Table of Contents





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|UNITED STATES                                                    
|SECURITIES
 AND EXCHANGE COMMISSION                              
|Washington, D.C.
 20549                                          
|                                                                  |  | 
|                                                                  |  | 
|                                                                  |  | 
|Form 10-K                                                        
|                                                                  |  | 
|                                                                  |  | 
|                                                                  |  | 
|þANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|EXCHANGE
 ACT OF 1934                                            
|                                                                  |  | 
|For the fiscal year ended December 31, 2010                      
|                                                                  |  | 
|Commission file number: 001-33966                                
|                                                                  |  | 
|                                                                  |  | 
|                                                                  |  | 
|                                                                  |  | 
|MAKO SURGICAL CORP.                                              
|(Exact Name of Registrant as Specified in Its Charter)           

|                                                                |                                     
|--------------------------------------------------------------- | ------------------------------------
|Delaware                                                        | 20-1901148                          
|(State or Other Jurisdiction of Incorporation or
 Organization) | (I.R.S. Employer Identification No.)
|                                                                |                                     
|2555 Davie Road, Fort Lauderdale, FL                            | 33317                               
|(Address of Principal Executive Offices)                        | (Zip
 Code)                         
|                                                                |                                     
|(954) 927-2044                                                 
|(Registrants telephone number, including area code)           
|                                                                |                                     
|Securities registered pursuant to Section 12(b) of the
 Act:   
|                                                                |                                     
|Title of Class                                                  | Name of Exchange on Which Registered
|                                                                |                                     
|Common stock, $0.001 par value per share                        | The NASDAQ Global Select Market     

|                                                                  |  | 
|----------------------------------------------------------------- |  | 
|Securities registered pursuant to
 Section 12(g) of the Act: None
|                                                                  |  | 

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

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

Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
(the Exchange Act) during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o     No o

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

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

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

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

The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2010 was approximately $261,325,923 (based on a
closing price of $12.45 per share on The NASDAQ Global Select Market as of such date).

As
of February 28, 2011, the registrant had outstanding 40,805,211 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Companys definitive proxy statement for the 2011 annual meeting of
stockholders will be incorporated by reference into Part III of this Annual
Report on Form 10-K when filed with the Securities and Exchange Commission.





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MAKO Surgical Corp.

INDEX TO FORM 10-K

|                            |  |                                                                                                                |  |         
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|                            |  |                                                                                                                |  | Page No.
|Forward-Looking
 Statements |  | 3                                                                                                             
|                            |  | Part I                                                                                                         |  |         
|                            |  |                                                                                                                |  |         
|Item
 1                     |  | Business                                                                                                       |  | 5       
|Item
 1A                    |  | Risk
 Factors                                                                                                  |  | 38      
|Item
 1B                    |  | Unresolved
 Staff Comments                                                                                     |  | 63      
|Item
 2                     |  | Properties                                                                                                     |  | 63      
|Item
 3                     |  | Legal
 Proceedings                                                                                             |  | 63      
|Item
 4                     |  | Reserved                                                                                                       |  | 63      
|                            |  |                                                                                                                |  |         
|                            |  | Part II                                                                                                        |  |         
|                            |  |                                                                                                                |  |         
|Item
 5                     |  | Market
 for Registrants Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |  | 64      
|Item
 6                     |  | Selected
 Financial Data                                                                                       |  | 67      
|Item
 7                     |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                         |  | 68      
|Item
 7A                    |  | Quantitative
 and Qualitative Disclosures about Market Risk                                                    |  | 79      
|Item
 8                     |  | Financial
 Statements and Supplementary Data                                                                   |  | 80      
|Item
 9                     |  | Changes
 in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 113     
|Item
 9A                    |  | Controls
 and Procedures                                                                                       |  | 113     
|Item
 9B                    |  | Other
 Information                                                                                             |  | 114     
|                            |  |                                                                                                                |  |         
|                            |  | Part III                                                                                                       |  |         
|                            |  |                                                                                                                |  |         
|Item
 10                    |  | Directors,
 Executive Officers and Corporate Governance                                                        |  | 115     
|Item
 11                    |  | Executive
 Compensation                                                                                        |  | 115     
|Item
 12                    |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters               |  | 115     
|Item
 13                    |  | Certain
 Relationships, Related Transactions and Director Independence                                         |  | 115     
|Item
 14                    |  | Principal
 Accountant Fees and Services                                                                        |  | 116     
|                            |  |                                                                                                                |  |         
|                            |  | Part IV                                                                                                        |  |         
|                            |  |                                                                                                                |  |         
|Item
 15                    |  | Exhibits,
 Financial Statements and Financial Statement Schedules                                              |  | 117     
|Signatures                  |  |                                                                                                                |  | 120     
|Exhibit
 Index              |  |                                                                                                                |  | 121     

