and short-term investment
balances and interest income earned on these balances, will be sufficient to
meet its anticipated cash requirements for at least the next 12 months. To the
extent the Companys available cash, cash equivalents and short-term investment
balances are insufficient to satisfy its operating requirements after that
period, the Company will need to seek additional sources of funds, including
selling additional equity or debt securities or entering into a credit
facility. The sale of additional equity and debt securities may result in
dilution to the Companys current stockholders. If the Company raises
additional funds through the issuance of debt securities, these securities may
have rights senior to those of its common stock and could contain covenants
that could restrict its operations. The Company may require additional capital
beyond its currently forecasted amounts. Any such required additional capital
may not be available on reasonable terms, or at all. If the Company is unable
to obtain additional financing, the Company

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may be
required to reduce the scope of, delay or eliminate some or all of its planned
research, development and commercialization activities, which could materially
harm its business and results of operations.

Concentrations
of Credit Risk and Other Risks and Uncertainties

Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents and short-term
investments. Cash and cash equivalents are deposited in demand and money market
accounts at two large financial institutions. Such deposits are generally in
excess of insured limits. The Company has not experienced any losses on its
deposits of cash and cash equivalents.

The
Company is subject to risks common to emerging companies in the medical device
industry including, but not limited to: new technological innovations,
dependence on key personnel, dependence on key suppliers, changes in general
economic conditions and interest rates, protection of proprietary technology,
compliance with government regulations, uncertainty of widespread market
acceptance of products, access to credit for capital purchases by our
customers, product liability and the need to obtain additional financing. The
Companys products include components subject to rapid technological change.
Certain components used in manufacturing have relatively few alternative
sources of supply and establishing additional or replacement suppliers for such
components cannot be accomplished quickly. The inability of any of these
suppliers to fulfill the Companys supply requirements may negatively impact
future operating results. While the Company has ongoing programs to minimize
the adverse effect of such uncertainty and considers technological change in
estimating its inventory net realizable value, uncertainty continues to exist.

The
Companys current versions of its Tactile Guidance System (TGS) and its
unicompartmental implants have been cleared by the U.S. Food and Drug
Administration (FDA) and, in December 2008, the Company received 510(k)
clearances from the FDA to market both its MAKO-branded RIO Robotic Arm Interactive
Orthopedic system (RIO), which is the Companys version 2.0 of its TGS, and
its MAKO-branded RETORIS MCK multicompartmental knee implant system. Certain
products currently under development by the Company will require clearance or
approval by the FDA or other international regulatory agencies prior to
commercial sale. There can be no assurance that the Companys products will
receive the necessary clearances or approvals. If the Company were to be denied
such clearance or approval or such clearance or approval were delayed, it could
have a material adverse impact on the Company.

The
Company may perform credit evaluations of its customers financial condition
and, generally, requires no collateral from its customers. The Company provides
an allowance for doubtful accounts when required but has not experienced any
credit losses to date.

Financial
Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an
Enterprise and
Related Information,
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Companys chief operating
decision maker is its CEO. The Companys CEO reviews financial information
presented on an aggregate basis for purposes of allocating resources and
evaluating financial performance. The Company has one business activity and
there are no segment managers who are held accountable for operations,
operating results and plans for products or components below the aggregate
Company level. Accordingly, the Company reports as a single operating segment.
To date, all of the Companys revenue is from companies located in the United
States. The following table presents information about the Companys revenue by
significant customer:

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|               |  |                          |       |      |   |      |  |   |    | 
|-------------- |  | ------------------------ | ----- | ---- | - | ---- |  | - | -- | 
|(in thousands) |  | Years Ended December 31, |      
|               |  | 2008                     |       | 2007 |   | 2006 | 
|Company A      |  | $                        | 417   |      | $ | 331  |  | $ | 60 | 
|Company B      |  |                          | 277   |      |   | 161  |  |   | ―  | 
|Company C      |  |                          | 493   |      |   | 126  |  |   | ―  | 
|Company D      |  |                          | 274   |      |   | 18   |  |   | ―  | 
|Others         |  |                          | 996   |      |   | 82   |  |   | 3  | 
|Net Revenue    |  | $                        | 2,457 |      | $ | 718  |  | $ | 63 | 

Cash and Cash Equivalents

The
Company considers all highly liquid investments with an original maturity at
date of purchase of 90 days or less to be cash equivalents.

Fair Value of Financial Instruments

Carrying
amounts of certain of the Companys financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable and other accrued
liabilities approximate fair value due to their short maturities or market
rates of interest.

Allowance for Doubtful Accounts

The
allowance for doubtful accounts is based on the Companys assessment of the
collectability of customer accounts. The Company regularly reviews the
allowance by considering factors such as historical experience, credit quality,
the age of the accounts receivable balances and current economic conditions
that may affect a customers ability to pay. The Company has not experienced
any collectability issues to date and has no allowance, provision for doubtful accounts
receivable or write-offs to date in the accompanying financial statements.

Accrual for Warranty Costs

Upon
installation of a TGS unit, the Company establishes an accrual for the
estimated costs associated with providing a standard one-year warranty for
defects in materials and workmanship. Due to the Companys limited history of
commercial placements of TGS units, the estimate of warranty costs is
subjective; however, costs incurred to date have not been significantly
different from the estimate.

Inventory

Inventory
is stated at the lower of cost or market value on a first-in, first-out basis.
Inventory costs include direct materials, direct labor and overhead costs. The
Company reviews its inventory periodically to determine net realizable value
and considers product upgrades in its periodic review of realizability. The
Company writes down inventory, if required, based on forecasted demand and
technological obsolescence. These factors are impacted by market and economic
conditions, technology changes and new product introductions and require
estimates that may include uncertain elements.

Beginning
with the fourth quarter of 2008, inventory overhead costs of approximately
$282,000 were capitalized and included in inventory as of December 31, 2008 and
non-capitalized costs were included in selling, general and administrative
expense. Previously, such overhead costs were fully expensed as selling,
general and administrative expense as capitalizable amounts were not
significant.

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Property and Equipment

Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
of property and equipment is computed using the straight-line method over their
estimated useful lives of two to seven years. Leasehold improvements are
amortized on a straight-line basis over the lesser of their useful life or the
term of the lease and are included in depreciation expense in the accompanying
statements of operations. Upon retirement or sale, the cost and related
accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operations. Maintenance and repairs are charged to
operations as incurred.

Intangible Assets

The
Companys intangible assets are comprised of a purchased patent application and
licenses to intellectual property rights. These intangible assets are carried
at cost, net of accumulated amortization. Amortization is recorded using the
straight-line method, over their respective useful lives (generally the life of
underlying patents), which range from approximately 10 to 19 years.

Impairment of Long-Lived Assets

The
Company evaluates its long-lived assets for indicators of impairment by
comparison of the carrying amounts to future net undiscounted cash flows
expected to be generated by such assets when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Should an
impairment exist, the impairment loss would be measured based on the excess
carrying value of the asset over the assets fair value or estimated discounted
future cash flows. The Company has not recorded any such impairment losses to
date.

Revenue Recognition

Revenue
is generated from unit sales of the TGS, including installation services,
training, upgrades and enhancements, from sales of implants and disposable
products, and by providing extended warranty services. The Companys TGS, as
well as upgrades and enhancements to its TGS, include software that is
essential to the functionality of the product and, accordingly, the Company
accounts for the sale of the TGS pursuant to Statement of Position
No. 97-2, Software Revenue Recognition (SOP 97-2), as amended.

The
Company recognizes product revenue for sales of the TGS when there is
persuasive evidence of an arrangement, the fee is fixed or determinable,
collection of the fee is probable and delivery has occurred as prescribed by
SOP 97-2. For all sales, the Company uses either a signed agreement or a
binding purchase order as evidence of an arrangement. For sales of TGS units
through December 31, 2008, such arrangements require the Company to provide
upgrades and enhancements to the TGS unit through and including delivery of the
RIO system. The Company received 510(k) clearance from the FDA to market the
RIO system in the fourth quarter of 2008, which we anticipate will be
commercially launched in the first half of 2009.

For
arrangements with multiple elements, the Company allocates arrangement
consideration to TGS units, upgrades, enhancements and services based upon
vendor specific objective evidence (VSOE) of fair value of the respective
elements. As of December 31, 2008, VSOE of fair value did not yet exist for all
the undelivered elements. Accordingly, all revenue and direct cost of revenue
associated with the sale of the TGS are deferred until the earlier of
(1) delivery of all elements or (2) establishment of VSOE of fair
value for all undelivered elements.

Sales
of TGS units are currently recorded as deferred revenue. The direct cost of
revenue associated with the sale of TGS units is currently recorded as deferred
cost of revenue. Costs associated with establishing an accrual for the TGS
standard one-year warranty liability and royalties related to the sale of TGS
units covered by licensing arrangements are expensed as incurred and are
included in cost of revenue - systems, in the statements of operations. The
Company anticipates ultimately recognizing a positive margin on the sales to
date of TGS units, including the satisfaction of the remaining upgrades through
the final deliverable of the RIO system, which we anticipate will be
commercially launched in the first half of 2009. As recognition of the deferred
revenue and

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deferred cost
of revenue balances associated with sales of TGS units are anticipated to occur
within 12 months of December 31, 2008, the Company classified these balances as
current liabilities and current assets, respectively, as of December 31, 2008.

Subsequent
to December 31, 2008, the Company will no longer manufacture TGS units, to
which associated TGS sales arrangements required it to provide upgrades and
enhancements, through and including the delivery of the RIO system. Sales
arrangements for future sales of RIO systems do not require the Company to
provide upgrades and enhancements. Under such RIO system sales arrangements, the
Company has determined that upon installation of the RIO system at a customers
facility, there will be few or no remaining significant undelivered elements.
As a result, revenues related to future RIO system sales will be recognized
upon installation of the system and training of surgeons and surgical staff and
will not be deferred.

Product
revenue from the sale of implants and disposable products (the Products) is
recognized as revenue in accordance with Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectability is reasonably assured. The Products are a
separate unit of accounting from the TGS as (1) they have value to the
customer on a standalone basis, (2) objective and reliable evidence of the
fair value of the item exists and (3) no right of return exists once the
Products are implanted or consumed. Accordingly, as the Companys implants and
disposable products are sold on a procedural basis, the revenue and costs associated
with the sale of Products are recognized at the time of sale (i.e., at the time
of the completion of the related surgical procedure).

Service
revenue, which is included in other revenue, consists of extended warranty
services on the TGS hardware, is deferred and recognized ratably over the
service period until no further obligation exists. Costs associated with
providing services are expensed when incurred.

Deferred Revenue and Deferred Cost of
Revenue

Deferred
revenue consists of deferred product revenue and deferred service revenue.
Deferred product revenue arises from timing differences between the shipment of
product and satisfaction of all revenue recognition criteria consistent with
the Companys revenue recognition policy. Deferred service revenue results from
the advance payment for services to be delivered over a period of time, usually
in one-year increments. Service revenue is recognized ratably over the service
period. Deferred cost of revenue consists of the direct costs associated with
the manufacture of TGS units for which the revenue has been deferred in
accordance with the Companys revenue recognition policy. Deferred revenue and
associated deferred cost of revenue expected to be realized within one year are
classified as current liabilities and current assets, respectively.

