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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 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, Ft. 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 RegisteredCommon stock, $0.001 par value per share
    
    The NASDAQ Global Market
  o þ
 o þ
 o þ
 þ
  Large accelerated filer o
  Accelerated filer o
  Non-accelerated filer þ
  Smaller reporting company o  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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MAKO Surgical Corp.
 INDEX TO FORM 10-K
 Page No.Forward-Looking StatementsPart IItem 1
    
    Business
    
    
    5Item 1A
    
    Risk Factors
    
    
    41Item 1B
    
    Unresolved Staff Comments
    
    
    75Item 2
    
    Properties
    
    
    76Item 3
    
    Legal Proceedings
    
    
    76Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    76Part IIItem 5
    
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    77Item 6
    
    Selected Financial Data
    
    
    81Item 7
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    83Item 7A
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    102Item 8
    
    Financial Statements and Supplementary Data
    
    
    103Item 9
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    141Item 9A(T)
    
    Controls and Procedures
    
    
    141Item 9B
    
    Other Information
    
    
    141Part IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    142Item 11
    
    Executive Compensation
    
    
    142Item 12
    
    Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    142Item 13
    
    Certain Relationships and Related Transactions, and
Director Independence
    
    
    142Item 14
    
    Principal Accountant Fees and Services
    
    
    142Part IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    143Signatures
    
    
    146Exhibit Index
    
    
    147Exhibit 3.1Exhibit 3.2Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  ®
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FORWARD-LOOKING STATEMENTS
  
    
    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
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 of implants and components of our Tactile Guidance System
from third-party suppliers, including single-source suppliers;
    
    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 products currently being developed;
    
    the ability to implement new technologies successfully;
    
    future declarations of cash dividends;
    
    our ability to sustain sales and earnings growth;
    
    our goals for sales and earnings growth;
    
    our success in achieving timely approval or clearance of products with domestic and
foreign regulatory entities;
    
    the stability of certain 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.
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
    
    changes in general economic conditions and interest rates;
    
    changes in the availability of capital and financing sources;
    
    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;
    
    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;
    
    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 network of
independent orthopedic product agents and distributors of our products;
    
    unanticipated expenditures related to any future litigation; and
    
    unanticipated intellectual property expenditures required to develop and market our
products.
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PART I
 
 ITEM 1. BUSINESS
 Overview
      5




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Industry Background
 The Growing Osteoarthritis Problem
   6




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Market for Osteoarthritis of the Knee
  
  7




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Current Orthopedic Knee Arthroplasty Approaches
  Total Knee Replacement.
  
  8




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
    
    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.
  Unicompartmental Knee Resurfacing.
  
    
    the restricted room to maneuver and impeded line of sight due to the smaller incision and
minimally invasive nature of the procedure 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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Introduction of Minimally Invasive Surgery
   
    
    restricted vision at the anatomical site;
    
    cumbersome handling of surgical instruments;
    
    difficult hand-eye coordination; and
    
    limited tactile feedback.
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Introduction of Robotics into Other Surgical Fields
    The Use of Robotics in Orthopedic Surgical Procedures
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The MAKO Solution
  
    
    Minimally Invasive Targeted Knee Arthroplasty. MAKOplasty enables surgeons to isolate
and resurface just the diseased compartment of the knee joint through a minimally invasive
keyhole 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
resurfacing, a viable option for a greatly expanded pool of patients and physicians.
    
    Consistently Reproducible Precision. We believe that MAKOplasty will reduce the
variability of procedure outcomes and increase 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 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 our TGS. We believe that the
tactile safety zone enables improved placement and alignment of the implant, while the
3-D visualization enables the procedure to be performed through a small incision
without direct visualization.  We believe that this consistently
reproducible precision will enable physicians to be trained in the use of MAKOplasty in a
relatively short period of time and also increase the number of physicians who are willing and
able to perform unicompartmental resurfacing procedures.
    
    Ease of Use. We believe that our TGS leverages and complements 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.
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
    
    Improved Restorative Post-Operative Outcomes. Due to the minimally invasive nature of
the procedure, we believe that patients who undergo 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
MAKOplasty solution aids hospitals and patients in reducing costs by shortening hospital
stays and recovery periods and reducing the amount of rehabilitation and medication.
   
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Our Strategy
  
    
    Focus on key physicians and thought leaders to encourage early adoption of our MAKOplasty
solution. We plan to initially focus our marketing efforts on key orthopedic surgeons who
currently perform the majority of unicompartmental knee procedures or who are actively
involved in the development of minimally invasive orthopedic approaches. We also plan to
focus our 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 purchase of our TGS, they can reinforce their
reputations as leading institutions for the treatment of early to mid-stage osteoarthritis
of the knee.
    
    Expand the market for unicompartmental knee resurfacing. We plan to expand the market for
unicompartmental knee resurfacing procedures by encouraging use of the procedure for
patients who, given only conventional surgical alternatives, would have opted for total knee
replacement surgery or no surgery at all. Our current application of MAKOplasty is for
unicompartmental knee resurfacing procedures using either an inlay knee implant system or
onlay knee implant system, allowing us to accommodate varied patient profiles and surgeon
preferences. The addition of onlay knee implants to our offerings helps accommodate
additional 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 unicompartmental knee resurfacing.
    
    Drive volume sales of implants and disposable products for installed TGS units. Following
the initial installation of our TGS at a given hospital, we intend to expand the number of
orthopedic surgeons who use our TGS and work with the hospitals and their surgeons to
promote patient education about the benefits of MAKOplasty. Our goal is to increase usage
per system to drive higher volume sales of our implants and disposable products.
    
    Expand our product offerings to multicompartmental implants. We believe that a key to
growing our business is expanding the application of MAKOplasty to resurfacing procedures
that address mid-stage multicompartmental degeneration of the knee. This modular application
of MAKOplasty to multicompartmental resurfacing procedures will allow orthopedic surgeons to
treat degenerative osteoarthritis of the knee from early-stage, unicompartmental
degeneration through mid-stage, multicompartmental degeneration with a single knee implant
system. To achieve this goal, we are developing the next version of our TGS, which will
include improved surgical planning and execution software and customized bone cutting
instruments. We are also developing new modular implants, as well as strengthening our
intellectual property rights as necessary to support these new offerings. We believe that
this expanded product offering should position us as a leading company in the field of
early to mid-stage
orthopedic knee procedures, offering a complete range of minimally invasive solutions for
the treatment of osteoarthritis of the knee.
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
    
    Demonstrate the clinical and financial value proposition of MAKOplasty. We intend to
collaborate with leading surgeons and early-adopting hospitals through such programs as the
MAKOplasty Knee Center of Excellence to build clinical and financial data that support the
benefits of MAKOplasty. The MAKOplasty Knee Center of Excellence is a program developed in
conjunction with participating hospitals to educate surgeons and patients regarding the
benefits of 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 unicompartmental 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
  Tactile Guidance System
   
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Tactile Robotic-Arm System.
 
    
    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 with five degrees of freedom which enables 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 placed in the
patients anatomy by bone pins. The tracking system assists the TGS 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 refresh rate of approximately 30  60 hz
(cycles/second), providing the TGS with a sufficient flow of information regarding movements
by both the patient and the robotic arm to ensure optimal cutting and placement. Our TGS
updates the tactile safety zone output forces at a rate of 2,000 Hz (cycles/second),
enabling it to adjust for movements of the tracked anatomy by dynamically adjusting the position
of the tactile safety zone.
As a result,
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.
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Patient-Specific Visualization System.
 
    
    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.
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
    
    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 MAKO clinical technical 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 pre-operatively plan the procedure, 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.
 Version 1.0 of the Tactile Guidance System
  Version 1.2 of the Tactile Guidance System
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Future Versions of the Tactile Guidance System
  
    
    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;
    
    improvement of the tracking system for monitoring movements by the patient and the
robotic arm;
    
    intelligent implant planning features that will aid the surgeon in achieving optimal
patient-specific alignments;
    
    redesign of certain components to make them more accessible for service repairs and
easier to replace; and
    
    sophisticated industrial design and state-of-the art user interface.
  Knee Implants
  Inlay Implant for Use in Unicompartmental Procedures
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Onlay Implant for Use in Unicompartmental Procedures
    20




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Modular Implants for Use in Multicompartmental Procedures
  Disposable Products
  Future Potential Applications
  Sales and Marketing
   21




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
    
    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 early adoption by such leading hospitals will help us
to seed the market for MAKOplasty and provides the validation and visibility necessary for
more widespread adoption.
    
    Establish and Promote MAKOplasty Knee Centers of Excellence.The MAKOplasty Knee 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, 2007, we entered into four co-marketing agreements with hospitals to establish MAKOplasty
Knee Centers of Excellence.
    