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

2

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Table of Contents

FORWARD-LOOKING
STATEMENTS

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

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

Forward-looking
statements reflect our current expectations and are not guarantees of
performance. These statements are based on managements beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to these forward-looking statements include,
among others, assumptions regarding demand for our products, expected pricing
levels, raw material costs, the timing and cost of planned capital
expenditures, competitive conditions and general regulatory and economic
conditions. You are cautioned that reliance on any forward-looking statement
involves risks and uncertainties. Although we believe that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of those assumptions could prove to be inaccurate given the inherent
uncertainties as to the occurrence or nonoccurrence of future events. There can
be no assurance that the forward-looking statements contained in this report
will prove to be accurate. The inclusion of a forward-looking statement in this
report should not be regarded as a representation
by us that our objectives will be achieved.

3

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

| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a continued economic
 downturn or delayed economic recovery that may have a significant adverse
 effect on the ability of our customers to secure adequate funding, including
 access to credit, for the purchase of our products or that may cause our
 customers to delay a purchasing decision;
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in general
 economic conditions and credit conditions;                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in the
 availability of capital and financing sources for our company and our customers;                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in competitive
 conditions and prices in our markets;                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in the
 relationship between supply of and demand for our products;                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | fluctuations in costs of
 raw materials and labor;                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in other
 significant operating expenses;                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to intended product launches;                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | 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 or changing government regulation or taxation of our
 business;                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                   
| |  | the impact of the recently
 enacted United States healthcare reform legislation on hospital spending,
 reimbursement, and the taxing of medical device companies;                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated changes in
 reimbursement to our customers for our products;                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues in
 securing regulatory clearance or approvals for new products or upgrades or
 changes to our current products;                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                   
| |  | developments adversely
 affecting our potential sales activities outside the United States;                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | increases in cost
 containment efforts by group purchasing organizations;                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                   
| |  | loss of key management and
 other personnel or inability to attract such management and other personnel;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                   
| |  | increases in costs of
 retaining a direct sales force and building a distributor network;                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to, or unanticipated changes in or difficulties associated with, the
 recruitment of agents and distributors of our products;                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated expenditures
 related to litigation; and                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated intellectual
 property expenditures required to develop, market and defend our products.                                                                                                                                                                                            

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

4

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Table of Contents

PART I

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

Overview

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

MAKOplasty
is performed using our proprietary RIO® Robotic Arm Interactive Orthopedic
system, or RIO. The RIO is a technology platform that utilizes tactile guided
robotic arm technology and patient specific visualization to offer consistently
reproducible precision to surgeons. The RIO is currently used to treat early to
mid-stage osteoarthritic knee disease. We anticipate commercially releasing an
application and associated implant systems in the second half of 2011 that will
allow the RIO to be used to perform total hip arthroplasty. We believe that the
RIO has the potential to serve as a platform for applications for other
orthopedic procedures beyond the knee and hip and that MAKOplasty has the
potential to empower physicians to address the needs of the large and growing,
yet underserved, population of patients with osteoarthritic disease who desire
a restoration of quality of life and reduction of pain, but for whom current
surgical treatments are not appropriate or desirable.

We
currently offer knee MAKOplasty which, unlike conventional total knee
replacement surgery, which requires extraction and replacement of the entire
joint, enables resurfacing of one or two specific diseased compartments of the
joint, preserving significantly more soft tissue and healthy bone of the knee.
We believe localized resurfacing can be optimized using the RIO to achieve
optimal implant placement and alignment for smaller, more easily inserted
modular implant components. The RIO is used to prepare the knee joint for the
insertion and alignment of our proprietary RESTORIS® MCK multicompartmental and
RESTORIS® unicompartmental knee implant systems through a small incision in a
minimally invasive, bone preserving and tissue sparing procedure. Our RESTORIS
family of knee implants is designed to enable minimally invasive restoration of
one or two of the diseased compartments of the knee joint.

We
believe that the tissue sparing and bone conserving techniques enabled with
knee MAKOplasty can offer substantial advantages to patients, surgeons and
healthcare providers. Because of the minimally invasive nature of the
procedure, smaller incisions are possible, which lead to less tissue damage and
faster recoveries, thereby reducing the overall costs of rehabilitation,
medication and hospitalization. In addition, because more of the patients
natural anatomy is preserved and less trauma is inflicted on the knee, we
believe that patients who undergo knee MAKOplasty have the potential to
experience better functionality and more natural knee movements, thereby
achieving an improved post-operative quality of life. Our RESTORIS family of
implants for use in single and bicompartmental knee resurfacing procedures
provides the ability to address a broad range of the patient population
suffering from early to mid-stage knee osteoarthritis. Finally, because our RIO
system is easy to use, we believe that our knee MAKOplasty solution makes knee
resurfacing procedures accessible to orthopedic surgeons with varied levels of
training and skills and has the potential to lead to greater adoption of knee resurfacing
solutions for early to mid-stage osteoarthritis of the knee.