Deferred Initial Public Offering Costs

Specific
incremental costs directly associated with the Companys IPO, primarily legal,
accounting and printing costs, were deferred and reflected as an asset until
reclassification to stockholders equity (deficit) upon closing of the IPO in
February 2008.

Research and Development Costs

Costs
related to research, design and development of products are charged to research
and development expense as incurred. These costs include direct salary costs
for research and development personnel, costs for materials used in research
and development activities and costs for outside services.

Software Development Costs

Software
development costs are included in research and development and are expensed as
incurred. After technological feasibility is established, material software
development costs are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenue, whichever is greater. To date, the
period between achieving technological feasibility,

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which the
Company has defined as the establishment of a working model which typically
occurs when the verification and validation testing is complete, and the
general availability of such software has been short and software development
costs qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs to date.

Stock-Based Compensation

Effective
January 1, 2006, the Company adopted the fair value provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 Revised,
Share-Based Payment(SFAS 123(R)).
SFAS 123(R) requires the recognition of compensation expense, using a fair
value based method, for costs related to all share-based payments including
stock options. SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an option-pricing
model.

The
Company adopted SFAS 123(R) using the modified retrospective transition
method, which requires the restatement of financial statements for prior
periods.

The
Company accounts for stock-based compensation arrangements with non-employees
in accordance with the Emerging Issues Task Force (EITF) Abstract
No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services.The Company records the expense of such services based on
the estimated fair value of the equity instrument using the
Black-Scholes-Merton pricing model. The value of the equity instrument is
charged to expense over the term of the service agreement.

See
Note 8 for a detailed discussion of the various stock option plans and
related stock-based compensation.

Advertising Costs

Advertising
costs are expensed as incurred. Advertising costs were approximately $1.4
million and $431,000 for the years ended December 31, 2008 and 2007,
respectively. Advertising costs were insignificant prior to 2007.

Income Taxes

The
Company accounts for income taxes under SFAS 109, Accounting for Income Taxes,
and Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes.
Deferred income tax assets and liabilities are determined based on the
differences between financial reporting and income tax bases of assets and
liabilities, using income tax rates expected to be in effect when the
differences will reverse. Valuation allowances are established when necessary
to reduce deferred income tax assets to the amounts expected to be realized.
The Company recognizes any interest and penalties related to unrecognized tax
benefits as a component of income tax expense.

Operating Leases

Rental
payments and incentives, if any, are recognized on a straight-line basis over
the life of a lease. See Note 7 for further discussion of operating
leases.

Net Loss Per Share

The
Company calculated net loss per share in accordance with
SFAS No. 128, Earnings per Share.
Basic earnings per share (EPS) is calculated by dividing the net income or
loss available to common stockholders adjusted for redeemable convertible
preferred stock accretion and dividends by the weighted average number of
common shares outstanding for the period, without consideration for common
stock equivalents. Diluted EPS is computed by dividing the net income or loss
available to common stockholders by the weighted average number of common
shares outstanding for the period and the weighted average number of dilutive
common stock equivalents outstanding for the period determined using the
treasury stock method. The following table sets forth

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potential
shares of common stock that are not included in the calculation of diluted net
loss per share because to do so would be anti-dilutive as of the end of each
period presented:

|                                        |  |              |  |        |  |        | 
|--------------------------------------- |  | ------------ |  | ------ |  | ------ | 
|(in thousands)                          |  | December 31, | 
|                                        |  | 2008         |  | 2007   |  | 2006   | 
|Stock
 options outstanding              |  | 2,193        |  | 1,917  |  | 948    | 
|Warrants to
 purchase common stock      |  | 2,076        |  | 463    |  | 463    | 
|Redeemable
 convertible preferred stock |  | ―            |  | 33,164 |  | 19,650 | 

Comprehensive Loss

Comprehensive
loss is defined as the change in equity from transactions and other events and
circumstances other than those resulting from investments by owners and
distributions to owners. For the years ended December 31, 2008, 2007 and
2006, the Company recorded comprehensive losses of approximately $37.0 million,
$20.7 million and $10.6 million, respectively.

Recent Accounting Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, provides a consistent framework for
measuring fair value under accounting principles generally accepted in the
United States and expands fair value financial statement disclosure requirements.
SFAS 157 does not require any new fair value measurements. It only applies to
accounting pronouncements that already require or permit fair value measures,
except for standards that relate to stock-based payments.

SFAS
157s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:

| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1
 InputsQuoted prices for identical instruments in active markets.                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                           
| |  | Level 2
 InputsQuoted prices for similar instruments in active markets; quoted prices
 for identical or similar instruments in markets that are not active; and
 model derived valuations whose inputs are observable or whose significant
 value drivers are observable.
| |   |                                                                                                                                                                                                                                                                           
| |  | Level 3
 InputsInstruments with primarily unobservable value drivers.                                                                                                                                                                                                    

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SFAS
157 is effective for fiscal years beginning after November 15, 2007.
Effective January 1, 2008, the Company adopted the provisions of SFAS 157.
The adoption of SFAS 157 did not have a material impact on the Companys
results of operations and financial position.

Effective
January 1, 2008, the Company adopted SFAS No. 159, The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (SFAS 159) and has
not elected to use fair value measurement on any assets or liabilities under
this statement. The Company has determined that the adoption of SFAS 159 had no
effect on its results of operations and financial position.

Effective
January 1, 2008, the Company adopted EITF Issue No. 07-03, Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities (EITF 07-03). EITF
07-03 requires that nonrefundable advance payments for goods or services that
will be used or rendered for future research and development activities should
be deferred and capitalized. Such amounts should be recognized as an expense as
the related goods are delivered or the related services are performed. Entities
should continue to evaluate whether they expect the goods to be delivered or
services to be rendered. If an entity does not expect the goods to be delivered
or services to be rendered, the capitalized advance payment should be charged
to expense. The Company has determined that the adoption of EITF 07-03 had no
effect on its results of operations and financial position.

In
June 2008, the EITF issued Issue No. 07-05, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock (EITF 07-05). EITF
07-05 addresses the determination of whether an instrument (or an embedded
feature) is indexed to an entitys own stock, if an instrument (or an embedded
feature) that has the characteristics of a derivative instrument is indexed to
an entitys own stock, it is still necessary to evaluate whether it is
classified in stockholders equity (or would be classified in stockholders
equity if it were a freestanding instrument). In addition, for some instruments
that are potentially subject to the guidance in EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, but do not have all the characteristics of a
derivative instrument under paragraphs 6 through 9, it is still necessary to
evaluate whether it is classified in stockholders equity. It is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact of EITF 07-05, but does not expect
the adoption of EITF 07-05 to have a material impact on its results of
operations and financial position.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)). SFAS 141(R) retains the
fundamental requirements of the original pronouncement requiring that the
purchase method be used for all business combinations. SFAS 141(R) defines
the acquirer as the entity that obtains control of one or more businesses in
the business combination, establishes the acquisition date as the date that the
acquirer achieves control and requires the acquirer to recognize the assets
acquired, liabilities assumed and any noncontrolling interest at their fair
values as of the acquisition date. SFAS 141(R) also requires that
acquisition related costs be recognized separately from the acquisition.
SFAS 141(R) will become effective for the Company on January 1, 2009.
The Company is currently evaluating the impact of SFAS 141(R), but does not
expect the adoption of SFAS 141(R) to have a material impact on its results of
operations and financial position.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS 160 will
become effective for the Company beginning in the first quarter of 2009. The
Company is currently evaluating the impact of SFAS 160, but does not expect the
adoption of SFAS 160 to have a material impact on its results of operations and
financial position.

In
October 2008, the FASB issued Staff Position No. FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP 157-3) which clarifies the application of SFAS 157 in

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an inactive
market and illustrates how an entity would determine fair value when the market
for a financial asset is not active. FSP 157-3 is effective immediately and
applies to prior periods for which financial statements have not been issued,
including interim or annual periods ending on or before September 30, 2008. The
implementation of FAS 157-3 did not have a material impact on the Companys
results of operations and financial position.

Reclassifications

Certain
insignificant reclassifications have been made to the prior periods balance
sheet and statements of cash flows to conform to the current periods
presentation.

3. Investments

The
Companys investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
included in other comprehensive income within stockholders equity (deficit).
Realized gains and losses and declines in value determined to be
other-than-temporary on available-for-sale securities are included in interest
and other expenses. Interest and dividends on securities classified as
available-for-sale are included in interest and other income. The cost of
securities sold is based on the specific identification method.

The
amortized cost and fair value of short and long-term investments, with gross unrealized
gains and losses, were as follows:

As
of December 31, 2008

|                                 |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|-------------------------------- |  | --------------- | ----- | ------------------------ | - | ------------------------- |  | ----------- | - |  | - | ----- | 
|(in thousands)                   |  | Amortized
 Cost |       | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|Short-term
 investments:         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|Certificates of deposit          |  | $               | 61    |                          | $ | ―                         |  | $           | ― |  | $ | 61    | 
|Variable auction rate securities |  |                 | 962   |                          |   | 54                        |  |             | ― |  |   | 1,016 | 
|Total
 short-term investments    |  | $               | 1,023 |                          | $ | 54                        |  | $           | ― |  | $ | 1,077 | 
|                                 |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|As
of December 31, 2007          |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|                                 |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|(in thousands)                   |  | Amortized
 Cost |       | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|Short-term
 investments:         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|Variable auction rate securities |  | $               | 1,550 |                          | $ | ―                         |  | $           | ― |  | $ | 1,550 | 
|U.S. treasury bills              |  |                 | 1,505 |                          |   | 4                         |  |             | ― |  |   | 1,509 | 
|Certificates of deposit          |  |                 | 25    |                          |   | ―                         |  |             | ― |  |   | 25    | 
|Total
 short-term investments    |  | $               | 3,080 |                          | $ | 4                         |  | $           | ― |  | $ | 3,084 | 

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As
of December 31, 2008 and December 31, 2007, all short-term investments have
maturities or interest reset dates of less than one year.

The
fair values of the Companys investments based on the level of inputs are
summarized below:

|                                 |  |                    |       |                                                                      |                                                     |                                                   |  |                                              |   |  |   |       | 
|-------------------------------- |  | ------------------ | ----- | -------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------- |  | -------------------------------------------- | - |  | - | ----- | 
|(in thousands)                   |  |                    |       |                                                                      | Fair Value Measurements at the Reporting Date Using |                                                  
|                                 |  | December 31,
 2008 |       | Quoted
 Prices in
 Active
 Markets for
 Identical
 Assets
 (Level 1) |                                                     | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|Short-term
 investments:         |  |                    |       |                                                                      |                                                     |                                                   |  |                                              |   |  |   |       | 
|Certificates of
deposit          |  | $                  | 61    |                                                                      | $                                                   | 61                                                |  | $                                            | ― |  | $ | ―     | 
|Variable auction rate
securities |  |                    | 1,016 |                                                                      |                                                     | ―                                                 |  |                                              | ― |  |   | 1,016 | 
|Total
 short-term investments    |  | $                  | 1,077 |                                                                      | $                                                   | 61                                                |  | $                                            | ― |  | $ | 1,016 | 

As
of December 31, 2008, the Company held $1,025,000 par value of variable auction
rate securities issued by two separate funds. In February 2008, the auction
rate securities experienced failed auctions that limited the liquidity of these
securities. Historically, the fair value of auction rate securities
approximated par value due to the frequent resets through the auction rate
process. The uncertainty in the credit markets affected the Companys holdings
in auction rate securities and the liquidity and fair value of these
investments were negatively impacted. An other-than-temporary impairment charge
of $63,000 was recorded in the first quarter of 2008 to reduce the value of its
auction rate securities to the new fair value. Subsequent changes in fair value
were included in accumulated other comprehensive income. As of December 31,
2008, the auction rate securities were recorded at the estimated fair value of
$1,016,000. The Company classified its auction rate securities as short-term
investments at December 31, 2008, as the Company believed that its auction rate
securities would be redeemed within one year of December 31, 2008. The
Companys investment firm had informed the Company that it intended to redeem
its auction rate securities in early 2009; and in January 2009, all of the
Companys outstanding auction rate securities were redeemed at par value either
by the issuing fund or the Companys investment firm. Gains included in
accumulated other comprehensive income as of December 31, 2008 will be
recognized in the statement of operations in the first quarter of 2009.