    Drive Patient Demand for MAKOplasty.We plan to expand our marketing efforts to include
direct-to-patient marketing. 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
support
hospitals participating in the MAKOplasty Knee Center of Excellence program
in their efforts
to publicize the
benefits of MAKOplasty and educate patients.
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Research and Development
    Manufacturing and Assembly
   23




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24




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Intellectual Property
    Wholly-Owned Patent Applications
   25




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Patents and Patent Applications Licensed from Third Parties
  License Arrangements with Z-KAT
  License Arrangements with Other Third Parties
   26




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Competition
    27




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
    
    the safety and efficacy of the procedure and product offerings, as documented through
published studies and other clinical reports;
    
    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.
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Regulatory Requirements of the U.S. Food and Drug Administration
  
    
    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
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5 10(k) Clearance Pathway
   30




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PMA Approval Pathway
    31




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Clinical Trials
  Post-Market Study
  Pervasive and Continuing Regulation
  
    
    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;
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
    
    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;
    
    regulations pertaining to voluntary recalls; and
    
    notices of corrections or removals.
  
    
    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;
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
    
    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;
    
    refusal to grant export approval for our products; or
    
    criminal prosecution.
 International Marketing Approvals
   Health Care Laws and Regulations
 Third-Party Reimbursement
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Medicare and Medicaid
    35




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Commercial Insurers
  Fraud and Abuse Laws
  Anti-Kickback Statutes and Federal False Claims Act
    37




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HIPAA and Other Fraud and Privacy Regulations
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Employees
  Available Information
 http://www.makosurgical.com
 
    
    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
 
    
    Corporate Governance Guidelines
    
    Audit Committee Charter
    
    Compensation Committee Charter
    
    Corporate Governance and Nominating Committee Charter
    
    Code of Business Conduct and Ethics
    
    Information on how to communicate directly with our board of directors
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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
 We are an early-stage medical device company with a limited operating history and our business may
not become profitable.
  We have incurred significant losses since our inception and anticipate that we will continue to
incur significant losses for the foreseeable future.
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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.
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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.
  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.
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We depend on the success of a single line of products for our revenue, which could impair our
ability to achieve profitability.
  If our MAKOplasty solution does not gain market acceptance, 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 MAKOplasty, which may
make patients, surgeons and hospitals reluctant to purchase our products.
  We have limited sales and marketing experience and capabilities, which could impair our ability to
achieve profitability.
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
    
    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.
  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.
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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.
     
    
    significantly greater name recognition;
    
    longer operating histories;
    
    established exclusive relations with healthcare professionals, customers and third-party
payors;
    
    established distribution networks;
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
    
    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
    
    greater financial and human resources for product development, sales and marketing and
patent litigation.
  If we do not timely achieve our development goals for new versions of our TGS or our implants, the
commercialization of these products will be delayed and our business and financial results may be
adversely affected.
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If we fail to develop, acquire or secure a customized bone cutting instrument, we may not be able
to develop future iterations of version 2.0 of our TGS, and as a result, our business and financial results may be
adversely affected.
  We may not have sufficient funding to complete the development and commercialization of our
existing products.
  
    
    the success of our research and product development efforts;
    
    the expenses we incur in selling and marketing our products;
    
    the costs and timing of regulatory clearances for upgrades or changes to our products;
    
    the cash generated by sales of our products;
    
    the emergence of competing or complementary technological developments;
    
    the costs of filing, prosecuting, defending and enforcing any patent 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.
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Our reliance on third-party suppliers, including single source suppliers, for our implants and
nearly all components of our TGS could harm our ability to meet demand for our products in a timely
and cost effective manner.
  
    
    suppliers may fail to comply with regulatory requirements or make errors in manufacturing
components that could negatively affect the efficacy or safety of our products or cause
delays in shipments of our products;
    
    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;
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
    
    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
    
    our suppliers may encounter financial hardships unrelated to our demand for components,
which could inhibit their ability to fulfill our orders and meet our requirements.
  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.
  
    
    managing production yields;
    
    maintaining quality control and assurance;
    
    providing component and service availability;
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
    
    maintaining adequate control policies and procedures;
    
    hiring and retaining qualified personnel; and
    
    complying with state, federal and foreign regulations.
  Any failure in our efforts to train surgeons or hospital staff could result in lower than expected
product sales and potential liabilities.
  We will likely experience extended and variable sales cycles, which together with the unit price of
the TGS and our revenue recognition policies, could cause significant variability in our results of
operations for any given quarter.
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
    
    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.
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If we receive a significant number of warranty claims or our TGS units require significant amounts
of service after sale, our costs will increase and our business and financial results will be
adversely affected.
  We could become subject to product liability claims, product recalls and other field or regulatory
actions that could be expensive, divert managements attention and harm our business.
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
    
    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 recalls or market withdrawals;
    
    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 our TGS
and surgeons may not perform MAKOplasty, which would harm our business and financial results.
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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.
  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.
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If we do not effectively manage our growth, we may be unable to successfully develop, market and
sell our products.
  
    
    implementing appropriate operational and financial systems and controls;
    
    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.
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If we decide to market and sell MAKOplasty internationally, we would be subject to various risks
relating to our international activities, which could adversely affect our business and financial
results.
  
    
    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.
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Our operations are currently conducted primarily at a single location in Florida, which may be at
risk from hurricanes, storm, fire, terror attacks or other disasters.
  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.
  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.
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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.
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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.
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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.
  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.
  
    
    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;
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
    
    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.
   
    
    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;
    
    withdrawing 510(k) clearances or PMA approvals that have already been granted;
    
    refusal to grant export approval for our products; or
    
    criminal prosecution.
 
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Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from
expanding the commercialization of our products abroad.
  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.
  
    
    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.
  Our products may in the future be subject to product recalls that could harm our reputation,
business operations and financial results.
  
    
    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;
    
    refusal to grant export approval for our products; or
    
    criminal prosecution.
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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.
  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.
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Federal regulatory reforms may adversely affect our ability to sell our products profitably.
   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.
  
    
    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;
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
    
    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.
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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.
  
    
    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;
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
    
    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.
  Securities analysts may issue negative reports, which may have a negative impact on the market
price of our common 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.
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We have not paid dividends in the past and do not expect to pay dividends in the future.
  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 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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
   75




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ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   76




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market for Our Common Stock
   Dividend Policy
  Reverse Stock Split and Conversion of Preferred Stock
   Equity Compensation Plan Information
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(c)(a)
    
    (b)
    
    Number of Shares ofNumber of Shares of
    
    Weighted-
    
    Our Common Stock RemainingOur Common Stock
    
    Average
    
    Available for Future Issuanceto be Issued Upon
    
    Exercise Price of
    
    Under Equity CompensationExercise of
    
    Outstanding
    
    Plans (Exceeding SecuritiesPlan Category
    
    Outstanding Options
    
    Options
    
    Reflected in Col (a))2004 Stock Incentive Plan
    
    
    1,916,525
    
    
    $
    4.81
    
    
    
    84,728Equity compensation plans
not approved by our
security holders
    
    None
        
    None
        
    NoneTOTAL
    
    
    1,916,525
    
    
    $
    4.81
    
    
    
    84,728
   Registration Rights
  Demand Registration Rights.
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Form S-3 Registration Rights.
 Piggyback Registration Rights.
 Expenses of Registration.
 Lock-Up Agreements
  Unregistered Sales of Equity Securities
  
    
    We granted options to purchase an aggregate of 1,001,695 shares of our common stock, at
a weighted-average exercise price of $8.30 per share, to our employees pursuant to our
2004 Stock Incentive Plan, or 2004 Plan. During this period, options to purchase an
aggregate of 31,814 shares of our common stock related to our 2004 Plan were cancelled
without being exercised. Also during this period, 1,306 options were exercised under our
2004 Plan.
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
    
    We granted 330,033 restricted shares of our common stock pursuant to the 2004 Plan.
    