We
currently anticipate offering hip MAKOplasty, a surgical solution that enables
orthopedic surgeons to perform total hip arthroplasty with the same potential
for consistently reproducible precision, accuracy, and dexterity as knee
MAKOplasty, in the second half of 2011. In the same way that the cutting system
of the RIO allows for the precise resection of bone in the knee joint, we
believe that surgeons will use the RIO in a hip MAKOplasty to accurately
prepare the patients acetabulum, or hip socket, for the implantation of a
replacement cup. During the insertion of the final implant, the RIO can assist
the surgeon in positioning the cup at the orientation that was planned by the
surgeon on a preoperative computed tomography, or CT, scan. We believe that hip
MAKOplasty will allow surgeons to seat these implants according to the plan at
a level of accuracy that we believe is extremely difficult to accomplish
manually, resulting in placement of the implants in the optimal position to
resist dislocation and reduce surface wear.

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Table of Contents

Our products require 510(k)
marketing clearance from the U.S. Food and Drug Administration, or FDA,
before we can market our products in the United States and CE Mark approval
before we can market our products in the European Union. The following table
summarizes our current product 510(k) marketing clearance and our CE Mark
approval to date:

|                                                                                                                                                                               |  |                     |                |                                                                                                               |                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | -------------- | ------------------------------------------------------------------------------------------------------------- | ---------------
|Product                                                                                                                                                                        |  |                     | Date of 510(k) |                                                                                                               | Date of CE Mark
|Platform Products                                                                                                                                                              |  |                     |                |                                                                                                              
|RIO, version 2.0                                                                                                                                                               |  | Fourth Quarter 2008 |                | Fourth Quarter 2009                                                                                          
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|Application that assists a surgeon in acetabular reaming  during total hip arthroplasty using the TGS (i.e., RIO, version 1.0),
 predecessor to our hip MAKOplasty application |  | Second Quarter 2009 |                | --                                                                                                           
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|Application that assists a surgeon in acetabular reaming  during total hip arthroplasty using the RIO, predecessor
 to our hip MAKOplasty application                          |  | Third Quarter 2009  |                | --                                                                                                           
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|Hip MAKOplasty application                                                                                                                                                     |  | First Quarter 2010  |                | --                                                                                                           
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|Implant Products                                                                                                                                                               |  |                     |                |                                                                                                              
|Tibial onlay knee implant system and combined inlay  and onlay system, branded as RESTORIS                                                                                     |  | Fourth Quarter 2007 |                | First Quarter 2010 (onlay
 system)                                                                           
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|Unicompartmental and patellofemoral knee implants,  predecessor components of RESTORIS MCK                                                                                     |  | Second Quarter 2008 |                | --                                                                                                           
|                                                                                                                                                                               |  |                     |                |                                                                                                              
|RESTORIS MCK                                                                                                                                                                   |  | Fourth Quarter 2008 |                | Second Quarter 2010 (onlay
 unicompartmental); First
 Quarter 2011 (onlay patellofemoral and bicompartmental)

In
2010, we sold thirty-three new RIO systems worldwide, including two RIO systems
to international distributors, bringing the total number of domestic commercial
MAKOplasty sites to sixty-seven as of December 31, 2010. A total of 3,485
MAKOplasty procedures were performed in 2010 and, as of December 31, 2010,
5,869 MAKOplasty procedures had been performed since commercial introduction in
June 2006.

As
of February 28, 2011, we have fifty-eight scientific studies, either recently
completed or in progress, which are aimed at measuring the clinical and
economic value of MAKOplasty as follows: eight studies are focused on
quantifying the accuracy of MAKOplasty procedures; nine studies are focused on
assessing basic clinical and radiographic outcomes; four studies are focused on
evaluating the functional and kinematic outcomes of patients; sixteen studies
are focused on supporting implant design and product development; sixteen
studies are focused on codifying surgical technique, ergonomic robotic use, and
surgical indications; and five studies are focused on quantifying the economic
impact of less invasive and more accurate arthroplasty. As of February 28,
2011, we have an intellectual property portfolio of more than 300 licensed or
owned patents and patent applications relating to the areas of computer
assisted surgery, robotics, haptics and implants.

We
generate revenue from unit sales of our RIO system, sales of our implants and
disposable products and the sale of warranty service contracts.