The
Company used a discounted cash flow model to determine the estimated fair value
of its auction rate securities in 2008. The assumptions used in preparing the
discounted cash flow model included estimates for interest rates, timing and
amount of cash flows and expected holding periods of the auction rate
securities. These assumptions were subject to uncertainties, are difficult to
predict and require significant judgment. The use of different assumptions
could have resulted in significantly different estimates of fair value.

The
table below provides a reconciliation of auction rate securities assets
measured at fair value on a recurring basis which use Level 3 or significant
unobservable inputs for the year ended December 31, 2008.

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|                                                                                                                                                                                       |  |                                                                 |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ----- | -
|(in thousands)                                                                                                                                                                         |  | Fair Value Measurements
 Using Significant
 Unobservable Inputs |      
|                                                                                                                                                                                       |  | Year Ended 
 December 31, 2008                                  |      
|Balance at beginning of year                                                                                                                                                           |  | $                                                               | ―     |  
|Transfers into Level 3                                                                                                                                                                 |  |                                                                 | 1,550 |  
|Total losses realized included
in earnings                                                                                                                                             |  |                                                                 | (63   | )
|Total unrealized gains included
in other
 comprehensive income                                                                                                                         |  |                                                                 | 54    |  
|Sales/Redemptions                                                                                                                                                                      |  |                                                                 | (525  | )
|Balance at end of year                                                                                                                                                                 |  | $                                                               | 1,016 |  
|                                                                                                                                                                                      
|The total amount of gains or losses for the
 period included in earnings attributable to the change in unrealized gains or
 losses relating to assets still held at the reporting date |  | $                                                               | (63   | )

4. Selected Balance Sheet Components

The
following table provides details of selected balance sheet items:

|                 |  |              |       |      |   |       | 
|---------------- |  | ------------ | ----- | ---- | - | ----- | 
|(in thousands)   |  | December 31, |      
|                 |  | 2008         |       | 2007 |  
|Inventory:       |  |              |       |      |   |       | 
|Raw
 materials   |  | $            | 3,809 |      | $ | 974   | 
|Work-in-process  |  |              | 748   |      |   | 642   | 
|Finished
 goods  |  |              | 3,116 |      |   | 730   | 
|Total
 inventory |  | $            | 7,673 |      | $ | 2,346 | 

The
Company developed a MAKO-branded unicompartmental knee implant system called
RESTORIS®, which launched in the third quarter of 2008. The Company also
developed the RIO system. In conjunction with the launch of RESTORIS and the
anticipated launch of the RIO system, the Company has discontinued portions of
its current implant lines and the manufacturing of its TGS. The Company
incurred write-offs totaling approximately $730,000 during the year ended
December 31, 2008 as follows:

| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Approximately
 $299,000 of obsolete inventory due to the discontinuation of the Companys
 current implant lines in connection with the launch of RESTORIS;             
| |   |                                                                                                                                                                         
| |  | Approximately
 $320,000 of obsolete inventory due to the discontinuation of the manufacturing
 of the Companys TGS in anticipation of the launch of the RIO system; and
| |   |                                                                                                                                                                         
| |  | Approximately
 $111,000 of other write-offs.                                                                                                                            

Depending
on demand for the Companys products and technical obsolescence, additional
future write-offs of the Companys inventory may occur. Write-downs of
inventory for the years ended December 31, 2007 and 2006 were
approximately $8,000 and $36,000, respectively. Write-downs of inventory are
included in cost of revenue - systems in the statements of operations.

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|                                               |  |              |        |                        |   |       |   |  |                                     | 
|---------------------------------------------- |  | ------------ | ------ | ---------------------- | - | ----- | - |  | ----------------------------------- | 
|(in thousands)                                 |  | December 31, |        | Estimated
 Useful Life |  
|                                               |  | 2008         |        | 2007                   |   |      
|Property and
 equipment:                       |  |              |        |                        |   |       |   |  |                                     | 
|Consigned
 TGS/RIO units and instruments       |  | $            | 705    |                        | $ | 606   |   |  | 2-5 years                           | 
|TGS/RIO demo
 systems                          |  |              | 549    |                        |   | 403   |   |  | 2-5 years                           | 
|Computer
 equipment and software               |  |              | 1,669  |                        |   | 1,057 |   |  | 3-5 years                           | 
|Manufacturing
 and laboratory equipment        |  |              | 1,261  |                        |   | 570   |   |  | 5 years                             | 
|Office
 furniture and equipment                |  |              | 804    |                        |   | 493   |   |  | 7 years                             | 
|Leasehold
 improvements                        |  |              | 387    |                        |   | 128   |   |  | Lesser of useful life or lease term | 
|                                               |  |              | 5,375  |                        |   | 3,257 |   |  |                                     | 
|Less accumulated depreciation and amortization |  |              | (1,951 | )                      |   | (936  | ) |  |                                     | 
|Total
 property and equipment, net             |  | $            | 3,424  |                        | $ | 2,321 |   |  |                                     | 

|                           |  |              |       |      |   |       | 
|-------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|(in thousands)             |  | December 31, |      
|                           |  | 2008         |       | 2007 |  
|Other accrued liabilities: |  |              |       |      |   |       | 
|Accrued
 royalties         |  | $            | 429   |      | $ | 349   | 
|Accrued
 legal fees        |  |              | 586   |      |   | 801   | 
|Other                      |  |              | 3,268 |      |   | 1,530 | 
|                           |  | $            | 4,283 |      | $ | 2,680 | 

5. Related Parties

Acquisitions of Assets From Predecessor

Z-Kat,
Inc. (Z-Kat) was formed in 1997 to develop and commercialize computer
assisted surgery (CAS) applications. Z-Kat formed MAKO in November 2004, to
develop and commercialize unique applications combining computer assisted
surgery (CAS) with haptic robotics in the medical field of orthopedics. In
December 2004, pursuant to a contribution agreement (the Contribution
Agreement), the Company acquired substantially all of Z-Kats tangible assets
and a majority of Z-Kats CAS technology assets not required for Z-Kats
retained CAS business, and all of its haptic robotic research and development
technology inventory. The Company was granted a limited license to Z-Kats CAS
and haptic robotic intellectual property portfolio for exclusive use in the
field of orthopedics (the Z-Kat License).

Pursuant
to the December 2004 contribution of the Z-Kat License, the Company obtained
the right to manage and maintain the Z-Kat patent portfolio, and assumed the
obligation to pay a ratable portion (among all licensees) of all maintenance
fees, patent costs and applicable net annual minimum royalties to Z-Kats
licensors. For the majority of applicable licenses, the Companys ratable
portion for the intellectual property fees, costs and net annual minimum
royalties has been 50% since consummation of the Z-Kat License.

In
December 2006, the Company entered into an Addendum to the Contribution
Agreement (the Addendum). Under the Addendum, Z-Kat assigned to MAKO its
right to receive required royalty payments from two prior third-party CAS
intellectual property licensees; and MAKO assumed the obligation to pay the
annual minimum royalty to a third-party CAS licensor due to the importance of
maintaining the licensed rights. There was no change in licensed intellectual
property rights as a result of the Addendum.

The
Z-Kat license and Addendum include sublicenses to third-party intellectual
property rights for which the Company is obligated to make ongoing royalty
payments ranging from 2% to 5% on the sale of certain products or components
thereof and minimum annual payments totaling $575,000.

In
December 2008, a third-party CAS intellectual property licensee from which MAKO
had the right to receive royalty payments under the Addendum terminated its
license. Accordingly, the Company no longer receives royalties under this
license.

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Employee Loans

During
2006, the Company issued $225,000 in employee loans to certain officers of the
Company (the Employee Loans). The Employee Loans accrued interest at a rate
of 4.0% per annum, compounded annually. The interest was paid biweekly. The
Employee Loans and accrued interest were due upon the earlier of one year from
the date of the Employee Loan or a liquidation event, as defined. The Employee
Loans were fully repaid in April 2007. In May and June 2007, the Company issued
$225,000 in employee loans to certain officers of the Company under terms that
were substantially similar to the Employee Loans issued in 2006. In August and
September 2007, the Company forgave the $225,000 of outstanding loans,
including accrued interest, with a charge to the statement of operations. No
Employee Loans were outstanding as of December 31, 2008 and 2007.

Restricted Stock and
Note Receivable from Related Party

In
July 2005 and May 2006, the Company issued a total of 446,287 shares of
restricted common stock to its CEO and 49,504 shares of unrestricted common
stock to an entity affiliated with the CEO in exchange for promissory notes
from the CEO totaling approximately $631,000 (representing the fair value of
the shares on the date of issuance) approximately 50% of which was nonrecourse.
The promissory notes accrued interest at a rate of 8% per annum, with 25% of
the restricted stock vesting immediately and the remainder vesting monthly over
48 months as service is provided. The restricted stock was pledged as
collateral against the promissory notes. In March 2007, the Company issued
82,508 shares of restricted common stock to its CEO at a purchase price of
$2.48 per share (the estimated fair value at the date of issuance) in exchange
for a promissory note of $205,000, 50% of which was nonrecourse and a pledge
agreement. The March 2007 restricted stock, pledge agreement and promissory
note were issued under terms substantially similar to the July 2005 and May
2006 restricted stock issuances. Because it was unclear as to whether the
recourse portion had substance as of the dates of issuance of the restricted
stock and the promissory notes, the Company determined to treat the entire
amount of the promissory notes related to the restricted stock as nonrecourse
for accounting purposes. A nonrecourse note issued for restricted stock is in
substance an option to acquire the stock. Accordingly, the Company recorded
compensation expense for the restricted stock grants and the promissory notes
and the restricted stock were not then recorded in the financial statements.
The compensation expense was determined under the Black-Scholes-Merton model
assuming a risk free interest rate of 0.0% (as the interest rate on the
promissory notes was greater than the risk free interest rate and the excess
was not significant to the Black-Scholes-Merton valuation  risk free interest
rate ranging from 4.08% to 4.96% less the stated interest rate of 8% implicit
in the promissory notes), a volatility factor ranging from 57.1% to 66.5% and a
6.25 year estimated life. The value of the common stock was initially
determined by the Companys board of directors and was validated as reasonable
on a retrospective basis in a March 2007 valuation by an independent valuation
firm.