    We sold 13,513,514 shares of Series C redeemable convertible preferred stock.
  Uses of Proceeds from Sale of Registered Securities
   
    
    Approximately $14.0  $20.0 million for the expansion of our sales and marketing
activities;
    
    Approximately $12.0  $18.0 million for continuation of our research and development
activities;
    
    Approximately $4.0 million payment to IBM, as required upon the IPO of our common stock
under the terms of our licensing agreement with IBM; and
    
    The remainder to fund working capital and other general corporate purposes, including
the expenses associated with our IPO.
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Issuer Purchases of Equity Securities
  
 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.
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The Company
    
    
    
    PredecessorNov. 12,
    
    
    
    Jan. 1,2004
    
    
    
    2004Year Ended
    
    Through
    
    
    
    Through
    
    
    Year EndedDecember 31,
    
    Dec. 31,
    
    
    
    Nov. 11,
    
    
    December 31,2007
    
    
    2006
    
    
    2005
    
    2004
    
    
    
    2004
    
    
    2003Statements of Operations
DataRevenue
    
    $
    771,362
    
    
    $
    62,571
    
    
    $
    
    
    $
    
    
    
    
    $
    1,648,342
    
    
    $
    1,380,128Cost of revenue
    
    
    582,914
    
    
    
    76,547
    
    
    
    
    
    
    
    
    
    
    
    1,085,523
    
    
    
    1,010,803Gross profit (loss)
    
    
    188,448
    
    
    
    (13,976
    )
    
    
    
    
    
    
    
    
    
    
    562,819
    
    
    
    369,325Operating costs and
expenses:Selling, general and
administrative
    
    
    12,042,690
    
    
    
    5,022,685
    
    
    
    2,735,901
    
    
    630,048
    
    
    
    
    2,642,028
    
    
    
    4,244,414Research and
development
    
    
    8,268,803
    
    
    
    5,192,453
    
    
    
    2,581,828
    
    
    402,899
    
    
    
    
    1,453,685
    
    
    
    3,530,298Depreciation and
amortization
    
    
    1,296,881
    
    
    
    644,082
    
    
    
    98,519
    
    
    5,727
    
    
    
    
    429,694
    
    
    
    564,720Total operating costs and
expenses
    
    
    21,608,374
    
    
    
    10,859,220
    
    
    
    5,416,248
    
    
    1,038,674
    
    
    
    
    4,525,407
    
    
    
    8,339,432Loss from operations
    
    
    (21,419,926
    )
    
    
    (10,873,196
    )
    
    
    (5,416,248
    )
    
    (1,038,674
    )
    
    
    
    (3,962,588
    )
    
    
    (7,970,107
    )Interest and other income
    
    
    1,073,280
    
    
    
    476,578
    
    
    
    269,231
    
    
    
    
    
    
    
    868
    
    
    
    8,682Interest and other
expenses
    
    
    (311,608
    )
    
    
    (220,219
    )
    
    
    
    
    
    
    
    
    
    
    (479,959
    )
    
    
    (17,240
    )Net loss
    
    $
    (20,658,254
    )
    
    $
    (10,616,837
    )
    
    $
    (5,147,017
    )
    $
    (1,038,674
    )
    
    
    $
    (4,441,679
    )
    
    $
    (7,978,665
    )Net loss attributable to
common stockholders
    
    $
    (24,318,028
    )
    
    $
    (12,493,183
    )
    
    $
    (6,288,297
    )
    $
    (1,060,713
    )
    
    
    $
    (5,221,774
    )
    
    $
    (8,828,815
    )Net loss per share: Basic
and diluted attributable
to common stockholders
(1)
    
    $
    (14.74
    )
    
    $
    (8.03
    )
    
    $
    (4.18
    )
    $
    (2.39
    )
    
    
    $
    (0.63
    )
    
    $
    (1.23
    )Weighted average common
shares 
outstanding: Basic
and diluted (2)
    
    
    1,649,365
    
    
    
    1,555,287
    
    
    
    1,502,761
    
    
    443,868
    
    
    
    
    8,234,560
    
    
    
    7,202,176
 The Company
    
    
    PredecessorAs ofAs of December 31
    
    
    December 312007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balance Sheet Data:Cash and cash
equivalents
    
    $
    9,615,027
    
    
    $
    2,108,015
    
    
    $
    6,145,266
    
    
    $
    1,959,079
    
    
    $
    257,939Short-term investments
    
    
    3,083,980
    
    
    
    1,399,763
    
    
    
    10,097,020
    
    
    
    
    
    
    
    Total assets
    
    
    29,190,306
    
    
    
    12,753,581
    
    
    
    17,435,073
    
    
    
    2,403,518
    
    
    
    5,717,405Long-term debt, net
of current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,021,681Redeemable
convertible preferred
stock
    
    
    59,486,700
    
    
    
    25,910,622
    
    
    
    24,034,276
    
    
    
    2,866,073
    
    
    
    13,597,736Accumulated deficit
    
    
    (42,843,131
    )
    
    
    (19,366,087
    )
    
    
    (6,819,675
    )
    
    
    (1,038,674
    )
    
    
    (23,409,631
    )Total stockholders
deficit
    
    
    (42,837,231
    )
    
    
    (19,436,916
    )
    
    
    (6,887,600
    )
    
    
    (700,080
    )
    
    
    (12,528,142
    )
 (1)
    
    The basic and diluted net loss per share computation excludes
potential common shares upon exercise of options to purchase common
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
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read together with our financial statements and related notes appearing elsewhere in this
Form 10-K. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. You should review Item 1A, Risk Factors, of this report for a
discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements described in the following
discussion and analysis.
 Overview
    
    
    In 2004 and 2005, we were a development stage company primarily engaged in research and
development for key aspects of our core technology and establishment of our intellectual
property portfolio.
    
    In May 2005, we obtained 510(k) marketing clearance from the FDA for a patient-specific
visualization system with a robotic arm that was an earlier version of our TGS. In November
2005, we obtained 510(k) marketing clearance from the FDA for version 1.0 of our TGS.
  83




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
    
    In 2006, we completed development of the first version of our TGS and commenced the
commercialization of our MAKOplasty solution. We entered into contracts with third-party
manufacturers and suppliers for the manufacturing of key components of
our TGS and implants, and began assembly of our products at our headquarters in Fort
Lauderdale, Florida. Our first TGS was installed in June 2006. As of December 31, 2007, 181
MAKOplasty procedures had been performed since its commercial introduction in June 2006.
    
    In January 2008, we obtained 510(k) marketing clearance from the FDA for version 1.2 of
our TGS.
    
    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, for proceeds, before expenses, of $51.0
million.
    
    We commenced development of a TGS software application to enable a single MAKO-branded
unicompartmental implant system, combining our inlay and onlay system. We intend to
commercially introduce this software enhanced version 1.3 and the MAKO-branded implant by
the end of 2008. We have received a 510(k) clearance for the MAKO-branded implant, and we do
not anticipate that TGS version 1.3 will require a 510(k) clearance.
    
    We are currently developing version 2.0 of our TGS and modular implants, which would
allow multicompartmental knee resurfacing procedures. We intend to commercially introduce
version 2.0 of the TGS and the modular implants in the first half of 2009, subject to
regulatory clearances or approvals. If we were to be denied such clearances or approvals or
if such clearances or approvals were delayed, it could have a material adverse impact on our
results of operations.
  Factors Which May Influence Future Results of Operations
  Revenue
   84




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Cost of Revenue
   Selling, General and Administrative Expenses
   85




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##### Table of Contents



Research and Development Expenses
   
    
    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;
    
    improvement of the tracking system for monitoring movements by the patient and robotic
arm;
    
    intelligent implant planning features that will aid the surgeon in achieving optimal
patient-specific alignments;
    
    redesign of certain components to make them more accessible for service repairs and
easier to replace; and
    
    sophisticated industrial design and state-of-the-art user interface.
 Critical Accounting Policies and Significant Judgments and Estimates
    86




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Revenue Recognition
 Software Revenue Recognition
   Revenue Recognition
  87




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Allowance for Doubtful Accounts
  Inventory Impairment Charges
  Accrual for Warranty Costs
   88




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Valuation Allowance for Deferred Income Tax Assets and Liabilities
  Impairment of Long-Lived Assets
  Determination of Stock-Based Compensation
 Share-Based Payment
 Accounting for Stock Based Compensation
 Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
  89




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90




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Acquisitions of Assets from Predecessor
    91




---



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Results of Operations
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 Revenue.
 Cost of Revenue.
  92




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Selling, General and Administrative.
 Research
and Development.
 Depreciation and Amortization.
 Interest and Other Income.
 Interest and Other Expense.
  93




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Income Taxes.
 Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 Revenue.
 Cost of Revenue.
 Selling, General and Administrative.
 Research and Development.
 Depreciation and Amortization.
  94




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Interest and Other Income.
 Interest and Other Expense.
 Income Taxes.
 Liquidity and Capital Resources
 2007
    
    
    Change
    
    
    2006
    
    
    Change
    
    
    2005Cash and cash equivalents
    
    $
    9,615,027
    
    
    $
    7,507,012
    
    
    
    2,108,015
    
    
    $
    (4,037,251
    )
    
    $
    6,145,266Short-term investments
    
    
    3,083,980
    
    
    
    1,684,217
    
    
    
    1,399,763
    
    
    
    (8,697,257
    )
    
    
    10,097,020Total cash, cash
equivalents, and
short-term investments
    
    $
    12,699,007
    
    
    $
    9,191,229
    
    
    $
    3,507,778
    
    
    $
    (12,734,508
    )
    
    $
    16,242,286Cash used in operating
activities
    
    $
    (15,380,647
    )
    
    $
    (5,964,719
    )
    
    $
    (9,415,928
    )
    
    $
    (4,405,886
    )
    
    $
    (5,010,042
    )Cash provided by (used
in) investing activities
    
    
    (3,910,548
    )
    
    
    (9,296,663
    )
    
    
    5,386,115
    
    
    
    16,217,446
    
    
    
    (10,831,331
    )Cash provided by (used
in) financing activities
    
    
    26,798,207
    
    
    
    26,805,645
    
    
    
    (7,438
    )
    
    
    (20,034,998
    )
    