6

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Table of Contents

Industry Background

The Growing Osteoarthritis Problem

Osteoarthritis
is a common medical condition that leads to the degeneration of joints from
aging and repetitive stresses, resulting in a loss of the flexibility,
elasticity and shock-absorbing properties of the joints. As osteoarthritis
disease progresses, the cartilage and other soft tissues protecting the
surfaces of key joints in the body, including knees, hips and shoulders,
deteriorate, resulting in substantial and chronic joint pain, numbness and loss
of motor function. This pain can be overwhelming for patients and can have
significant physical, psychological, quality of life and financial
implications. According to estimates by the National Institutes of Health, or
NIH, 27 million people in the U.S., age 25 and older, suffer from
osteoarthritis.

Compelling
demographic trends, such as the growing, aging and more active population and
rising obesity rates are expected to be key drivers in the continued growth of
osteoarthritis occurrence. The NIH projects that by 2030, 20% of Americans, or
approximately seventy-two million people, will be 65 years or older
and will be at high risk of developing osteoarthritis. According to The Journal
of the American Medical Association, it is estimated that of the
U.S. population over the age of 20, approximately 68% was overweight and 34%
was obese in 2007-2008. According to The Orthopaedic Industry Annual Report,
22% of the U.S. overweight population and 31% of the U.S. obese population will
be diagnosed with some form of osteoarthritis versus only 16% of the U.S.
normal and underweight population.

For
the most severe cases of osteoarthritis, in which patients suffer from extreme
pain, reconstructive joint surgery may be required. Reconstructive joint
surgery involves the removal of the bone area surrounding the affected joint
and the insertion of one or more manufactured implants as a replacement for the
affected bone. According to The Orthopaedic Industry Annual Report,
global sales of joint replacement products in 2009, including knees, hips,
elbows, wrists, digits and shoulders, were $13.3 billion, an increase in sales
of nearly 5.6% over 2008, of which sales in the United States represented
$7 billion. Of the $13.3 billion of global sales of joint replacement
products in 2009, $12.42 billion was attributed to knee and hip products.
According to Millennium Research Group, the U.S. large joint
reconstructive implant market (composed of hip and knee implant systems) will
grow to approximately $9.8 billion by 2014.

Introduction of
Minimally Invasive Surgery

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

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

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

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

7

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Introduction of
Robotics into Other Surgical Fields

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

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

Robotics
technology has been successfully applied in a variety of diverse fields
including urology, gynecology, cardiothoracic surgery, general surgery,
radiosurgery and catheter based interventional cardiology and radiology. The
success of robotics technologies in these applications has led to the growing
adoption and commercialization of these technologies in the medical world.

The Use of Robotics
in Orthopedic Surgical Procedures

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

Introduction of
Patient Specific Instrumentation and Implants

Another
recent trend in orthopedics is the use of patient specific instrumentation and
implants in total knee arthroplasty. The patient specific instrumentation and
implants are developed by orthopedic implant manufacturers using digitized
information obtained from a preoperative CT scan or magnetic resonance imaging,
or MRI, of the affected knee joint. During surgery, the surgeon is able to seat
the patient specific cutting instrumentation in the appropriate position for
cutting more quickly than with traditional surgical instrumentation. The
surgeon then implants either a traditional, off the shelf knee implant or a
patient specific knee implant.

We
believe patient specific instrumentation and implants present several
limitations, including the following:

| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The patient
 specific instrumentation does not accommodate intra-operative adjustments of
 implant position and orientation.                                            
| |   |                                                                                                                                                                         
| |  | The fit of
 the patient specific instrumentation on the bone is subject to potential
 misalignment and subsequent inaccuracies in bone cuts and final implant
 position.
| |   |                                                                                                                                                                         
| |  | The patient
 specific instrumentation introduces an additional recurring disposable
 expense to the procedure.                                                          

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| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Most patient
 specific instrumentation is developed using a preoperative MRI in order to
 fit the instrumentation to the cartilage surface, which may add additional
 expense to the procedure in comparison to MAKOplasty.

Additionally,
according to a study entitled Radiographic Review of Alignment in Patient-Matched
Total Knee Arthroplasty, which was presented at the 2010 American
Academy of Orthopedic Surgeons, patient matched instrumentation did not
significantly improve accuracy relative to conventional instrumentation or
navigation.

We
believe that the limitations of currently available surgical options for
osteoarthritic disease have created a sizeable market for treatment of a large and
growing population of patients with osteoarthritic disease. We believe that
robotics technology is the key to enabling surgeons to perform the kind of
consistently reproducible and precise surgery that results in restoration of
function and improved post-operative outcomes for such patients.