On
September 5, 2007, the Company forgave approximately $1,149,000 of outstanding
loans, including accrued interest of $113,000, to its CEO, which represents all
loans outstanding to the Companys CEO. Of this amount $949,000 was associated
with the issuances of the restricted and unrestricted stock and $200,000 was
associated with the employee loans discussed above. In connection with the
forgiveness of the loans, 35,244 shares of common stock were surrendered by the
CEO to the Company to pay for the payroll taxes associated with the taxable
income from the forgiveness of the loans. The forgiveness of the notes
receivable resulted in a modification to the original award. Accordingly, the
Company accounted for the modification by determining the amount of the incremental
compensation charge to be recorded in accordance with paragraph 51 of SFAS
123(R). The original award, which was accounted for as a stock option, was
revalued on the date of modification using the Black-Scholes-Merton model with
current inputs for risk-free rate, volatility and market value. This calculated
amount was compared to the fair value of the restricted stock award on the date
of modification resulting in the incremental charge. Due to the forgiveness of
the note, the Company ceased to record the award as a stock option and
commenced the recording of the award as a restricted stock award. Accordingly,
on the date of modification, the Company recognized the incremental charge for
the portion of the vested shares and is recording the additional portion
related to the unvested shares over the remaining term. The forgiveness
resulted in a modification to the original terms of the restricted stock-based
awards with a charge of approximately $395,000 recorded in the financial
statements in September 2007. The remaining unrecognized compensation expense
of approximately $533,000 relating to the unvested restricted stock will be
recorded in the

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financial
statements over the remaining vesting period, along with the related vested
common stock. The compensation expense associated with the modification of the
terms of the restricted stock was determined under the Black-Scholes-Merton
model assuming a risk free interest rate of 0.0% (as the interest rate on the
promissory notes was greater than the risk free interest rate and the excess
was not significant to the Black-Scholes-Merton valuation  risk free interest
rate of 4.29% less the stated interest rate of 8% implicit in the promissory
notes), a volatility factor of 54.07% and an estimated life ranging from 4.10
to 5.80 years. The value of the common stock on the modification date was
determined in an August 2007 valuation by an independent valuation firm.

In
August 2007, the Company issued 247,524 shares of restricted stock to its CEO
at an estimated fair value of $11.12 per share on the date of issuance. The
restricted stock will vest over a four-year period. No restricted stock was
granted or forfeited during the year ended December 31, 2008.

Compensation
expense related to the CEO restricted stock was approximately $907,000,
$774,000 and $73,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. Compensation expense for the year ended December 31, 2007
included a charge of approximately $395,000 due to the modification of the
restricted stock awards discussed above.

The
following is a summary of changes in unvested CEO restricted stock for the year
ended December 31, 2008:

|                                       |  |        |  |                                   |   |  |  |   |      |  | 
|-------------------------------------- |  | ------ |  | --------------------------------- | - |  |  | - | ---- |  | 
|(in
 thousands, except per share data) |  | Shares |  | Weighted
 Average
 Fair Value (1) |  
|Unvested shares at December
 31, 2007  |  |        |  | 428                               |   |  |  | $ | 6.98 |  | 
|Shares vested in 2008                  |  |        |  | (161                              | ) |  |  |   | 5.63 |  | 
|Unvested shares at December
 31, 2008  |  |        |  | 267                               |   |  |  |   | 7.78 |  | 
|Vested shares at December
 31, 2008    |  |        |  | 474                               |   |  |  |   | 3.89 |  | 
|Total                                  |  |        |  | 741                               |   |  |  | $ | 5.29 |  | 

| |     |                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The weighted
 average fair value includes the incremental compensation charge resulting
 from the modification to the original terms of the restricted stock-based
 awards discussed above. The original weighted average grant-date fair values
 of the restricted stock awards granted during the years ended December 31,
 2007 and 2006 was $8.67 and $0.73, respectively.

As
of December 31, 2008, the remaining stock-based compensation expense for the
restricted stock awards was approximately $2.1 million, which will be
recognized on a straight line basis over a remaining weighted average period of
1.82 years.

Securities Purchase
Agreement

In
October 2008, the Company entered into a Securities Purchase Agreement for an
equity financing of up to $60 million, with initial gross proceeds of
approximately $40.2 million, which the Company closed on October 31, 2008, and
conditional access to an additional $20 million (the Second Closing). The
financing resulted in net proceeds to the Company of approximately $39.7
million, after expenses of approximately $469,000. In connection with the
financing, the Company issued and sold to the participating investors 6,451,613
shares of its common stock at a purchase price of $6.20 per share and issued at
the purchase price of $0.125 per warrant to the participating investors warrants to
purchase 1,290,323 shares of common stock at an exercise price of $7.44 per
share. The warrants will become exercisable 180 days from issuance and have a
seven-year term. Subject to the Companys satisfaction of certain business
related milestones before December 31, 2009, the Company will have the right to
require certain participants in the financing to purchase an additional $20
million of common stock and warrants to purchase common stock. At the initial
closing, the investors that agreed to provide the additional $20 million
investment received warrants  to purchase an
additional 322,581 shares of common stock at a purchase price of $0.125 per warrant and an exercise price of $6.20 per share.
These warrants will not be exercisable until the earlier of

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the Second
Closing or December 31, 2009, and are subject to forfeiture if the investors do
not participate in the Second Closing.

The
participating investors consisted of eleven accredited investors, six of which
were existing stockholders of the Company who were deemed to be affiliates of
the Company by virtue of their being represented on the Companys Board of
Directors or by virtue of their Board membership.

Although
the Second Closing is conditional upon achievement of certain business related
milestones before December 31, 2009, the Company received the necessary
stockholder approval in January 2009 for the potential future issuance of $20
million of common stock along with related warrants as contemplated by the
Securities Purchase Agreement.

6.
Intangible Assets

The Companys
intangible assets are comprised of a purchased patent application and licenses
to intellectual property rights (the Licenses). The Licenses are amortized
on a straight line basis over their estimated useful lives which range on
average from 10 to 19 years. See Note 7 for additional discussion of Licenses.

The
following tables present details of MAKOs intangible assets:

|                                |  |               |        |                                         |  |        |  |                                         |        |   |  |      | 
|------------------------------- |  | ------------- | ------ | --------------------------------------- |  | ------ |  | --------------------------------------- | ------ | - |  | ---- | 
|                                |  | December
 31, |       
|(in
 thousands)                 |  | 2008          |        | 2007                                    | 
|                                |  | Amount        |        | Weighted
 Average
 Amortization
 Period |  | Amount |  | Weighted
 Average
 Amortization
 Period |       
|Licenses                        |  | $             | 6,549  |                                         |  | 10.0   |  | $                                       | 6,549  |   |  | 10.0 | 
|Patent                          |  |               | 60     |                                         |  | 17.8   |  |                                         | 60     |   |  | 17.8 | 
|                                |  |               | 6,609  |                                         |  | 10.1   |  |                                         | 6,609  |   |  | 10.1 | 
|Less: accumulated
 amortization |  |               | (1,792 | )                                       |  |        |  |                                         | (1,132 | ) |  |      | 
|Intangible assets, net          |  | $             | 4,817  |                                         |  |        |  | $                                       | 5,477  |   |  |      | 

Amortization
expense related to intangible assets was approximately $660,000, $645,000 and
$470,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

The
estimated future amortization expense of intangible assets for the next five
years as of December 31, 2008 is as follows:

|                |  |   |       | 
|--------------- |  | - | ----- | 
|(in
 thousands) |  |   |       | 
|2009            |  | $ | 660   | 
|2010            |  |   | 660   | 
|2011            |  |   | 660   | 
|2012            |  |   | 660   | 
|2013            |  |   | 660   | 
|Total           |  | $ | 3,300 | 

7. Commitments and Contingencies

Operating Leases

The
Company leases its facility under an operating lease that expires in July 2011.
The Company has the option to renew its facility lease for two consecutive
three year periods. Rent expense on a straight-line basis was $498,000,
$314,000 and $250,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. The rent

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expense for
the years ended December 31, 2008, 2007 and 2006 included the Companys monthly
variable operating costs of the facility.

Future
minimum lease commitments, excluding monthly variable operating costs, under
the Companys operating lease as of December 31, 2008 are approximately as
follows:

|                |  |   |       | 
|--------------- |  | - | ----- | 
|(in
 thousands) |  |   |       | 
|2009            |  | $ | 389   | 
|2010            |  |   | 400   | 
|2011            |  |   | 239   | 
|                |  | $ | 1,028 | 

Purchase Commitments

At
December 31, 2008, the Company was committed to make future purchases for
inventory related items under various purchase arrangements with fixed purchase
provisions aggregating approximately $7.1 million.

License and Royalty
Agreements

As
discussed in Note 5, in December 2004 and December 2006, respectively, the
Company entered into the Z-Kat License and the Addendum, whereby MAKO was
granted rights to certain intellectual property. The Z-Kat License included
sublicenses to third-party intellectual property rights (the Sublicenses).
The Z-Kat License is fully paid up as to licenses directly to Z-Kat. Under the
Sublicenses, the Company is obligated to make ongoing royalty payments ranging
from 2% to 5% on the sale of certain products or components thereof and minimum
annual payments totaling $575,000. By their terms, the Z-Kat License and the component
Sublicenses generally continue until all of the licensed patents have expired,
which, based on the licensed granted patents and presently pending patent
applications is currently estimated to be December 2024.

In
March 2006, the Company entered into a license agreement with International
Business Machines Corporation (IBM) for a license, in the Companys field of
business, to IBMs patent portfolio (the IBM License) in exchange for a
payment of $2 million upon execution of the agreement (the Upfront License
Fee) and a deferred payment of $4 million payable upon a change of control, as
defined (e.g., IPO, acquisition or change in voting ownership greater than
50.01%) (the Deferred License Fee). The IBM License requires royalty payments
of 2% of the selling price of each TGS / RIO system. The Upfront License Fee
and net present value of the Deferred License Fee were included in intangible
assets in the accompanying balance sheets. The net present value of the
Deferred License Fee obligation was approximately $3.4 million, net of a
discount of $590,000 and was recorded as a long-term debt obligation as the
Company believed it was probable at the inception of the agreement that the
contingent obligation would become payable. The net present value of the
Deferred License Fee was determined using an incremental borrowing rate of 8%
and an expected payment date of approximately two years from the effective date
of the license agreement. The discount on the debt obligation was being
amortized over the estimated term of the Deferred License Fee obligation as
interest expense which was approximately $45,000 and $305,000 for the years
ended December 31, 2008 and 2007, respectively, in the accompanying statements
of operations. In February 2008, the Company paid the $4 million Deferred
License Fee due to IBM upon completion of the Companys IPO.

The
Company has other license agreements related to current product offerings and
research and development projects. Upfront license fees paid for these agreements
total approximately $1.1 million. Royalty payments related to these agreements
are anticipated to range between 1% and 7% of future sales of the Companys RIO
system and components thereof and/or products. These royalty payments are
subject to certain minimum annual royalty payments as shown in the schedule
below. The terms of these license agreements continue until the related
licensed patents and intellectual property rights expire, which is expected to
range between 8 and 17 years. The net expense related to the Companys license
and royalty agreements was approximately $525,000, $304,000 and $134,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.