    
    20,027,560Net increase (decrease)
in cash and cash
equivalents
    
    $
    7,507,012
    
    
    $
    11,544,263
    
    
    $
    (4,037,251
    )
    
    $
    (8,223,438
    )
    
    $
    4,186,187
     95




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Net Cash Used in Operating Activities
  Net Cash Provided by (Used in) Investing Activities
  Net Cash Provided by Financing Activities
   96




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Operating Capital and Capital Expenditure Requirements
     97




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
    
    the expenses we incur in selling and marketing our products;
    
    the costs and timing of regulatory clearance;
    
    the revenue generated by sales of our future products;
    
    the rate of progress and cost of development activities;
    
    the success of our 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;
and
    
    the acquisition of businesses, products and technologies, although we currently have no
understandings, commitments or agreements relating to any of these types of transactions.
  98




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Contractual Obligations
  Payment Due by PeriodDecember 31,
    
    
    AfterTotal
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    2012Contractual ObligationsOperating lease  real estate
    
    $
    775,000
    
    
    $
    208,000
    
    
    $
    436,000
    
    
    $
    131,000
    
    
    $
    Capital leases  furniture
    
    
    24,000
    
    
    
    13,000
    
    
    
    11,000
    
    
    
    
    
    
    
    IBM deferred license fee(1)
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    Minimum royalty payments 
licenses
    
    
    4,058,000
    
    
    
    631,000
    
    
    
    1,350,000
    
    
    
    1,260,000
    
    
    
    817,000Total
    
    $
    8,857,000
    
    
    $
    4,852,000
    
    
    $
    1,797,000
    
    
    $
    1,391,000
    
    
    $
    817,000
  (1)
    
    In March 2006, we entered into a license agreement with IBM in exchange for a payment of
$2.0 million upon execution of the agreement and pursuant to which we were required to make a $4.0
million payment in the form of a deferred license fee to IBM upon the closing of the initial public
offering of our common stock or other change in control events (e.g., acquisition or change in
voting ownership greater than 50.01%). In February 2008, upon completion of our initial public
offering, the Company paid the $4.0 million deferred license fee due to IBM. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
 Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
  99




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Fair
Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115 Accounting for Certain Investments in
Debt and Equity Securities
 Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities
  100




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Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 Off-Balance Sheet Arrangements
   101




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    102




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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
    
    
    104Balance Sheets as of December 31, 2007 and 2006
    
    
    105Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    
    106Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
for the years ended December 31, 2007, 2006 and 2005
    
    
    107Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    109Notes to Financial Statements
    
    
    110
  103




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104




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##### Table of Contents



MAKO SURGICAL CORP.
 
 Balance Sheets
 December 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    9,615,027
    
    
    $
    2,108,015Short-term investments
    
    
    3,083,980
    
    
    
    1,399,763Accounts receivable
    
    
    2,212,697
    
    
    
    578,340Inventory
    
    
    2,346,351
    
    
    
    926,031Due from related party
    
    
    29,485
    
    
    
    97,736Employee loans
    
    
    
    
    
    
    225,155Prepaids and other assets
    
    
    281,010
    
    
    
    84,835Total current assets
    
    
    17,568,550
    
    
    
    5,419,875Deferred cost of revenue
    
    
    926,342
    
    
    
    210,349Restricted cash
    
    
    100,000
    
    
    
    125,000Property and equipment, net
    
    
    2,321,097
    
    
    
    1,216,464Intangible assets, net
    
    
    5,476,836
    
    
    
    5,656,186Note receivable  related party
    
    
    69,649
    
    
    
    125,707Deferred initial public offering costs
    
    
    2,727,832
    
    
    
    Total assets
    
    $
    29,190,306
    
    
    $
    12,753,581LIABILITIES AND STOCKHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    1,511,347
    
    
    $
    433,319Accrued compensation and employee benefits
    
    
    1,033,414
    
    
    
    510,547Other accrued liabilities
    
    
    2,679,938
    
    
    
    1,015,458Deferred revenue
    
    
    50,000
    
    
    
    29,167Accrued license fee
    
    
    3,955,305
    
    
    
    3,620,551Total current liabilities
    
    
    9,230,004
    
    
    
    5,609,042Long-term liabilities:Deferred revenue
    
    
    3,310,833
    
    
    
    670,833Total liabilities
    
    
    12,540,837
    
    
    
    6,279,875Commitments and contingenciesRedeemable convertible preferred stock:Series A redeemable convertible preferred stock, $0.001 par value;
5,000,000 shares authorized; 4,498,745 shares issued and
outstanding; liquidation value of $4,498,745; including accrued
cumulative dividends of $1,054,185 and $681,909 as of December 31,
2007 and 2006, respectively
    
    
    4,806,125
    
    
    
    4,171,890Series B redeemable convertible preferred stock, $0.001 par value;
16,500,000 shares authorized; 15,151,516 shares issued and
outstanding; liquidation value of $20,000,000; including accrued
cumulative dividends of $3,162,032 and $1,822,901 as of December 31,
2007 and 2006, respectively
    
    
    23,101,855
    
    
    
    21,738,732Series C. redeemable convertible preferred stock, $0.001 par value; none
authorized, issued and outstanding as of December 31, 2006;
13,600,000 shares authorized; 13,513,514 shares issued and
outstanding; liquidation value of $30,000,000; including accrued
cumulative dividends of $1,647,456 as of December 31, 2007
    
    
    31,578,720
    
    
    
    Total redeemable convertible preferred stock
    
    
    59,486,700
    
    
    
    25,910,622Stockholders deficit:Common stock, $0.001 par value; 60,000,000 shares authorized as of
December 31, 2007, and 50,000,000 shares authorized as of December 31,
2006; 1,870,603 and 1,555,938 shares issued and outstanding as of
December 31, 2007 and 2006, respectively
    
    
    1,871
    
    
    
    1,556Note receivable from stockholder and related interest
    
    
    
    
    
    
    (70,574
    )Accumulated deficit
    
    
    (42,843,131
    )
    
    
    (19,366,087
    )Accumulated other comprehensive income (loss)
    
    
    4,029
    
    
    
    (1,811
    )Total stockholders deficit
    
    
    (42,837,231
    )
    
    
    (19,436,916
    )Total liabilities and stockholders deficit
    
    $
    29,190,306
    
    
    $
    12,753,581
   105




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MAKO SURGICAL CORP.
 
 Statements of Operations
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenue:Products
    
    $
    717,798
    
    
    $
    62,571
    
    
    $
    Tactile Guidance System
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    53,564
    
    
    
    
    
    
    
    Total revenue
    
    
    771,362
    
    
    
    62,571
    
    
    
    Cost of revenue:
    
    
    
    
    
    
    
    
    
    
    Products
    
    
    197,086
    
    
    
    18,780
    
    
    
    Tactile Guidance System
    
    
    360,525
    
    
    
    57,767
    
    
    
    Other
    
    
    25,303
    
    
    
    
    
    
    
    Total cost of revenue
    
    
    582,914
    
    
    
    76,547
    
    
    
    Gross profit (loss)
    
    
    188,448
    
    
    
    (13,976
    )
    
    
    Operating costs and expenses:Selling, general and administrative
    
    
    12,042,690
    
    
    
    5,022,685
    
    
    
    2,735,901Research and development
    
    
    8,268,803
    
    
    
    5,192,453
    
    
    
    2,581,828Depreciation and amortization
    
    
    1,296,881
    
    
    
    644,082
    
    
    
    98,519Total operating costs and expenses
    
    
    21,608,374
    
    
    
    10,859,220
    
    
    
    5,416,248Loss from operations
    
    
    (21,419,926
    )
    
    
    (10,873,196
    )
    
    
    (5,416,248
    )Interest and other income
    
    
    1,073,280
    
    
    
    476,578
    
    
    
    269,231Interest and other expenses
    
    
    (311,608
    )
    
    
    (220,219
    )
    
    
    Net loss
    
    
    (20,658,254
    )
    
    
    (10,616,837
    )
    
    
    (5,147,017
    )Accretion of preferred stock
    
    
    (300,911
    )
    
    
    (267,319
    )
    
    
    (257,474
    )Dividends on preferred stock
    
    
    (3,358,863
    )
    
    
    (1,609,027
    )
    
    
    (883,806
    )Net loss attributable to common stockholders
    
    $
    (24,318,028
    )
    
    $
    (12,493,183
    )
    
    $
    (6,288,297
    )Net loss per share  Basic and diluted
attributable to common stockholders
    
    $
    (14.74
    )
    
    $
    (8.03
    )
    
    $
    (4.18
    )Weighted average common shares outstanding 
Basic and diluted
    
    
    1,649,365
    
    
    
    1,555,287
    
    
    
    1,502,761
   106




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MAKO SURGICAL CORP.
 
 Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
 NoteRedeemable
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Receivable
    
    
    
    
    
    
    Other
    
    
    TotalConvertible Preferred
    
    
    Common
    
    
    Stock
    
    
    Paid-in
    
    
    from
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholder
    
    
    Deficit
    
    
    Income (Loss)
    
    
    DeficitBalance at December 31, 2004
    
    
    4,346,235
    
    
    $
    2,866,250
    
    
    
    1,457,342
    
    
    $
    1,457
    
    
    $
    267,137
    
    
    $
    
    
    
    $
    (1,038,674
    )
    
    $
    
    
    
    $
    (770,080
    )Issuance of common stock for consulting
services
    
    
    
    
    
    
    
    
    
    
    47,442
    
    
    
    47
    
    
    
    60,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,376Issuance of common stock for stockholder
note and accrued interest
    
    
    
    
    
    
    
    
    
    
    49,504
    
    
    
    50
    
    
    
    65,298
    
    
    
    (65,348
    )
    
    
    
    
    
    
    
    
    
    
    Receipt of subscription receivable for
Series A redeemable convertible preferred
stock and common stock warrants
    
    
    53,000
    
    
    
    53,000
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Issuance of Series A redeemable convertible
preferred stock and warrants for common
stock for cash, net of issuance costs of
$7,000
    
    
    99,510
    
    
    
    92,446
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640Issuance of Series B redeemable convertible
preferred stock for cash, net of issuance
costs of $119,000
    
    
    15,151,516
    
    
    
    19,881,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,718
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,718Accretion to redemption value of Series A
and B redeemable convertible preferred
stock
    
    
    
    
    
    
    257,474
    
    
    
    
    
    
    
    
    
    
    
    (257,474
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257,474
    )Accrued dividends on Series A and B
redeemable convertible preferred stock
    
    
    
    
    
    
    883,806
    
    
    
    
    
    
    
    
    
    
    
    (249,822
    )
    
    
    
    
    
    
    (633,984
    )
    
    
    
    
    
    
    (883,806
    )Change in unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,131
    )
    
    
    (4,131
    )Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,147,017
    )
    
    
    
    
    
    
    (5,147,017
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,151,148
    )Balance at December 31, 2005
    
    
    19,650,261
    
    
    
    24,034,276
    
    
    
    1,554,288
    
    
    
    1,554
    
    
    
    
    
    
    
    (65,348
    )
    
    
    (6,819,675
    )
    
    
    (4,131
    )
    
    
    (6,887,600
    )Issuance of common stock upon exercise of
options
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    2
    
    
    
    1,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,100Employee share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170,033Interest on note receivable from stockholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,226
    
    
    
    (5,226
    )
    
    
    
    
    
    
    
    
    
    
    Addendum to asset contribution with Z-KAT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176,357
    )
    
    
    
    
    
    
    (44,691
    )
    
    
    
    
    
    
    (221,048
    )Stock issuance costs for Series C
redeemable convertible preferred stock sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,538
    )
    
    
    
    
    
    
    (8,538
    )Accretion to redemption value of Series A
and B redeemable convertible preferred
stock
    
    
    
    
    
    
    267,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (267,319
    )
    
    
    
    
    
    
    (267,319
    )Accrued dividends on Series A and B
redeemable convertible preferred stock
    
    
    
    
    
    
    1,609,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,609,027
    )
    
    
    
    
    
    
    (1,609,027
    )Change in unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,320
    
    
    
    2,320Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,616,837
    )
    
    
    
    
    
    
    (10,616,837
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,614,517
    )Balance at December 31, 2006
    
    
    19,650,261
    
    
    $
    25,910,622
    
    
    
    1,555,938
    
    
    $
    1,556
    
    
    $
    
    
    
    $
    (70,574
    )
    
    $
    (19,366,087
    )
    
    $
    (1,811
    )
    
    $
    (19,436,916
    )
   107




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##### Table of Contents



MAKO SURGICAL CORP.
 Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit
 NoteRedeemable
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Receivable
    
    
    
    
    
    
    Other
    
    
    TotalConvertible Preferred
    
    
    Common
    
    
    Stock
    
    
    Paid-in
    
    
    from
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stockholder
    
    
    Deficit
    
    
    Income (Loss)
    
    
    DeficitBalance at December 31, 2006
    
    
    19,650,261
    
    
    $
    25,910,622
    
    
    
    1,555,938
    
    
    $
    1,556
    
    
    $
    
    
    
    $
    (70,574
    )
    
    $
    (19,366,087
    )
    
    $
    (1,811
    )
    
    $
    (19,436,916
    )Issuance of Series C redeemable
convertible preferred stock, net
of issuance costs of $84,000
    
    
    13,513,514
    
    
    
    29,916,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock upon
exercise of options
    
    
    
    
    
    
    
    
    
    
    1,306
    
    
    
    1
    
    
    
    1,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,662Employee share-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530,592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530,592Interest on note receivable from
stockholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,760
    
    
    
    (3,760
    )
    
    
    
    
    
    
    
    
    
    
    Modification of restricted stock
    
    
    
    
    
    
    
    
    
    
    300,084
    
    
    
    300
    
    
    
    394,480
    
    
    
    74,334
    
    
    
    
    
    
    
    
    
    
    
    469,114Return of 35,244 shares due to
modification of CEO restricted
stock
    
    
    
    
    
    
    
    
    
    
    (35,244
    )
    
    
    (35
    )
    
    
    (391,892
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (391,927
    )Restricted common stock
compensation expense
    
    
    
    
    
    
    
    
    
    
    48,519
    
    
    
    49
    
    
    
    302,383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,432Accretion to redemption value of
Series A, B and C redeemable
convertible preferred stock
    
    
    
    
    
    
    300,911
    
    
    
    
    
    
    
    
    
    
    
    (300,911
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300,911
    )Accrued dividends on Series A, B
and C redeemable convertible
preferred stock
    
    
    
    
    
    
    3,358,863
    
    
    
    
    
    
    
    
    
    
    
    (540,073
    )
    
    
    
    
    
    
    (2,818,790
    )
    
    
    
    
    
    
    (3,358,863
    )Change in unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,840
    
    
    
    5,840Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,658,254
    )
    
    
    
    
    
    
    (20,658,254
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,652,414
    )Balance at December 31, 2007
    
    
    33,163,775
    
    
    $
    59,486,700
    
    
    
    1,870,603
    
    
    $
    1,871
    
    
    $
    
    
    
    $
    
    
    
    $
    (42,843,131
    )
    
    $
    4,029
    
    
    $
    (42,837,231
    )
   108




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##### Table of Contents



MAKO
SURGICAL CORP.
 
 Statements of Cash Flows
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Operating activities:Net loss
    
    $
    (20,658,254
    )
    
    $
    (10,616,837
    )
    
    $
    (5,147,017
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    677,538
    
    
    
    175,311
    
    
    
    80,149Amortization of intangible assets
    
    
    645,374
    
    
    
    470,082
    
    
    
    18,370Stock-based compensation
    
    
    1,227,804
    
    
    
    170,033
    
    
    
    174,094Inventory writedown
    
    
    7,918
    
    
    
    35,821
    
    
    
    Loss on disposal of assets
    
    
    
    
    
    
    2,533
    
    
    
    Loss on asset impairment
    
    
    13,759
    
    
    
    
    
    
    
    Accrued interest expense on deferred license fee
    
    
    304,971
    
    
    
    210,913
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,634,357
    )
    
    
    (578,340
    )
    
    
    Inventory
    
    
    (1,428,238
    )
    
    
    (605,402
    )
    
    
    (87,950
    )Due from related party
    
    
    68,251
    
    
    
    (97,736
    )
    
    
    Employee loans
    
    
    225,155
    
    
    
    (225,155
    )
    
    
    Prepaid and other assets
    
    
    (196,175
    )
    
    
    214,498
    
    
    
    (28,729
    )Other assets
    
    
    (560,601
    )
    
    
    (405,349
    )
    
    
    Accounts payable
    
    
    1,078,028
    
    
    
    353,423
    
    
    
    14,717Accrued compensation and employee benefits
    
    
    522,867
    
    
    
    385,452
    
    
    
    (25,405
    )Other accrued liabilities
    
    
    1,664,480
    
    
    
    509,851
    
    
    
    (8,271
    )Due to related party
    
    
    
    
    
    
    (115,026
    )
    
    
    Deferred revenue
    
    
    2,660,833
    
    
    
    700,000
    
    
    
    Net cash used in operating activities
    
    
    (15,380,647
    )
    
    
    (9,415,928
    )
    
    
    (5,010,042
    )Investing activities:Purchase of short-term investments
    
    
    (15,158,741
    )
    
    
    (600,000
    )
    
    
    (11,099,419
    )Proceeds from sales and maturities of short-term investments
    
    
    13,480,364
    
    
    
    9,299,577
    
    
    
    998,268Acquisition of property and equipment
    
    
    (1,782,171
    )
    
    
    (1,193,462
    )
    
    
    (175,180
    )Acquisition of intangible assets
    
    
    (450,000
    )
    
    
    (2,120,000
    )
    
    
    (555,000
    )Net cash provided by (used in) investing activities
    
    
    (3,910,548
    )
    