The MAKO Solution

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consistently Reproducible Precision.
 We believe that MAKOplasty reduces the variability of procedure outcomes and
 increases efficacy through the consistently reproducible precision provided
 by our computer assisted and tactile robotic arm technology. We believe that
 the precision of our cutting process and placement and alignment of implants
 leads to significantly improved and reliable results, compared to
 conventional, manually executed orthopedic procedures. The surgeon retains
 control of the actual movements of the robotic arm within a pre-established
 volume of space, the tactile safety zone, which is tracked and bounded by
 the RIO system. We believe that the tactile safety zone enables improved
 placement and alignment of the implant, while the visualization guides the
 surgeon through each step of the procedure. We believe that this consistently
 reproducible precision enables physicians to be trained in the use of
 MAKOplasty in a relatively short period of time and also will increase the
 number of physicians who are willing and able to perform MAKOplasty
 procedures.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Ease of Use. We
 believe that our RIO system 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. We believe that the RIOs ease of use makes MAKOplasty
 procedures accessible to orthopedic surgeons with a broad range of training
 and skills and has the potential to lead to greater adoption of MAKOplasty
 procedures. We also believe that the ease of use provided by the RIO may
 enable physicians to shorten operating room time and potentially increase the
 number of procedures performed.                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Improved Restorative Post-Operative
 Outcomes. Due to the reproducible and precise nature
 of the MAKOplasty 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | therapy,
 medication and hospitalization. In addition, because of the improved
 placement and alignment of the implants, patients who undergo MAKOplasty have
 the potential to experience better mobility, comfort, range of motion and
 more natural joint movements to achieve an improved post-operative quality of
 life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Reduced Costs for Patients and Hospitals.
 The consistently reproducible precision of MAKOplasty has the potential to
 aid hospitals and patients in reducing costs by shortening hospital stays and
 recovery periods and reducing the amount of rehabilitation and medication.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Patient Optimized Implant Systems.Because
 all implants used in MAKOplasty procedures are sized and planned for based on
 patient-specific anatomical indications, the potential for favorable clinical
 outcomes is enhanced. We believe that our proprietary knee resurfacing
 implants allow surgeons to customize a knee resurfacing solution for
 individual patients facing early to mid-stage osteoarthritis in one or two
 compartments of the knee joint. Our original RESTORIS unicompartmental
 implant system allows for a choice of tibial implant based on patient bone
 quality. Our RESTORIS MCK implant system, which represents the significant
 majority of our MAKOplasty procedure volume, provides for this same choice
 for medial or lateral unicompartmental disease and allows for the resurfacing
 of the patellofemoral compartment as well, either independently or in
 combination with the medial compartment in a bicompartmental knee MAKOplasty.
 Similar to our approach with the knee, we anticipate initially utilizing and
 selling a commercially available implant system for use in performing hip
 MAKOplasty and subsequently developing a proprietary hip implant system.

The
comprehensive nature of the MAKOplasty solution also provides hospitals with
the implants and disposable products necessary to perform the MAKOplasty
procedures. We believe that our complete solution represents a substantial
improvement over currently available approaches.

The
figure below illustrates the MAKOplasty solution.



|(GRAPHIC)                                                                                                                     
|------------------------------------------------------------------------------------------------------------------------------
|[1] Hip MAKOplasty patient specific visualization application and implants
    not commercially released as of March 10, 2011.

Our Strategy

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on key physicians and thought leaders
 to encourage adoption of our MAKOplasty solution. We
 plan to continue to focus our marketing efforts on key orthopedic surgeons
 who are actively involved in the development of innovative orthopedic
 approaches. We also plan to continue 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 acquisition of our RIO system, they can
 reinforce their reputations as leading institutions for the treatment of
 osteoarthritic disease.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Drive volume sales of our RESTORIS family
 of implant systems and the disposable products for installed RIO systems. We
 intend to increase the number of orthopedic surgeons who use our RIO system
 and work with the hospitals and their surgeons to promote patient education
 about the benefits of MAKOplasty. Our goal is to increase usage per RIO
 system to drive higher volume sales of our RESTORIS
 family of implant systems and disposable products.                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand the market for multicompartmental
 knee resurfacing. We plan to expand the market
 for multicompartmental knee resurfacing procedures by encouraging use of the
 knee MAKOplasty procedure for patients who, given only conventional surgical
 alternatives, would have opted for total knee replacement surgery or no
 surgery at all. Our current FDA cleared application of knee MAKOplasty is for
 unicompartmental and bicompartmental knee resurfacing procedures using the
 RESTORIS family of knee implant systems, allowing us the potential of
 accommodating varied patient profiles and surgeon preferences. We believe
 that the potential benefits of our knee MAKOplasty solution and the
 combination of these product offerings will facilitate our efforts to expand
 and capture the market for multicompartmental knee resurfacing.                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Deliver consistently reproducible precision
 to additional orthopedic procedures, including total hip arthroplasty.We
 believe that the introduction of hip MAKOplasty will increase the overall
 value proposition for MAKOplasty. The commercial release of our hip
 MAKOplasty application and associated implant systems, currently anticipated
 in the second half of 2011, will enable surgeons to perform total hip arthroplasty
 with the same consistently reproducible precision, accuracy, and dexterity as
 knee MAKOplasty, resulting in the placement of the hip implants in the best
 position to resist dislocation and reduce surface wear. We believe this
 expansion of our product offerings will facilitate our efforts to increase
 the number of commercial MAKOplasty sites, the number of orthopedic surgeons
 who use our RIO system, and the utilization at our existing MAKOplasty sites.                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Demonstrate the clinical and financial value
 proposition of MAKOplasty. We intend to
 continue to collaborate with leading surgeons and hospitals through such
 programs as our MAKOplasty Center of Excellence to build clinical and
 financial data that support the benefits of MAKOplasty. The MAKOplasty 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
 agree to 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
 procedures, as well as the accuracy of such implant placements and resulting
 longevity of the implants, while demonstrating to hospitals the top and
 bottom line financial benefits of our MAKOplasty solution. Furthermore, if we
 are able to commercialize additional applications for our RIO system, we
 believe that we would be able to further enhance the financial value
 proposition of MAKOplasty to hospitals.