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As
of December 31, 2008, future annual minimum royalty payments under the licenses
and sublicenses are as follows:

|                |  |   |       | 
|--------------- |  | - | ----- | 
|(in
 thousands) |  |   |       | 
|2009            |  | $ | 660   | 
|2010            |  |   | 690   | 
|2011            |  |   | 630   | 
|2012            |  |   | 630   | 
|2013            |  |   | 431   | 
|Thereafter      |  |   | 386   | 
|                |  | $ | 3,427 | 

Contingencies

In
November 2007, the Company received a letter from counsel to SensAble
Technologies, Inc. (SensAble), a licensor to the Company, alleging that the
Company infringed certain of its patents and breached a confidentiality
provision in the license agreement between SensAble and the Company dated May
2006 (the SensAble License Agreement). In the letter, SensAble alleged, among
other things, that the Company exceeded the scope of its licensed field of CAS
by using its technology for, among other things, pre-operative planning and
post-operative follow-up. SensAble also alleged that the Companys TGS
infringed one or more claims in five U.S. patents that are not among the
patents licensed to the Company pursuant to the SensAble License Agreement.

The
Company investigated SensAbles allegations, and, based on the opinion of
external counsel, it believes that if SensAble initiates a lawsuit against the
Company, a court should find that its TGS does not infringe any of the SensAble
patents identified in the November 2007 letter. The Company communicated its
belief to SensAble. SensAble has not commenced any legal action against the
Company, but may do so in the future. The letter from counsel to SensAble
stated that unless the Company, among other things, ceases and desists from
alleged infringement of SensAbles patents or pays additional licensing fees,
including a proposed licensing fee of $30 million for additional patents not
included in the SensAble License Agreement, SensAble intends to bring a lawsuit
against the Company. The Company intends to vigorously defend itself against
these allegations in the event of a lawsuit. There have been no new material
developments with respect to this matter since the second quarter of 2008. The
Company cannot predict the outcome of this matter at this time.

The
Company has been a party to other legal contingencies or claims arising in the
normal course of business, none of which the Company believes is material to
its financial position, results of operations or cash flows.

8. Redeemable Convertible Preferred Stock and
Stockholders Equity (Deficit)

Redeemable
Convertible Preferred Stock

As
of December 31, 2008, the Company was authorized to issue 27,000,000 shares of
$0.001 par value preferred stock. As of December 31, 2008, there were no shares
of preferred stock issued or outstanding. All shares of Series A, B and C
redeemable convertible preferred stock that were issued and outstanding as of
December 31, 2007 converted into 10,945,080 shares of common stock upon closing
of the Companys IPO in February 2008.

Common Stock

As
of December 31, 2008, the Company was authorized to issue 135,000,000 shares of
$0.001 par value common stock. As of December 31, 2007, the Company was
authorized to issue 60,000,000 shares of $0.001 par value common stock. Common
stockholders are entitled to dividends as and if declared by the Board of
Directors,

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subject to the
rights of holders of all classes of stock outstanding having priority rights as
to dividends. There have been no dividends declared to date. The holder of each
share of common stock is entitled to one vote.

In
December 2004, the Company issued 189,768 shares of restricted common stock to
certain consultants (the Consultant Restricted Stock). The Consultant
Restricted Stock vested in tranches upon the Companys achievement of certain
business milestones and any unvested restricted stock vested immediately upon
completion of an initial public offering of common stock. Upon vesting, the
Company recorded a consulting expense equal to the estimated fair value of the
Companys common stock on the date of vesting. As of January 1, 2008, 94,884
shares of the Consultant Restricted Stock were unvested. Upon closing of the
IPO in February 2008, the vesting of the remaining 94,884 shares of Consultant
Restricted Stock was accelerated and the Company recognized $949,000 of
compensation expense associated with the accelerated vesting of the Consultant
Restricted Stock during the year ended December 31, 2008 based on the IPO price
of $10.00 per share.

401K Plan

The
Company maintains a qualified deferred compensation plan under Section 401K of
the Internal Revenue Code, covering substantially all full-time employees,
which permits employees to contribute up to 84% of pre-tax annual compensation
up to annual statutory limitations. The discretionary company match for
employee contributions to the plan is 25% of up to the first 6% of the
participants earnings contributed to the plan. The discretionary company match
commenced in 2008 and to date has not been significant.

Employee Stock
Purchase Plan

In
January 2008, the Companys Board of Directors and stockholders approved the
MAKO Surgical Corp. 2008 Employee Stock Purchase Plan (the 2008 Employee Stock
Purchase Plan). The 2008 Employee Stock Purchase Plan became effective upon
closing of the IPO. The 2008 Employee Stock Purchase Plan authorizes the
issuance of 625,000 shares of the Companys common stock for purchase by
eligible employees of the Company or any of its participating affiliates. The
shares of common stock issuable under the 2008 Employee Stock Purchase Plan may
be authorized but unissued shares, treasury shares or shares purchased on the
open market. The purchase price for a purchase period may not be less than 85%
of the fair market value of the Companys common stock on the first trading day
of the applicable purchase period or the last trading day of such purchase
period, whichever is lower. The initial purchase period of the 2008 Employee
Stock Purchase Plan began on October 1, 2008. In January, 2009, the Company
issued 17,784 shares under the 2008 Employee Stock Purchase Plan upon the
expiration of the initial purchase period on December 31, 2008.

Stock Option Plans
and Stock-Based Compensation

The
Company recognizes compensation expense for its stock-based awards in
accordance with SFAS No. 123 Revised, Share-Based Payment (SFAS 123(R)). SFAS
123(R) requires the recognition of compensation expense, using a fair value
based method, for costs related to all stock-based payments including stock
options. SFAS 123(R) requires companies to estimate the fair value of
stock-based payment awards on the date of grant using an option-pricing model.

During
the year ended December 31, 2008, 2007 and 2006, stock-based compensation
expense was $3.3 million, $1.2 million and $170,000 respectively. Included
within stock-based compensation expense for the year ended December 31, 2008
were $1.4 million related to stock option grants, $907,000 related to the
partial vesting of 741,075 shares of restricted stock granted to the Companys
CEO at various dates from 2005 through 2007 (see further discussion in Note 5),
$949,000 related to the vesting of the Consultant Restricted Stock, and $40,000
related to employee stock purchases under the 2008 Employee Stock Purchase
Plan.

In
December 2004, the Companys stockholders approved the Companys 2004 Stock
Incentive Plan (the 2004 Plan). Under the 2004 Plan, the Board of Directors
is authorized to grant restricted common stock and options to purchase shares
of common stock to employees, directors and consultants. In January 2008, the
Companys Board of Directors and stockholders approved the MAKO Surgical Corp.
2008 Omnibus Incentive

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Plan (the
2008 Plan, and together with the 2004 Plan, the Plans). The 2008 Plan
became effective upon the closing of the IPO and will expire January 9, 2018
unless earlier terminated by the Board of Directors. The aggregate number of
shares of the Companys common stock that may be issued initially pursuant to
stock awards under the 2008 Plan is 1,084,703 shares, which includes
approximately 85,000 shares previously reserved but unallocated under the 2004
Plan. Awards under the 2008 Plan may be made in the form of: stock options,
which may be either incentive stock options or non-qualified stock options;
stock appreciation rights; restricted stock; restricted stock units; dividend
equivalent rights; performance shares; performance units; cash-based awards;
other stock-based awards, including unrestricted shares; and any combination of
the foregoing.

Generally,
the Companys outstanding stock options vest over four years. However, certain
stock options granted in 2004 vested on the date of grant. Stock options
granted to certain non-employee directors generally vest over three years.
Continued vesting typically terminates when the employment or consulting
relationship ends. Vesting generally begins on the date of grant; however,
certain stock options granted in 2007 began vesting upon the achievement of performance
conditions.

Under
the terms of the Plans, the maximum term of options intended to be incentive
stock options granted to persons who own at least 10% of the voting power of
all outstanding stock on the date of grant is 5 years. The maximum term of all
other options is 10 years. Options issued under the 2008 Plan that are
forfeited or expire will again be made available for issuing grants under the
2008 Plan. Options issued under the 2004 Plan that are forfeited or expire will
not be made available for issuing grants under the 2008 Plan. All future
awards will be made under the Companys 2008 Plan.

As
of December 31, 2008, the Company had reserved shares of common stock for the
issuance of common stock under the 2008 Employee Stock Purchase Plan, the
exercise of warrants and the issuance of options granted under the 2008 Plan as
follows:

|                                   |  |  |       | 
|---------------------------------- |  |  | ----- | 
|(in
 thousands)                    |  |  |       | 
|2008 Employee Stock
 Purchase Plan |  |  | 625   | 
|Warrants to purchase common
 stock |  |  | 2,076 | 
|2008 Plan                          |  |  | 1,085 | 
|                                   |  |  | 3,786 | 

The
2008 Plan contains an evergreen provision whereby the authorized shares
increase on January 1st of each year in an amount equal to the least of (1)
four percent (4%) of the total number of shares of common stock outstanding on
December 31st of the preceding year, (2) 2.5 million shares and (3) a number of
shares determined by the Companys Board of Directors that is lesser than (1)
and (2). The number of additional shares authorized under the 2008 Plan on
January 1, 2009 was approximately 998,000.

Only
employees are eligible to receive incentive stock options. Non-employees may be
granted non-qualified options. The Board of Directors has the authority to set
the exercise price of all options granted, subject to the exercise price of
incentive stock options being no less than 100% of the estimated fair value, as
determined by the Board of Directors, of a share of common stock on the date of
grant; and no less than 85% of the estimated fair value for non-qualified stock
options, except for an employee or non-employee with options who owns more than
10% of the voting power of all classes of stock of the Company, in which case
the exercise price shall be no less than 110% of the fair market value per
share on the grant date. Options become exercisable as determined by the Board
of Directors.

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Activity
under the Plans is summarized as follows:

|                                       |  |                                      |   |                     |   |                                    |      | 
|-------------------------------------- |  | ------------------------------------ | - | ------------------- | - | ---------------------------------- | ---- | 
|(in thousands, except per share data)  |  |                                      |   | Outstanding Options |  
|                                       |  | Shares/Options
 Available
 For Grant |   | Number of
 Options  |   | Weighted
 Average
 Exercise
 Price |     
|Balance at December 31, 2005           |  | 814                                  |   | 630                 |   | $                                  | 0.91 | 
|Restricted
 stock issued               |  | (83                                  | ) | ―                   |   |                                    | ―    | 
|Options
 granted                       |  | (345                                 | ) | 345                 |   |                                    | 1.27 | 
|Options
 exercised                     |  | ―                                    |   | (2                  | ) |                                    | 0.67 | 
|Options
 forfeited                     |  | 25                                   |   | (25                 | ) |                                    | 0.85 | 
|Balance at December 31, 2006           |  | 411                                  |   | 948                 |   |                                    | 1.06 | 
|Shares
 reserved                       |  | 974                                  |   | ―                   |   |                                    | ―    | 
|Restricted
 stock issued               |  | (330                                 | ) | ―                   |   |                                    | ―    | 
|Options
 granted                       |  | (1,002                               | ) | 1,002               |   |                                    | 8.30 | 
|Options
 exercised                     |  | ―                                    |   | (1                  | ) |                                    | 1.27 | 
|Options
 forfeited                     |  | 32                                   |   | (32                 | ) |                                    | 3.51 | 
|Balance at December 31, 2007           |  | 85                                   |   | 1,917               |   |                                    | 4.81 | 
|Shares
 reserved                       |  | 1,000                                |   | ―                   |   |                                    | ―    | 
|Options
 granted                       |  | (355                                 | ) | 355                 |   |                                    | 8.88 | 
|Options
 exercised                     |  | ―                                    |   | (62                 | ) |                                    | 0.76 | 
|Options
 forfeited under the 2004 Plan |  | ―                                    |   | (14                 | ) |                                    | 6.80 | 
|Options
 forfeited under the 2008 Plan |  | 3                                    |   | (3                  | ) |                                    | 9.30 | 
|Balance at December 31, 2008           |  | 733                                  |   | 2,193               |   | $                                  | 5.56 | 

Included
in the 2008 stock option grants in the table above are 198,019 incentive stock
options the Company granted to its CEO upon the completion of its IPO in
February 2008.