    
    5,386,115
    
    
    
    (10,831,331
    )Financing activities:Proceeds from issuance of common stock and warrants
    
    
    
    
    
    
    
    
    
    
    640Deferred initial public offering costs
    
    
    (2,727,832
    )
    
    
    
    
    
    
    Proceeds from issuance of Series A. redeemable convertible
preferred stock, net of stock issuance costs
    
    
    
    
    
    
    
    
    
    
    145,620Proceeds from issuance of Series B redeemable convertible
preferred stock, net of stock issuance costs
    
    
    
    
    
    
    
    
    
    
    19,881,300Proceeds from issuance of Series C redeemable convertible
preferred stock, net of stock issuance costs
    
    
    29,916,304
    
    
    
    (8,538
    )
    
    
    Exercise of common stock options for cash
    
    
    1,662
    
    
    
    1,100
    
    
    
    Payment of CEO payroll taxes relating to restricted common
stock modification
    
    
    (391,927
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    26,798,207
    
    
    
    (7,438
    )
    
    
    20,027,560Net increase (decrease) in cash and cash equivalents
    
    
    7,507,012
    
    
    
    (4,037,251
    )
    
    
    4,186,187Cash and cash equivalents at beginning of year
    
    
    2,108,015
    
    
    
    6,145,266
    
    
    
    1,959,079Cash and cash equivalents at end of year
    
    $
    9,615,027
    
    
    $
    2,108,015
    
    
    $
    6,145,266Supplemental disclosures of cash flow informationInterest paid
    
    $
    
    
    
    $
    6,775
    
    
    $
    Noncash investing and financing activities:Accretion of preferred stock
    
    $
    300,911
    
    
    $
    267,319
    
    
    $
    257,474Accrued dividends on preferred stock
    
    
    3,358,863
    
    
    
    1,609,027
    
    
    
    883,806Licensing of intellectual property
    
    
    29,783
    
    
    
    3,409,638
    
    
    
    Deferred license fee payable
    
    
    29,783
    
    
    
    3,409,638
    
    
    
    Common stock issued for note receivable
    
    
    
    
    
    
    
    
    
    
    63,000Interest on note receivable for common stock
    
    
    3,760
    
    
    
    5,226
    
    
    
    2,348Receipt of 35,244 shares of restricted common stock as
reimbursement for payment of CEO payroll taxes
    
    
    391,927
    
    
    
    
    
    
    
    Acquisition of assets from affiliate:Note receivable
    
    
    
    
    
    
    55,707
    
    
    
    
   109




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##### Table of Contents



MAKO SURGICAL CORP.
 
 Notes to Financial Statements
 1. Description of the Business
   Predecessor
  2. Summary of Significant Accounting Policies
 Basis of Presentation and Use of Estimates
   110




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##### Table of Contents



Liquidity and Operations
  Concentrations of Credit Risk and Other Risks and Uncertainties
      111




---



##### Table of Contents



Disclosures about Segments of an Enterprise and Related Information
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Company A
    
    $
    330,650
    
    
    $
    59,543
    
    
    $
    Company B
    
    
    161,176
    
    
    
    
    
    
    
    Company C
    
    
    126,411
    
    
    
    
    
    
    
    Others
    
    
    99,561
    
    
    
    3,028
    
    
    
    Net Revenue
    
    $
    717,798
    
    
    $
    62,571
    
    
    $
    
 Cash and Cash Equivalents
  Restricted Cash
  Fair Value of Financial Instruments
   112




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##### Table of Contents



Short-Term Investments
   As of December 31, 2007
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueVariable auction rate securities
    
    $
    1,550,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,550,000U.S. treasury notes
    
    
    1,504,951
    
    
    
    4,029
    
    
    
    
    
    
    
    1,508,980Certificates of deposit
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000$
    3,079,951
    
    
    $
    4,029
    
    
    $
    
    
    
    $
    3,083,980
 As of December 31, 2006
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueVariable auction rate securities
    
    $
    1,301,574
    
    
    $
    
    
    
    $
    (1,574
    )
    
    $
    1,300,000Certificate of deposit
    
    
    100,000
    
    
    
    
    
    
    
    (237
    )
    
    
    99,763$
    1,401,574
    
    
    $
    
    
    
    $
    (1,811
    )
    
    $
    1,399,763
  Allowance for Doubtful Accounts
   113




---



##### Table of Contents



Accrual for Warranty Costs
  Inventory
  Property and Equipment
   Intangible Assets
  Impairment of Long-Lived Assets
   114




---



##### Table of Contents



Revenue Recognition
 Software
Revenue Recognition
     115




---



##### Table of Contents



Revenue Recognition
    Deferred Revenue and Deferred Cost of Revenue
   116




---



##### Table of Contents



Deferred Initial Public Offering Costs
  Shipping and Handling Costs
  Research and Development Costs
  Software Development Costs
  Stock-Based Compensation
 Share-Based Payment
   117




---



##### Table of Contents



Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services.
  Advertising Costs
  Income Taxes
  Operating Leases
  Net Loss Per Share
 Earnings per Share
  118




---



##### Table of Contents



Comprehensive Loss
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
  119




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities
 Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
  120




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##### Table of Contents



Reclassifications
  3. Selected Balance Sheet Components
  December 31,2007
    
    
    2006Inventory:Raw materials
    
    $
    974,450
    
    
    $
    396,772Work-in-process
    
    
    641,810
    
    
    
    371,764Finished goods
    
    
    730,091
    
    
    
    157,495Total inventory
    
    $
    2,346,351
    
    
    $
    926,031
 December 31,
    
    
    Estimated2007
    
    
    2006
    
    
    Useful LifeProperty and equipment:Consigned TGS units and instruments
    
    $
    605,833
    
    
    $
    279,631
    
    
    2 yearsTGS demo system
    
    
    402,600
    
    
    
    
    
    
    2 yearsComputer equipment and software
    
    
    1,057,209
    
    
    
    625,618
    
    
    3-5 yearLaboratory and manufacturing equipment
    
    
    570,531
    
    
    
    287,821
    
    
    5 yearsOffice furniture and equipment
    
    
    493,047
    
    
    
    249,763
    
    
    7 yearsLeasehold improvements
    
    
    128,201
    
    
    
    32,420
    
    
    Lease Term3,257,421
    
    
    
    1,475,253Less accumulated depreciation and amortization
    
    
    (936,324
    )
    
    
    (258,789
    )Total property and equipment, net
    
    $
    2,321,097
    
    
    $
    1,216,464
 December 31,2007
    
    
    2006Other accrued liabilities:Accrued development services
    
    $
    71,166
    
    
    $
    362,866Accrued legal fees
    
    
    800,852
    
    
    
    53,513Other
    
    
    1,807,920
    
    
    
    599,079$
    2,679,938
    
    
    $
    1,015,458
  121




---



##### Table of Contents



4. Related Parties
 Acquisitions of Assets From Predecessor
    Due From Related Party
  Note Receivable  Related Party
   122




---



##### Table of Contents



Employee Loans
  Restricted Stock and Note Receivable from Related Party
   123




---



##### Table of Contents



124




---



##### Table of Contents



WeightedAverageShares
    
    
    Fair ValueVested shares
    
    
    313,360
    
    
    $
    1.88Unvested shares
    
    
    427,715
    
    
    
    6.76Total
    
    
    741,075
    
    
    $
    4.70
  WeightedAverageShares
    
    
    Fair ValueVested shares
    
    
    217,224
    
    
    $
    1.27Unvested shares
    
    
    229,063
    
    
    
    1.27Total
    
    
    446,287
    
    
    $
    1.27
 5. Intangible Assets
   December 31,2007
    
    
    2006Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageAmortization
    
    
    
    
    
    
    AmortizationAmount
    
    
    Period
    
    
    Amount
    
    
    PeriodLicenses
    
    $
    6,549,421
    
    
    
    10.0
    
    
    $
    6,084,638
    
    
    
    10.1Patent
    
    
    60,000
    
    
    
    17.8
    
    
    
    60,000
    
    
    
    17.86,609,421
    
    
    
    10.1
    
    
    
    6,144,638
    
    
    
    10.1Less: accumulated amortization
    
    
    (1,132,585
    )
    
    
    
    
    
    
    (488,452
    )Intangible assets, net
    
    $
    5,476,836
    
    
    
    
    
    
    $
    5,656,186
   125




---



##### Table of Contents



2008
    
    $
    660,0002009
    
    
    660,0002010
    
    
    660,0002011
    
    
    660,0002012
    
    
    660,000Total
    
    $
    3,300,000
 6. Commitments and Contingencies
 Operating Leases
   2008
    
    $
    208,0002009
    
    
    215,0002010
    
    
    221,0002011
    
    
    131,000$
    775,000
 License and Royalty Agreements
    126




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##### Table of Contents



2008
    
    $
    631,0002009
    
    
    660,0002010
    
    
    690,0002011
    
    
    630,0002012
    
    
    630,000Thereafter
    
    
    817,000$
    4,058,000
 Contingencies
   127




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##### Table of Contents



7. Redeemable Convertible Preferred Stock
  December 31,2007
    
    
    2006
    
    
    2005Authorized shares
    
    
    40,000,000
    
    
    