The Knee

Market for
Osteoarthritis of the Knee

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

(GRAPHIC)

According
to the Centers for Disease Control, there are currently more than
fifteen million people in the U.S. with osteoarthritis of the knee.
According to a 2006 Duke University Survey of published literature, the growth
of osteoarthritis of the knee among the U.S. population is expected to
accelerate as the increasingly active population ages and obesity rates
increase. The Orthopaedic Industry Annual Report for the year ended June
15, 2010 reports that being overweight significantly increases the risk of
developing knee osteoarthritis and that obese women had nearly four times the
risk of suffering from osteoarthritis of the knee as non-obese women, and obese

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men had nearly five times the
risk of suffering from osteoarthritis of the knee as non-obese men. As a result
of this substantial clinical need, the market for orthopedic knee procedures in
the U.S. has experienced tremendous growth over the past decade. According
to data compiled by Millennium Research Group, the U.S. knee
implant market was nearly $4.0 billion in 2009, which represents
growth of 5.9% from 2008 to 2009. In addition to the substantial costs of the
procedure itself, total knee replacement and resurfacing procedures represent
significant incremental costs to the healthcare system. These include costs
associated with rehabilitation, medication, hospitalization and, over the
long-term, costs incurred as a result of replacements or revisions that may be
required due to wear and tear or improper placement.

Current Orthopedic
Knee Arthroplasty Approaches

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

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

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

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

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

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | highly
 invasive nature of the surgical procedure, which requires a large incision
 ranging from four to twelve inches to prepare and implant the large
 implants;                          
| |   |                                                                                                                                                                                             
| |  | significant
 damage to the bone and tissue surrounding the joint, including the typical
 removal of anterior cruciate ligament and the frequent removal of the
 posterior cruciate ligament;
| |   |                                                                                                                                                                                             
| |  | 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.                                                               

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

Unicompartmental
and Bicompartmental Knee Resurfacing. Unicompartmental
and bicompartmental knee resurfacing is a less invasive arthroplasty procedure
in which only the arthritic region of the knee is removed and a small implant
is inserted to resurface the diseased compartment of the knee. Unicompartmental
and bicompartmental knee resurfacing procedures are ideal for patients with
early to mid-stage osteoarthritis and are aimed at sparing the healthy bone,
cartilage and other soft tissues typically removed in a conventional total knee
replacement procedure. Today, these procedures are generally performed manually
and require a level of training, expertise and precision that significantly
exceeds what is required for the typical total knee replacement surgery. Millennium
Research Group has estimated that 51,300 unicompartmental knee
resurfacing procedures were performed in 2009 in the United States, which
represents a 6.7% increase from the estimated 48,100 such procedures performed
in 2008 in the United States.

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

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

The
difficulties in manually executing unicompartmental or bicompartmental knee
resurfacing procedures can result in inaccurate implant alignment, which can
lead to reduced range of motion and premature implant failure. In light of the
difficulties, many physicians choose not to recommend these procedures and many
patients choose either to live with the osteoarthritic pain or to undergo
standard total knee replacement surgery. According to the Journal of Engineering in Medicine,
approximately 21% of patients who underwent total knee replacement surgeries
had osteoarthritis in only one compartment of the knee, qualifying them as
appropriate candidates for an unicompartmental implant.