Included
in the 2007 option grants in the table above are approximately 462,000 options
granted at an exercise price of $11.12 per share that were subject to
performance conditions based on the achievement of certain performance
metrics. Upon satisfaction of the performance conditions, the options began vesting
ratably quarterly over a period of four years. Through December 31, 2007,
the Company began recognizing compensation expense on approximately 296,000
performance options as both the terms of the performance conditions were
established and it was probable that the performance condition will be
satisfied. In 2008, the Company began recognizing compensation expense on the
remaining performance options as the performance conditions were established
and it was probable that the performance conditions will be satisfied. If the
performance conditions are not met, no compensation cost is recognized and any
previously recognized compensation cost is reversed.

The
options outstanding and exercisable, by exercise price, at December 31,
2008 were as follows:

|                                      |  |                      |  |                                                   |  |                                |       |                                 |   |                   |  |                                                   |  |                                |  |                                 |       |  |   |       | 
|------------------------------------- |  | -------------------- |  | ------------------------------------------------- |  | ------------------------------ | ----- | ------------------------------- | - | ----------------- |  | ------------------------------------------------- |  | ------------------------------ |  | ------------------------------- | ----- |  | - | ----- | 
|                                      |  | Options
 Outstanding |  | Options
 Exercisable                              | 
|(in thousands, except per share data) |  | Number
 OfOptions    |  | Weighted
 AverageRemainingContractualLife (Years) |  | Weighted
 AverageExercisePrice |       | Aggregate
 Intrinsic
 Value (1) |   | Number
 OfOptions |  | Weighted
 AverageRemainingContractualLife (Years) |  | Weighted
 AverageExercisePrice |  | Aggregate
 Intrinsic
 Value (1) |      
|Range of
 Exercise Prices:            |  |                      |  |                                                   |  |                                |       |                                 |   |                   |  |                                                   |  |                                |  |                                 |       |  |   |       | 
|$0.67                                 |  | 292                  |  |                                                   |  | $                              | 0.67  |                                 |   |                   |  | 292                                               |  |                                |  | $                               | 0.67  |  |   |       | 
|$1.27  $2.48                         |  | 884                  |  |                                                   |  | $                              | 1.70  |                                 |   |                   |  | 565                                               |  |                                |  | $                               | 1.57  |  |   |       | 
|$6.99  $10.39                        |  | 366                  |  |                                                   |  | $                              | 8.91  |                                 |   |                   |  | 58                                                |  |                                |  | $                               | 9.06  |  |   |       | 
|$11.12                                |  | 651                  |  |                                                   |  | $                              | 11.12 |                                 |   |                   |  | 119                                               |  |                                |  | $                               | 11.12 |  |   |       | 
|                                      |  | 2,193                |  | 7.89                                              |  | $                              | 5.56  |                                 | $ | 6,161             |  | 1,034                                             |  | 7.14                           |  | $                               | 2.84  |  | $ | 4,644 | 

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|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
 aggregate intrinsic value represents the total pre-tax intrinsic value, based
 on the Companys closing stock price of $6.68 on December 31, 2008, which
 would have been received by the option holders had all option holders
 exercised their options as of that date.

The
weighted average fair values of options granted were $5.08, $4.54, and $0.82
for the years ended December 31, 2008, 2007 and 2006, respectively. The total
fair value of shares vested was approximately $1,322,000, $260,000, and $79,000
during the years ended December 31, 2008, 2007 and 2006, respectively. The
total intrinsic value of options exercised was $491,000 during the year ended
December 31, 2008.

For
options that vest upon grant, the Company records the entire related
compensation expense immediately upon the date of grant. For all other options,
the Company records compensation expense on a straight-line basis over the
vesting period. As of December 31, 2008, there was total unrecognized
compensation cost of approximately $4.5 million, net of estimated forfeitures,
related to non-vested stock-based payments granted to the Companys employees
and non-employee directors. Total unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures, and is expected to be
recognized over a remaining weighted average period of 2.07 years as of
December 31, 2008.

The
Company uses the Black-Scholes-Merton pricing model to determine the fair value
of stock options. The determination of the fair value of stock-based payment
awards on the date of grant using a pricing model is affected by our stock price
as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of
the awards, actual and projected employee stock option exercise behaviors,
risk-free interest rates and expected dividends.

The
estimated grant date fair values of the employee stock options were calculated
using the Black-Scholes-Merton valuation model, based on the following
assumptions:

|                         |  |                          |  |                 |  |                
|------------------------ |  | ------------------------ |  | --------------- |  | ---------------
|Stock Option Plans       |  | Years Ended December 31,
|                         |  | 2008                     |  | 2007            |  | 2006           
|Risk-free
 interest rate |  | 1.59% - 3.62%            |  | 4.50% - 5.14%   |  | 4.29% - 5.23%  
|Expected
 life           |  | 6.25 years               |  | 6.25 years      |  | 6.25 years     
|Expected
 dividends      |  | ―                        |  | ―               |  | ―              
|Expected
 volatility     |  | 56.36% - 58.31%          |  | 56.24% - 60.00% |  | 59.23% - 64.27%

In
connection with the adoption of SFAS 123(R), the Company estimates the fair
value of each share of stock which will be issued under the 2008 Employee Stock
Purchase Plan based upon its stock prices at the beginning of each offering
period using a Black-Scholes-Merton pricing model and amortizes that value to
expense over the plan purchase period. The fair values determined for the year
ended December 31, 2008, as well as the assumptions used in calculating
those values are as follows:

|                                  |  |                         
|--------------------------------- |  | ------------------------
|2008 Employee Stock Purchase Plan |  | Year Ended
 December 31,
|                                  |  | 2008                    
|Fair Value                        |  | $1.82 - $1.89           
|                                  |  |                         
|Assumptions                       |  |                         
|Risk-free interest rate           |  | 1.87% - 3.29%           
|Expected life                     |  | 0.25 years              
|Expected dividends                |  | ―                       
|Expected volatility               |  | 57.05% - 60.68%         

Risk-Free
Interest Rate. The risk-free rate is based on U.S.
Treasury zero-coupon issues with remaining terms similar to the expected term
on the options.

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Weighted-Average Expected Term. The
expected term of options granted is determined using the average period the
stock options are expected to remain outstanding and is based on the options
vesting term, contractual terms and historical exercise and vesting information
used to develop reasonable expectations about future exercise patterns and post-vesting
employment termination behavior. The expected term of the 2008 Employee Stock
Purchase Plan is equal to the duration of the purchase period.

Dividend Yield. The Company has never
declared or paid any cash dividends and does not plan to pay cash dividends in
the foreseeable future, and, therefore, used an expected dividend yield of zero
in the valuation model.

Volatility. Since the Company was a
private entity until February 2008 with no historical data regarding the
volatility of its common stock, the expected volatility used for the years
ended December 31, 2008, 2007 and 2006, is based on volatility of similar
entities, referred to as guideline companies. In evaluating similarity, the
Company considered factors such as industry, stage of life cycle and size.

Forfeitures. SFAS No. 123(R)
also requires the Company to estimate forfeitures at the time of grant, and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. The Company uses historical data to estimate pre-vesting
option forfeitures and records stock-based compensation expense only for those
awards that are expected to vest. All stock-based payment awards are amortized
on a straight-line basis over the requisite service periods of the awards,
which are generally the vesting periods. If the Companys actual forfeiture
rate is materially different from its estimate, the stock-based compensation
expense could be significantly different from what the Company has recorded in
the accompanying periods.

Warrants

In
December 2004, in connection with the issuance of the Series A redeemable
convertible preferred stock to third parties, the Company issued at the
purchase price of $0.03 per share warrants to purchase 272,259 shares of
common stock. In addition, the Company issued warrants to Z-Kat to purchase
190,457 shares of common stock under the Contribution Agreement. The
warrants are immediately exercisable at an exercise price of $3.00 per share,
with the exercise period expiring in December 2014. As of December 31,
2008 and 2007, all the warrants were outstanding and exercisable, and none have
been exercised.

As
more fully described in Note 5, in October 2008, the Company entered into a
Securities Purchase Agreement for an equity financing of up to $60 million,
with initial gross proceeds of approximately $40.2 million, and conditional
access to an additional $20 million. In connection with the financing, the
Company issued at the purchase price of $0.125 per warrant to the participating
investors warrants to purchase 1,290,323 shares of common stock at an exercise price of
$7.44 per share. The warrants will become exercisable 180 days from issuance
and have a seven-year term. In addition,  at a purchase
price of $0.125 per warrant, the Company issued warrants to purchase 322,581 shares of common stock at an
exercise price of $6.20 per share to investors that agreed purchase an
additional $20 million of common stock in the Second Closing. These warrants
will not be exercisable until the earlier of the Second Closing or December 31,
2009.

105

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9. Income Taxes

The
provision for income taxes is as follows:

|                               |  |                    |         |                    |   |                    |   |   |        |  
|------------------------------ |  | ------------------ | ------- | ------------------ | - | ------------------ | - | - | ------ | -
|(in thousands)                 |  | Years Ended        |        
|                               |  | December 31,
 2008 |         | December 31,
 2007 |   | December 31,
 2006 |  
|Current
 income taxes:         |  |                    |         |                    |   |                    |   |   |        |  
|Federal                        |  | $                  | ―       |                    | $ | ―                  |   | $ | ―      |  
|State                          |  |                    | ―       |                    |   | ―                  |   |   | ―      |  
|Total
 current income taxes    |  |                    | ―       |                    |   | ―                  |   |   | ―      |  
|Deferred
 income taxes         |  |                    | (13,031 | )                  |   | (7,835             | ) |   | (4,011 | )
|Change
 in valuation allowance |  |                    | 13,031  |                    |   | 7,835              |   |   | 4,011  |  
|Provision
 for income taxes    |  | $                  | ―       |                    | $ | ―                  |   | $ | ―      |  

The
Company accounts for income taxes under SFAS 109,Accounting for Income Taxes. Deferred
income taxes are determined based upon differences between financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted income tax rates and laws that will be in effect when the differences
are expected to reverse.

No
current or deferred income taxes were recorded for the years ended
December 31, 2008, 2007 and 2006, as the Companys income tax benefits
were fully offset by a corresponding increase to the valuation allowance
against its net deferred income tax assets.

At
December 31, 2008, 2007 and 2006, the Company had federal and state net
operating loss carryforwards of approximately $60 million, $32.9 million and
$14.5 million, respectively, available to offset future taxable income. These
net operating loss carryforwards will expire in varying amounts from 2024
through 2028.