    40,000,000
    
    
    
    40,000,000Outstanding shares:Series A
    
    
    4,498,745
    
    
    
    4,498,745
    
    
    
    4,498,745Series B
    
    
    15,151,516
    
    
    
    15,151,516
    
    
    
    15,151,516Series C
    
    
    13,513,514
    
    
    
    
    
    
    
    Total outstanding shares
    
    
    33,163,775
    
    
    
    19,650,261
    
    
    
    19,650,261Liquidation amount:Series A
    
    $
    4,498,745
    
    
    $
    4,498,745
    
    
    $
    4,498,745Series B
    
    
    20,000,000
    
    
    
    20,000,000
    
    
    
    20,000,000Series C
    
    
    30,000,000
    
    
    
    
    
    
    
    Total liquidation amount
    
    $
    54,498,745
    
    
    $
    24,498,745
    
    
    $
    24,498,745Cash proceeds, net of issuance costsSeries A
    
    $
    
    
    
    
    
    
    
    
    145,620Series B
    
    
    
    
    
    
    
    
    
    
    19,881,300Series C
    
    
    29,907,767
    
    
    
    
    
    
    
    Total proceeds, net of issuance costs
    
    $
    29,907,767
    
    
    $
    
    
    
    $
    20,026,920Cumulative undeclared accrued dividendsSeries A
    
    $
    958,680
    
    
    $
    681,909
    
    
    $
    334,590Series B
    
    
    2,819,736
    
    
    
    1,822,901
    
    
    
    561,193Series C
    
    
    1,179,760
    
    
    
    
    
    
    
    Total cumulative undeclared accruedDividends
    
    $
    4,958,176
    
    
    $
    2,504,810
    
    
    $
    895,783
  128




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Dividend Rights
  Liquidation Rights
     129




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Voting Rights
  Conversion Rights
    Redemption Rights
   130




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##### Table of Contents



Accounting Series
Release Classification and Measurement of Redeemable Securities
 8. Stockholders Deficit
 Common Stock
     Preferred stock
    
    
    10,945,080Warrants to purchase common stock
    
    
    462,716Stock option plans
    
    
    2,830,03314,237,829
  131




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##### Table of Contents



Preferred stock
    
    
    6,485,199Warrants to purchase common stock
    
    
    462,716Stock option plans
    
    
    1,856,4358,804,350
 Stock Option Plans
      132




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##### Table of Contents



Outstanding OptionsWeightedShares/Options
    
    
    
    
    
    
    AverageAvailable
    
    
    Number of
    
    
    ExerciseFor Grant
    
    
    Options
    
    
    PriceBalance at December 31, 2004
    
    
    241,406
    
    
    
    360,904
    
    
    $
    0.67Shares reserved
    
    
    1,254,125
    
    
    
    
    
    
    $
    Restricted stock issued
    
    
    (413,283
    )
    
    
    
    
    
    $
    Options granted
    
    
    (284,900
    )
    
    
    284,900
    
    
    $
    1.24Options forfeited
    
    
    16,237
    
    
    
    (16,237
    )
    
    $
    0.76Balance at December 31, 2005
    
    
    813,585
    
    
    
    629,567
    
    
    $
    0.91Restricted stock issued
    
    
    (82,508
    )
    
    
    
    
    
    $
    Options granted
    
    
    (344,884
    )
    
    
    344,884
    
    
    $
    1.27Options exercised
    
    
    
    
    
    
    (1,650
    )
    
    $
    0.67Options forfeited
    
    
    24,851
    
    
    
    (24,851
    )
    
    $
    0.85Balance at December 31, 2006
    
    
    411,044
    
    
    
    947,950
    
    
    $
    1.06Shares reserved
    
    
    973,598
    
    
    
    
    
    
    $
    Restricted stock issued
    
    
    (330,033
    )
    
    
    
    
    
    $
    Options granted
    
    
    (1,001,695
    )
    
    
    1,001,695
    
    
    $
    8.30Options exercised
    
    
    
    
    
    
    (1,306
    )
    
    $
    1.27Options forfeited
    
    
    31,814
    
    
    
    (31,814
    )
    
    $
    3.51Balance at December 31, 2007
    
    
    84,728
    
    
    
    1,916,525
    
    
    $
    4.81
    133




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Average
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    Remaining
    
    
    AverageOf
    
    
    Contractual
    
    
    Exercise
    
    
    Of
    
    
    Contractual
    
    
    ExerciseOptions
    
    
    Life (Years)
    
    
    Price
    
    
    Options
    
    
    Life (Years)
    
    
    PriceExercise Price:$0.67
    
    
    345,386
    
    
    
    6.97
    
    
    $
    0.67
    
    
    
    342,526
    
    
    
    6.96
    
    
    $
    0.67$1.27
    
    
    582,286
    
    
    
    7.99
    
    
    $
    1.27
    
    
    
    298,305
    
    
    
    7.92
    
    
    $
    1.27$1.97
    
    
    3,547
    
    
    
    9.00
    
    
    $
    1.97
    
    
    
    371
    
    
    
    8.97
    
    
    $
    1.97$2.48
    
    
    313,344
    
    
    
    9.23
    
    
    $
    2.48
    
    
    
    
    
    
    
    
    
    
    $
    $9.67
    
    
    9,900
    
    
    
    9.43
    
    
    $
    9.67
    
    
    
    
    
    
    
    
    
    
    $
    $11.12
    
    
    662,062
    
    
    
    9.65
    
    
    $
    11.12
    
    
    
    13,820
    
    
    
    9.65
    
    
    $
    11.121,916,525
    
    
    
    8.59
    
    
    $
    4.81
    
    
    
    655,022
    
    
    
    7.46
    
    
    $
    1.16
  Weighted AverageNumber of
    
    
    Grant Date FairOptions
    
    
    ValueNonvested, December 31, 2006
    
    
    515,615
    
    
    $
    0.82Granted
    
    
    1,001,695
    
    
    $
    4.54Vested
    
    
    (222,687
    )
    
    $
    1.17Exercised
    
    
    (1,306
    )
    
    $
    0.82Forfeited
    
    
    (31,814
    )
    
    $
    2.12Nonvested, December 31, 2007
    
    
    1,261,503
    
    
    $
    3.68
     134




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Risk-free interest rate
    
    
    4.50% - 5.14%
    
    
    
    4.29% - 5.23%
    
    
    
    3.83% - 4.59%Expected life
    
    6.25 years
    
    6.25 years
    
    6.25 yearsExpected dividends
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    56.24% - 60.00%
    
    
    
    59.23% - 64 .27%
    
    
    
    65.46% - 68.31%
 Risk-Free Interest Rate.
 Weighted-Average Expected Term.
 Dividend Yield.
 Volatility.
 Forfeitures.
  135




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##### Table of Contents



Warrants
  9. Income taxes
  Years EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Current income taxes:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total current income taxes
    
    
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (7,834,890
    )
    
    
    (4,011,314
    )
    
    
    (1,933,658
    )Less change in valuation allowance
    
    
    7,834,890
    
    
    
    4,011,314
    
    
    
    1,933,658Provision for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
     136




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##### Table of Contents



December 31,2007
    
    
    2006Current deferred income tax assets:Deferred revenue
    
    $
    19,290
    
    
    $
    11,253Accrued bonus
    
    
    4,946
    
    
    
    190,468Total current deferred income tax assets
    
    
    24,236
    
    
    
    201,721Noncurrent deferred income tax assets:Net operating loss carryforwards
    
    
    12,678,400
    
    
    
    5,575,775Deferred revenue
    
    
    1,277,151
    
    
    
    270,025Amortization
    
    
    229,685
    
    
    
    116,371Other
    
    
    326,443
    
    
    
    202,939Total noncurrent deferred income tax assets
    
    
    14,511,679
    
    
    
    6,165,110Noncurrent deferred income tax liabilities:Deferred costs
    
    
    (357,336
    )
    
    
    (81,142
    )Other deferred income tax liabilities
    
    
    (58,000
    )
    
    
    Total noncurrent deferred income tax liabilities
    
    
    (415,336
    )
    
    
    (81,142
    )Less valuation allowance
    
    
    (14,120,579
    )
    
    
    (6,285,689
    )Total
deferred income tax assets, net
    
    $
    
    
    
    $
    
   137




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##### Table of Contents



Years EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Tax at U.S. statutory rate
    
    
    (35.00
    )%
    
    
    (35.00
    )%
    
    
    (35.00
    )%State taxes, net of federal impact
    
    
    (3.55
    )%
    
    
    (3.50
    )%
    
    
    (3.48
    )%Non-deductible items
    
    
    0.28
    %
    
    
    0.72
    %
    
    
    0.91
    %Change in valuation allowance
    
    
    37.93
    %
    
    
    37.78
    %
    
    
    37.57
    %Other, net
    
    
    0.34
    %
    
    
    0.00
    %
    
    
    0.00
    %Effective income tax rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Accounting for Uncertainty in
Income Taxes
  138