The Hip

Market for
Osteoarthritis of the Hip

Similar
to the knee joint, osteoarthritis, or OA, of the hip, as illustrated in the figure below, typically begins with degeneration
of the hip joint caused by a local tear in the soft tissue surrounding the
acetabulum, or hip socket, of the hip or an excessive load on the cartilage
caused by impingement conditions between the femur and the acetabulum. The
progression of osteoarthritis of the hip can take years, but even in the early
stages, it can result in substantial pain for the patient and a reduction in
the quality of life.

(GRAPHIC)

According
to data from the Centers for Disease Control, there are currently more than 3
million people in the U.S. with osteoarthritis of the hip and there are
projected to be more than 4.5 million people in the U.S. with osteoarthritis of
the hip in 2035. As a result of this substantial clinical need, the market for
orthopedic hip procedures in the U.S. is expected to experience tremendous
growth. According to data compiled by Millennium Research Group, the U.S. hip
implant market was $2.7 billion in 2009 and is anticipated to grow to
$3.8 billion

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by 2014. In
addition to the substantial costs of the treatment itself, treatment options
for osteoarthritis of the hip represent significant incremental costs to the
healthcare system. These include costs associated with rehabilitation,
medication, hospitalization and, over the long-term, costs incurred as a result
of replacements or revisions that may be required due to wear or improper
placement.

Current Orthopedic
Hip Arthroplasty Approaches

The
current treatments available for osteoarthritis in the hip joint consist of
sports medicine procedures to treat soft tissue damage as well as more invasive
procedures to treat impingement conditions. Conventional treatment for the
replacement of the joint consists of a partial hip replacement where only one side
of the joint is replaced (normally utilized for hip fractures), hip
resurfacing, which is primarily indicated for male patients under the age of
65, and in late stage conditions, total hip arthroplasty. Total hip arthroplasty is a highly
invasive surgical procedure in which a patients diseased hip joint is removed
and replaced with a manufactured replacement hip joint comprised of several
components that attempt to mimic the normal function of the hip joint. The procedure requires a large incision
ranging from six to twelve inches, which often results in significant pain and
an extended recovery time. Unlike the knee joint, the hip joint is covered with
significant muscle and fat tissue, preventing direct access to the joint
without a large incision.

| |                                                                                   |                                                                                                
| | --------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------
| | The
 traditional total hip replacement implant consists of three main components:
| |                                                                                   |                                                                                                
| |                                                                                  | a metal cup
 and a plastic liner that together replace the acetabulum;                         
| |                                                                                   |                                                                                                
| |                                                                                  | a metal stem
 inserted into the femoral canal that replaces the femoral neck; and              
| |                                                                                   |                                                                                                
| |                                                                                  | a highly
 polished metal ball that attaches onto the metal stem and replaces the
 femoral head.

Despite
its history as an established and effective orthopedic procedure, we believe
that there are several limitations of traditional total hip arthroplasty
including malalignment of implant
components, dislocation, differences in leg length, implant loosening,
femoro-acetabular impingement and the eventual need for implant replacement or
revision.

Dislocation,
where the ball comes completely out of the replacement cup, is the most common
reason for revision total hip surgery. According to The Journal of Bone and Joint Surgery,
the national average for dislocation of the hip joint within six months of the
primary hip replacement procedure is approximately four percent, or
approximately 14,000 procedures, annually. Not all of these dislocations
require a revision surgery to replace the existing implant, but according to The Journal
of Bone and Joint Surgery, each dislocation that requires a replacement
of the existing implant costs a minimum of approximately $42,000 to the U.S.
healthcare system.

Current
surgical approaches to total hip arthroplasty may result in a leg length
discrepancy, which clinical studies show may result in back pain, increased
risk of nerve injury, dislocation, poor patient satisfaction, and the need for
revision surgery. According to a study published in Physiotherapy, a leg length
discrepancy of ten millimeters or more is associated with a significantly
poorer outcome in terms of the clinical benefits of surgery as well as more
than twice the incidence of limping than patients with a leg length discrepancy
of less than ten millimeters. One methodology currently used by surgeons to
measure leg length involves using a ruler to measure anatomical landmarks on
the hip before surgery to assess the patients preoperative leg length and then
measuring the leg length with the implants in place following surgery to assess
the change in the patients leg length. Another popular methodology used by
surgeons requires the surgeon to line the patients legs up on the operating
room table to assess the leg length before surgery and then to do the same
thing with the hip implants in place after surgery. This method requires the legs
to be in the exact same position at the time of both measurements and uses only
the surgeons eyes and sense of touch to assess the change in leg length. We
believe that limitations exist with respect to both of these methodologies.

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OUR PRODUCTS

MAKOplasty
procedures are enabled through our proprietary technology consisting of the
following components: our RIO system, our MAKOplasty applications, and our
RESTORIS family of implant systems.