The
Tax Reform Act of 1986 limits the annual utilization of net operating loss and
tax credit carryforwards, following an ownership change of the Company. Note
that as a result of the Companys IPO in February 2008, the Company underwent a
change of ownership for purposes of the Tax Reform Act during the tax year
ended December 31, 2008.

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Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows:

|                                                  |  |              |         |      |   |         |  
|------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|(in thousands)                                    |  | December 31, |        
|                                                  |  | 2008         |         | 2007 |  
|Current
 deferred income tax assets:              |  |              |         |      |   |         |  
|Deferred
 revenue                                 |  | $            | 4,443   |      | $ | 19      |  
|Accrued
 bonus                                    |  |              | ―       |      |   | 5       |  
|Total
 current deferred income tax assets         |  |              | 4,443   |      |   | 24      |  
|                                                  |  |              |         |      |   |         |  
|Noncurrent
 deferred income tax assets:           |  |              |         |      |   |         |  
|Net
 operating loss carryforwards                 |  |              | 23,144  |      |   | 12,678  |  
|Deferred
 revenue                                 |  |              | 27      |      |   | 1,277   |  
|Amortization                                      |  |              | 322     |      |   | 230     |  
|Other                                             |  |              | 629     |      |   | 327     |  
|Total
 noncurrent deferred income tax assets      |  |              | 24,122  |      |   | 14,512  |  
|                                                  |  |              |         |      |   |         |  
|Current
 deferred income tax liabilities:         |  |              |         |      |   |         |  
|Deferred
 costs                                   |  |              | (1,392  | )    |   |         |  
|                                                  |  |              | (1,392  | )    |   |         |  
|                                                  |  |              |         |      |   |         |  
|Noncurrent
 deferred income tax liabilities:      |  |              |         |      |   |         |  
|Deferred
 costs                                   |  |              | ―       |      |   | (357    | )
|Other
 deferred income tax liabilities            |  |              | (21     | )    |   | (58     | )
|Total
 noncurrent deferred income tax liabilities |  |              | (21     | )    |   | (415    | )
|                                                  |  |              |         |      |   |         |  
|Less
 valuation allowance                         |  |              | (27,152 | )    |   | (14,121 | )
|                                                  |  |              |         |      |   |         |  
|Total
 deferred income tax assets, net            |  | $            | ―       |      | $ | ―       |  

Due
to uncertainty surrounding realization of the deferred income tax assets in
future periods, the Company has recorded a 100% valuation allowance against its
net deferred tax assets. If it is determined in the future that it is more
likely than not that the deferred income tax assets are realizable, the
valuation allowance will be reduced.

The
reconciliation of the income tax provision computed at the U.S. federal
statutory rate to income tax provision is as follows:

|                                    |  |                    |    |                    |    |                    |   
|----------------------------------- |  | ------------------ | -- | ------------------ | -- | ------------------ | --
|                                    |  | Years Ended        |   
|                                    |  | December 31,
 2008 |    | December 31,
 2007 |    | December 31,
 2006 |   
|                                    |  |                    |    |                    |    |                    |   
|Tax at U.S.
 statutory rate         |  | (35.00             | )% | (35.00             | )% | (35.00             | )%
|State taxes,
 net of federal impact |  | (3.26              | )% | (3.55              | )% | (3.50              | )%
|Non-deductible
 items               |  | 3.13               | %  | 0.28               | %  | 0.72               | % 
|Change in
 valuation allowance      |  | 35.14              | %  | 37.93              | %  | 37.78              | % 
|Other, net                          |  | (0.01              | )% | 0.34               | %  | 0.00               | % 
|Effective
 income tax rate          |  | 0.00               | %  | 0.00               | %  | 0.00               | % 

107

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In
July 2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes.
FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted the provisions of
FIN 48 effective January 1, 2007. At the date of adoption of
FIN 48, the Company had no unrecognized tax benefits and expected no
significant changes in unrecognized tax benefits in the next 12 months.
The adoption of this statement did not result in a cumulative accounting
adjustment and did not impact the Companys financial position, results of
operations or cash flows. In accordance with FIN 48, paragraph 19,
the Company has decided to classify any interest and penalties as a component
of income tax expense. To date, there have been no interest or penalties
charged to the Company in relation to the underpayment of income taxes. The
Companys primary tax jurisdictions are the United States, Florida, California,
Rhode Island, Ohio, New York, Georgia, Texas, Illinois, North Carolina, Pennsylvania, Maryland, Colorado, Oklahoma and
Tennessee. The tax years from 2004 through 2008 remain open and are subject to
examination by the appropriate governmental agencies.

10. Selected Quarterly Data (Unaudited)

|                                                                            |  |      |        |    |   |        |   |    |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------ | -- | - | ------ | - | -- | ------- | - | - | ------- | -
|(in thousands, except per share data)                                       |  | 2008 |       
|                                                                            |  | Q1   |        | Q2 |   | Q3     |   | Q4 |        
|Revenue                                                                     |  | $    | 498    |    | $ | 704    |   | $  | 777     |   | $ | 965     |  
|Gross profit (loss)                                                         |  |      | 128    |    |   | 224    |   |    | (584    | ) |   | (270    | )
|Loss from operations                                                        |  |      | (8,552 | )  |   | (7,805 | ) |    | (10,443 | ) |   | (11,160 | )
|Net loss                                                                    |  |      | (8,501 | )  |   | (7,565 | ) |    | (10,202 | ) |   | (10,814 | )
|Net loss attributable to common stockholders                                |  |      | (9,066 | )  |   | (7,565 | ) |    | (10,202 | ) |   | (10,814 | )
|Net loss per share  basic and diluted attributable to
common
 stockholders |  |      | (0.95  | )  |   | (0.42  | ) |    | (0.56   | ) |   | (0.48   | )
|                                                                            |  |      |        |    |   |        |   |    |         |   |   |         |  
|(in thousands, except per share data)                                       |  | 2007 |       
|                                                                            |  | Q1   |        | Q2 |   | Q3     |   | Q4 |        
|Revenue                                                                     |  | $    | 100    |    | $ | 106    |   | $  | 150     |   | $ | 415     |  
|Gross profit (loss)                                                         |  |      | 64     |    |   | 59     |   |    | (59     | ) |   | 124     |  
|Loss from operations                                                        |  |      | (3,656 | )  |   | (4,255 | ) |    | (5,981  | ) |   | (7,528  | )
|Net loss                                                                    |  |      | (3,496 | )  |   | (4,015 | ) |    | (5,750  | ) |   | (7,397  | )
|Net loss attributable to common stockholders                                |  |      | (4,251 | )  |   | (4,969 | ) |    | (6,718  | ) |   | (8,380  | )
|Net loss per share  basic and diluted
 attributable to common stockholders |  |      | (2.73  | )  |   | (3.19  | ) |    | (4.12   | ) |   | (4.53   | )

108

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|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

|            |                        
|----------- | -----------------------
|ITEM 9A(T). | CONTROLS AND PROCEDURES

In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, or the
Exchange Act, our management evaluated, with the participation of our chief
executive officer and chief financial officer, or the Certifying Officers, the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December
31, 2008. Based upon their evaluation of these disclosure controls and
procedures, our Certifying Officers concluded that the disclosure controls and
procedures were effective as of December 31, 2008 to provide reasonable
assurance that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC rules and forms, and to
provide reasonable assurance that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding
required disclosure.

We
believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the likelihood of future events,
and therefore can only provide reasonable, not absolute, assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.

Managements Report on Internal Control Over
Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended, as a process designed by, or under the
supervision of, a companys principal executive and financial officers, or the
certifying officers, and effected by a companys board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with the authorization of our board of directors and management; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.

Under
the supervision and with the participation of our management, including the
certifying officers, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation
under the criteria established in Internal Control  Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2008. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by our

109

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independent
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this annual report.

During
the most recently completed fiscal quarter, there was no change in our internal
control over financial reporting that has materially affected or is reasonably
likely to materially affect, our internal control over financial reporting.

|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

None

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PART III.

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2009 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

| |   |                                                         
| | - | --------------------------------------------------------
| |  | Section
 16(a) Beneficial Ownership Reporting Compliance
| |   |                                                         
| |  | Election of
 Directors                                  
| |   |                                                         
| |  | Board of
 Directors and Corporate Governance            
| |   |                                                         
| |  | Executive
 Officers and Key Employees                   

|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2009 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

| |   |                                      
| | - | -------------------------------------
| |  | Director
 Compensation               
| |   |                                      
| |  | Compensation
 Discussion and Analysis
| |   |                                      
| |  | Compensation
 Committee Report       
| |   |                                      
| |  | Executive
 Compensation              

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2009
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

| |   |                        
| | - | -----------------------
| |  | Principal
 Stockholders

The
information under Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity
Compensation Plan Information in this annual report on Form 10-K is also
incorporated herein by reference.

|         |                                                                      
|-------- | ---------------------------------------------------------------------
|ITEM 13. | CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2009
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | Board of
 Directors and Corporate Governance  Independent Directors
| |   |                                                                     
| |  | Certain
 Relationships and Related Person Transactions              

111

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|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2009
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Ratification
 of the Appointment of Ernst & Young LLP as Independent Registered Public
 Accounting Firm

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PART IV

|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL
STATEMENTS and FINANCIAL STATEMENT SCHEDULES

|                                                                                                                                                                         |                                                                                         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|                                                                                                                                                                         | (a) The
 following documents are filed as a part of this Annual Report on Form 10-K:    
|                                                                                                                                                                         |                                                                                         
|                                                                                                                                                                         | 1. Financial
 Statements                                                                
|                                                                                                                                                                         |                                                                                         
|                                                                                                                                                                         | See Item 8,
 Financial Statements and Supplementary Data, Index to Financial Statements.
|                                                                                                                                                                         |                                                                                         
|                                                                                                                                                                         | 2. Financial
 Statement Schedules                                                       
|                                                                                                                                                                         |                                                                                         
|No
 financial statement schedules are provided because the information called for
 is not required or is shown either in the financial statements or the notes
 thereto.
|                                                                                                                                                                         |                                                                                         
|                                                                                                                                                                         | (b) Exhibits                                                                            