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##### Table of Contents



10. Selected Quarterly Data (Unaudited)
 2007Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    $
    99,769
    
    
    $
    106,174
    
    
    $
    149,439
    
    
    $
    415,980Gross profit (loss)
    
    
    64,416
    
    
    
    58,851
    
    
    
    (59,314
    )
    
    
    124,495Loss from operations
    
    
    (3,655,543
    )
    
    
    (4,255,027
    )
    
    
    (5,981,487
    )
    
    
    (7,527,869
    )Net loss
    
    
    (3,495,674
    )
    
    
    (4,014,966
    )
    
    
    (5,750,396
    )
    
    
    (7,397,218
    )Net loss
attributable to
common stockholders
    
    
    (4,250,771
    )
    
    
    (4,968,500
    )
    
    
    (6,718,546
    )
    
    
    (8,380,211
    )Net loss per share
- basic and diluted
attributable to
common stockholders
    
    
    (2.73
    )
    
    
    (3.19
    )
    
    
    (4.12
    )
    
    
    (4.53
    )
 2006Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    $
    
    
    
    $
    4,665
    
    
    $
    30,166
    
    
    $
    27,740Gross profit (loss)
    
    
    
    
    
    
    3,645
    
    
    
    2,386
    
    
    
    (20,007
    )Loss from operations
    
    
    (1,648,869
    )
    
    
    (2,381,660
    )
    
    
    (2,860,419
    )
    
    
    (3,982,248
    )Net loss
    
    
    (1,486,139
    )
    
    
    (2,320,806
    )
    
    
    (2,816,136
    )
    
    
    (3,993,756
    )Net loss
attributable to
common stockholders
    
    
    (1,944,296
    )
    
    
    (2,786,175
    )
    
    
    (3,288,826
    )
    
    
    (4,473,886
    )Net loss per share
- basic and diluted
attributable to
common stockholders
    
    
    (1.25
    )
    
    
    (1.79
    )
    
    
    (2.11
    )
    
    
    (2.88
    )
 11. Subsequent Events
    139




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140




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T). CONTROLS AND PROCEDURES
    
 ITEM 9B. OTHER INFORMATION
   141




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##### Table of Contents



PART III.
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13.
   CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   142




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENTS and FINANCIAL STATEMENT SCHEDULES
  Financial Statements
 Index to Financial Statements
 Financial Statement Schedules
  Exhibits
 ExhibitNo.
    
    Description3.1
    
    Third Amended and Restated Certificate of Incorporation of the
Registrant, dated February 20, 2008 (1)3.2
    
    Third Amended and Restated Bylaws of the Registrant effective as of
February 20, 2008 (1)4.1
    
    Second Amended and Restated Registration Rights Agreement, dated
February 6, 2007, between the Registrant and certain of its
stockholders (2)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 Fritz L. LaPorte (2)10.7+
    
    Amendment to Employment Agreement, dated as of February 5, 2007, by
and between Registrant and Fritz L. LaPorte (2)10.8+
    
    Employment Agreement, dated as of January 1, 2005, by and between
Registrant and Rony Abovitz (2)10.9+
    
    Amendment to Employment Agreement, dated as of February 5, 2007, by
and between Registrant and Rony Abovitz (2)
  143




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##### Table of Contents



ExhibitNo.
    
    Description10.10+
    
    Employment Agreement, dated as of January 1, 2005, by and between
Registrant and Menashe R. Frank (2)10.11+
    
    Amendment to Employment Agreement, dated as of February 5, 2007, by
and between Registrant and Menashe R. Frank (2)10.12+
    
    Employment Agreement, dated as of May 15, 2006, by and between
Registrant and Steven J. Nunes (2)10.13+
    
    Amendment to Employment Agreement, dated as of February 5, 2007, by
and between Registrant and Steven J. Nunes (2)10.14#
    
    Consulting Agreement, by and between Registrant and Thomas M. Coon,
M.D., dated as of April 6, 2007 (2)10.15#
    
    Consulting Agreement, by and between Registrant and Martin W. Roche,
M.D., dated August 12, 2005 (2)10.16#
    
    Amendment to Consulting Agreement, by and between Registrant and
Martin W. Roche, M.D., dated as of July 6, 2007 (2)10.17#
    
    Development Agreement, by and between Registrant and Martin W.
Roche, M.D., dated as of July 6, 2007 (2)10.18#
    
    License Agreement, dated December 17, 2004, by and between
Registrant and Z-KAT, Inc. (2)10.19
    
    Asset Contribution Agreement, dated December 17, 2004, by and
between Registrant and Z-KAT, Inc. (2)10.20#
    
    Addendum to Asset Contribution Agreement, dated December 28, 2006,
by and between Registrant and Z-KAT, Inc. (2)10.21
    
    Amendment to Addendum to Asset Contribution Agreement, dated April
28, 2007, by and between Registrant and Z-KAT, Inc. (2)10.22#
    
    License Agreement, by and between Registrant, International Business
Machines Corporation and Z-KAT, Inc., dated as of March 29, 2006 (2)10.23#
    
    License Agreement, by and between Registrant and Integrated Surgical
Systems, Inc., dated September 1, 2005 (2)10.24#
    
    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)10.25#
    
    Research Agreement, by and between Registrant and University of
Florida Board of Trustees, dated as of February 10, 2005 (2)10.26#
    
    Amendment to Research Agreement, by and between Registrant and the
University of Florida Board of Trustees, dated as of August 15, 2007
(2)10.27#
    
    Exclusive License Agreement, by and between Registrant and
University of Florida Research Foundation, dated August 15, 2007 (2)10.28#
    
    Supply Agreement, by and between Registrant and Trigon Incorporated,
dated as of September 13, 2005 (2)
  144




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##### Table of Contents



ExhibitNo.
    
    Description10.29
    
    License Agreement, by and between Registrant and Trigon
Incorporated, dated September 14, 2005 (2)10.30#
    
    Supply Agreement, by and between Registrant and Encore Medical,
L.P., dated as of February 28, 2007 (2)10.31#
    
    License Agreement, by and between Registrant and Encore Medical,
L.P., dated as of December 14, 2006 (2)10.32#
    
    Manufacturing Supply Agreement, by and between Registrant and
Symmetry Medical, dated as of July 26, 2007 (2)10.33
    
    Letter of Agreement, by and between Registrant and The Anspach
Effort, Inc., dated as of July 6, 2007 (2)10.34
    
    Multi-Tenant Lease, by and between Registrant and Westport Business
Park Associates LLP, last dated January 31, 2006 (2)10.35#
    
    Development Agreement by and between Registrant and Pro-Dex, Inc.,
dated December 12, 2007 (2)10.36+
    
    Form of Incentive Stock Option Agreement related to the 2008 Omnibus
Incentive Plan (3)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(3)
    
    Incorporated by reference to Registrants Current Report on Form 8-K filed with the SEC on
February 26, 2008+
    
    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.  145




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##### Table of Contents



SIGNATURES
  By:
    /s/ Maurice R. Ferré, M.D.President, Chief Executive Officerand Chairman of the Board
(Principal Executive Officer)   Signature
    
    Title
    
    Date/s/ Maurice R. Ferré, M.D.
    
    President, Chief Executive Officer and
    
    March 31, 2008Maurice R. Ferré, M.D.
    
    Chairman of the Board
(Principal Executive Officer)/s/ Fritz L. LaPorte
    
    Senior Vice President of Finance and Administration,
    
    March 31, 2008Fritz L. LaPorte
    
    Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)/s/ S. Morry Blumenfeld, Ph.D.
    
    Director
    
    March 31, 2008S. Morry Blumenfeld, Ph.D./s/ Gerald A. Brunk
    
    Director
    
    March 31, 2008Gerald A. Brunk/s/ Marcelo G. Chao
    
    Director
    
    March 31, 2008Marcelo G. Chao/s/ Christopher C. Dewey
    
    Director
    
    March 31, 2008Christopher C. Dewey/s/ Charles W. Federico
    
    Director
    
    March 31, 2008Charles W. Federico/s/ Frederic H. Moll, M.D.
    
    Director
    
    March 31, 2008Frederic H. Moll, M.D./s/ Michael P. Stansky
    
    Director
    
    March 31, 2008Michael P. Stansky
  146




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Third Amended and Restated Certificate of Incorporation of the
Registrant, dated February 20, 20083.2
    
    Third Amended
and Restated Bylaws of the Registrant effective as of February 20, 200823
    
    Consent of Ernst & Young LLP, Independent Public Registered
Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Exchange Act31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Exchange Act32.1
    
    Certification of Chief Executive Officer pursuant to18 U.S.C. §135032.2
    
    Certification of Chief Financial Officer pursuant to18 U.S.C. §1350
  147