|             |  |                                                                                                                                                
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 No. |  | Description                                                                                                                                    
|             |  |                                                                                                                                                
|3.1          |  | Third
 Amended and Restated Certificate of Incorporation of the Registrant, dated February
 20, 2008 (1)                                       
|             |  |                                                                                                                                                
|3.2          |  | Fourth
 Amended and Restated Bylaws of the Registrant effective October 31, 2008 (6)                                                           
|             |  |                                                                                                                                                
|4.1          |  | Second
 Amended and Restated Registration Rights Agreement, dated February 6,
 2007, between the Registrant and certain of its stockholders (2)
|             |  |                                                                                                                                                
|4.2          |  | Securities
 Purchase Agreement by and among the Registrant and Investors named therein,
 dated as of October 28, 2008 (6)                      
|             |  |                                                                                                                                                
|4.3          |  | Form of
 Warrant (6)                                                                                                                           
|             |  |                                                                                                                                                
|4.4          |  | Form of Call
 Warrant (6)                                                                                                                      
|             |  |                                                                                                                                                
|4.5          |  | Form of
 Second Closing Warrant (6)                                                                                                            
|             |  |                                                                                                                                                
|4.6          |  | Form of Call
 Exercise Warrant (6)                                                                                                             
|             |  |                                                                                                                                                
|4.7          |  | Amendment to
 Second Amended and Restated Registration Rights Agreement, dated as of
 October 28, 2008 (6)                                     
|             |  |                                                                                                                                                
|4.8          |  | Form of
 Voting Agreement (6)                                                                                                                  
|             |  |                                                                                                                                                
|10.1         |  | Form of
 Indemnity Agreement for Directors and Executive Officers (2)                                                                          
|             |  |                                                                                                                                                
|10.2+        |  | 2004 Stock
 Incentive Plan and forms of agreements related thereto (2)                                                                         
|             |  |                                                                                                                                                
|10.3+        |  | 2008 Omnibus
 Incentive Plan (2)                                                                                                               
|             |  |                                                                                                                                                
|10.4+        |  | 2008
 Employee Stock Purchase Plan and forms of agreements related thereto (2)                                                                 
|             |  |                                                                                                                                                
|10.5+        |  | Amended Employment
 Agreement, dated as of November 12, 2007, by and between Registrant and
 Maurice R. Ferré, M.D (2)                         
|             |  |                                                                                                                                                
|10.6+        |  | Employment
 Agreement, dated as of January 1, 2005, by and between Registrant and
 Rony Abovitz (2)                                            
|             |  |                                                                                                                                                
|10.7+        |  | Amendment to
 Employment Agreement, dated as of February 5, 2007, by and between
 Registrant and Rony Abovitz (2)                              
|             |  |                                                                                                                                                
|10.8#        |  | Consulting
 Agreement, by and between Registrant and Thomas M. Coon, M.D., dated as
 of April 6, 2007 (2)                                      

113

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|       |  |                                                                                                                                                                                                                                                                                        
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9#  |  | Consulting
 Agreement, by and between Registrant and Martin W. Roche, M.D., dated
 August 12, 2005 (2)                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                        
|10.10# |  | Amendment to
 Consulting Agreement, by and between Registrant and Martin W.
 Roche, M.D., dated as of July 6, 2007 (2)                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                        
|10.11# |  | Development
 Agreement, by and between Registrant and Martin W. Roche, M.D., dated as
 of July 6, 2007 (2)                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                        
|10.12# |  | License
 Agreement, dated December 17, 2004, by and between Registrant and Z-Kat,
 Inc. (2)                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                        
|10.13  |  | Asset
 Contribution Agreement, dated December 17, 2004, by and between
 Registrant and Z-Kat, Inc. (2)                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                        
|10.14# |  | Addendum to
 Asset Contribution Agreement, dated December 28, 2006, by and between
 Registrant and Z-Kat, Inc. (2)                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                        
|10.15  |  | Amendment to
 Addendum to Asset Contribution Agreement, dated April 28, 2007, by and
 between Registrant and Z-Kat, Inc. (2)                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                        
|10.16# |  | License
 Agreement, by and between Registrant, International Business Machines
 Corporation and Z-Kat, Inc., dated as of March 29, 2006 (2)                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                        
|10.17# |  | License
 Agreement, by and between Registrant and Integrated Surgical Systems, Inc.,
 dated September 1, 2005 (2)                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                        
|10.18# |  | Sublicense
 Agreement, by and between Registrant and SensAble Technologies, Inc., dated
 as of May 24, 2006, as amended and supplemented by that certain letter
 dated May 23, 2007 from SensAble Technologies, Inc. and by that certain
 letter dated May 23, 2007 from Registrant (2)
|       |  |                                                                                                                                                                                                                                                                                        
|10.19# |  | Research
 Agreement, by and between Registrant and University of Florida Board of
 Trustees, dated as of February 10, 2005 (2)                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                        
|10.20# |  | Amendment to
 Research Agreement, by and between Registrant and the University of Florida
 Board of Trustees, dated as of August 15, 2007 (2)                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                        
|10.21# |  | Exclusive
 License Agreement, by and between Registrant and University of Florida
 Research Foundation, dated August 15, 2007 (2)                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                        
|10.22# |  | License
 Agreement, by and between Registrant and Encore Medical, L.P., dated as of
 December 14, 2006 (2)                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                        
|10.23  |  | Letter of
 Agreement, by and between Registrant and The Anspach Effort, Inc., dated as
 of July 6, 2007 (2)                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                        
|10.24  |  | Multi-Tenant
 Lease, by and between Registrant and Westport Business Park Associates LLP,
 last dated January 31, 2006 (2)                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                        
|10.25# |  | Development
 Agreement by and between Registrant and Pro-Dex, Inc., dated
 December 12, 2007 (2)                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                        
|10.26+ |  | Form of
 Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan
 (3)                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                        
|10.27+ |  | Employment
 Agreement between Registrant and Duncan Moffat, effective as of April 28,
 2008 (4)                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                        
|10.28+ |  | Summary of
 2007  2008 Metrics Scorecard Cash Bonus Plan (4)                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                        
|10.29+ |  | Form of
 Non-Qualified Stock Option Agreement related to the 2008 Omnibus Incentive
 Plan (4)                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                        
|10.30+ |  | Form of
 Restricted Stock Unit Agreement related to the 2008 Omnibus Incentive Plan
 (4)                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                        
|10.31+ |  | Form of
 Subscription Agreement related to the 2008 Employee Stock Purchase Plan (4)                                                                                                                                                                                                   

114

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|       |  |                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------
|10.32+ |  | 2008
 Leadership Cash Bonus Plan (5)                                                                                             
|       |  |                                                                                                                                  
|10.33+ |  | Second
 Amendment to Employment Agreement between Registrant and Steven J. Nunes,
 effective as of July 21, 2008 (5)             
|       |  |                                                                                                                                  
|10.34+ |  | 2009
 Leadership Cash Bonus Plan (7)                                                                                             
|       |  |                                                                                                                                  
|10.35+ |  | 2009
 Performance Bonus Plan for S. Nunes  SVP of Sales & Marketing (7)                                                         
|       |  |                                                                                                                                  
|10.36+ |  | Amendment to
 Amended Employment Agreement by and between Registrant and Maurice R. Ferré,
 M.D., effective February 13, 2009 (8)
|       |  |                                                                                                                                  
|10.37+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Fritz L. LaPorte,
 effective February 13, 2009 (8)      
|       |  |                                                                                                                                  
|10.38+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Menashe R. Frank,
 effective February 13, 2009 (8)      
|       |  |                                                                                                                                  
|10.39+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Steven J. Nunes,
 effective February 13, 2009 (8)       
|       |  |                                                                                                                                  
|23     |  | Consent of
 Ernst & Young LLP, Independent Registered Public Accounting Firm (1)                                                 
|       |  |                                                                                                                                  
|31.1   |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
 Act (1)                                    
|       |  |                                                                                                                                  
|31.2   |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
 Act (1)                                    
|       |  |                                                                                                                                  
|32.1   |  | Certification
 of Chief Executive Officer pursuant to18 U.S.C. §1350 (1)                                                         
|       |  |                                                                                                                                  
|32.2   |  | Certification
 of Chief Financial Officer pursuant to 18 U.S.C. §1350 (1)                                                        

|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Filed
 herewith                                                                                                                                                   
|    |                                                                                                                                                                   
|(2) | Incorporated
 by reference to Registrants Registration Statement on Form S-1, as amended,
 filed with the SEC on September 19, 2007 (Registration No. 333-146162)
|    |                                                                                                                                                                   
|(3) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 26, 2008                                                    
|    |                                                                                                                                                                   
|(4) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 April 29, 2008                                                       
|    |                                                                                                                                                                   
|(5) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 July 25, 2008                                                        
|    |                                                                                                                                                                   
|(6) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 October 30, 2008                                                     
|    |                                                                                                                                                                   
|(7) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 13, 2009                                                    
|    |                                                                                                                                                                   
|(8) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 20, 2009                                                    
|    |                                                                                                                                                                   
|+   | Indicates
 management contract or compensatory plan.                                                                                                              
|    |                                                                                                                                                                   
|#   | Portions of
 the exhibit have been omitted pursuant to a request for confidential
 treatment. The omitted information has been filed separately with the SEC.     

115

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Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

| |     |                                     | 
| | --- | ----------------------------------- | 
| | By: | /s/ Maurice
 R. Ferré, M.D.         | 
| |     | President,
 Chief Executive Officer
| |     | and Chairman
 of the Board         
| |     | (Principal
 Executive Officer)     

Dated:
March 12, 2009

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.

|                                |  |                                                                                     |  |                
|------------------------------- |  | ----------------------------------------------------------------------------------- |  | ---------------
|Signature                       |  | Title                                                                               |  | Date           
|                                |  |                                                                                     |  |                
|/s/ Maurice
 R. Ferré, M.D.     |  | President,
 Chief Executive Officer and                                             |  | March 12,
 2009
|Maurice R.
 Ferré, M.D.         |  | Chairman of
 the Board (Principal Executive Officer)                                |  |                
|                                |  |                                                                                     |  |                
|/s/ Fritz L. LaPorte            |  | Senior Vice
 President of Finance and Administration,                               |  | March 12,
 2009
|Fritz L. LaPorte                |  | Chief
 Financial Officer and Treasurer (Principal Accounting and Financial Officer) |  |                
|                                |  |                                                                                     |  |                
|/s/ S. Morry
 Blumenfeld, Ph.D. |  | Director                                                                            |  | March 12,
 2009
|S. Morry
 Blumenfeld, Ph.D.     |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ Gerald A.
 Brunk            |  | Director                                                                            |  | March 12,
 2009
|Gerald A.
 Brunk                |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ Marcelo G. Chao             |  | Director                                                                            |  | March 12,
 2009
|Marcelo G. Chao                 |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ Christopher
 C. Dewey       |  | Director                                                                            |  | March 12,
 2009
|Christopher
 C. Dewey           |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ Charles
 W. Federico        |  | Director                                                                            |  | March 12,
 2009
|Charles W.
 Federico            |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ John G.
 Freund, M.D.       |  | Director                                                                            |  | March 12,
 2009
|John G.
 Freund, M.D.           |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ Frederic
 H. Moll, M.D.     |  | Director                                                                            |  | March 12,
 2009
|Frederic H.
 Moll, M.D.         |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ William
 D. Pruitt          |  | Director                                                                            |  | March 12,
 2009
|William D.
 Pruitt              |  |                                                                                     |  |                
|                                |  |                                                                                     |  |                
|/s/ John J.
 Savarese, M.D.     |  | Director                                                                            |  | March 12,
 2009
|John J.
 Savarese, M.D.         |  |                                                                                     |  |                

116

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Table of Contents

EXHIBIT INDEX

|             |  |                                                                                         
|------------ |  | ----------------------------------------------------------------------------------------
|Exhibit
 No. |  | Description                                                                             
|             |  |                                                                                         
|23           |  | Consent of
 Ernst & Young LLP, Independent Public Registered Accounting Firm            
|             |  |                                                                                         
|31.1         |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
|             |  |                                                                                         
|31.2         |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
|             |  |                                                                                         
|32.1         |  | Certification
 of Chief Executive Officer pursuant to18 U.S.C. §1350                    
|             |  |                                                                                         
|32.2         |  | Certification
 of Chief Financial Officer pursuant to18 U.S.C. §1350                    

117

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