The MAKO
RIO Robotic Arm Interactive Orthopedic System

The
centerpiece of MAKOplasty is the RIO system, our proprietary robotic arm,
interactive, orthopedic system, that provides both pre-operative and
intra-operative guidance to the orthopedic surgeon, enabling minimally
invasive, tissue sparing bone removal and knee implant insertion. The RIO
system consists of two elements: a tactile robotic arm utilizing an integrated
bone cutting instrument and a patient specific visualization component.

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

(GRAPHIC)

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Tactile Robotic Arm 
 The tactile robotic arm is designed to respond fluidly to movements initiated
 by the surgeon operating the bone cutting instrument. We have designed the
 robotic arm to achieve substantial dexterity and range of movement. The
 robotic arm helps enforce a tactile safety zone that is established by the
 patient specific visualization system by providing tactile resistance when
 the boundaries of the tactile safety zone are reached. This tactile
 resistance helps ensure that the surgeon does not move the bone cutting
 instrument outside the intended area.                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 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 tracking arrays attached to the patients anatomy by bone pins. The
 tracking system assists the robotic arm system in locating and physically
 tracking the patients anatomy and coordinating its real time position with
 the cutting instrument of the robotic arm. It has a sufficient refresh rate
 to provide the robotic arm system with an adequate flow of information
 regarding movements of both the patient and the robotic arm to ensure optimal
 cutting and placement. Using the system, the surgeon can freely move the
 robotic arm within the defined space, but encounters tactile resistance as
 the boundaries of such space are reached.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | End Effector 
 The end effector is the mechanical component by which the bone cutting
 instrument is attached to the tactile robotic arm. It is designed to ensure
 secure placement of the bone cutting instrument, while providing the
 flexibility necessary for the surgeon to manipulate the instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Bone Cutting Instruments
 The bone cutting instrument is integrated into the tactile robotic arm at the
 end effector. For knee MAKOplasty procedures, 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                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the bone
 cutting instrument that makes contact with the joint and actually removes the
 bone for placement of the knee implant in accordance with the pre-operative
 surgical plan. In combination with our tactile robotic arm, the knee bone
 cutting instrument enables the smooth precision and accuracy necessary for
 knee MAKOplasty procedures. For hip MAKOplasty procedures, the bone cutting
 instrument is a reamer (similar to a drill) that allows hemispherical cutting
 baskets to be attached to the reamer. Surgeons currently use similar reamers
 and cutting tools for traditional hip replacement surgery. The tactile
 robotic arm in conjunction with the reaming instrument makes it possible for
 the surgeon to accurately and precisely prepare the bone to the pre-operative
 surgical plan.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | 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 console houses the controller and various electrical and
 mechanical components that help power the tactile robotic arm. Its design
 enables the console to be situated next to the patient during surgery and the
 tactile robotic arm to be conveniently positioned over the patients anatomy.                                                                                                                                                                                                                                                                                                                          

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

(GRAPHIC)

Patient
Specific Visualization System.Our patient specific
visualization system is a vital part of our ability to deliver consistently
reproducible precision. The surgical team uses our system pre-operatively to
plan and intra-operatively to guide the surgical procedure. It consists of the
key components identified in the figure above and incorporates the following
specifications, features and benefits:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Surgical Planning and Execution Software 
 Our surgical planning and execution software, which is integrated into our
 patient specific visualization system, is used during the pre-operative
 surgical planning process to visualize and map the exact portion of bone to
 be removed, 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 step and displays in real time each current and planned
 surgical activity. The surgical plan is unique and individualized for each
 patient.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 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 joint. This CT image is uploaded to the patient
 specific visualization system, where a MAKOplasty Specialist processes the
 image for display as a 3-D volume in space. The MAKOplasty Specialist and
 surgeon can then virtually place the implants on the 3-D models of the
 patients bones. This patient specific visualization of our implant overlaid
 onto an image of the patients actual joint helps the surgeon to plan the
 procedure pre-operatively, by providing information that enables the surgeon
 to determine the optimal placement, alignment and sizing of the implant. The
 final planned placement of the implant establishes the boundaries of the
 tactile safety zone for surgery. During surgery, each monitor projects an
 active 3-D computer graphics visualization of the patients 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

The Current RIO
System

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

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

In
the fourth quarter of 2008, we received 510(k) marketing clearance for the RIO
system, which we commercially launched in the first quarter of 2009. In the
third quarter of 2009, we launched version 2.1 of our RIO system, which
reflected further refinement of the RIO platform and knee MAKOplasty
application. In the fourth quarter of 2009, we launched version 2.2 of our RIO
system, which modified the knee MAKOplasty application to enable surgeons to
treat lateral compartment knee arthritis. In April 2010, we launched version
2.3 of our RIO system, which further modified the knee MAKOplasty application
to improve functionality and ease of use. The modifications present in versions
2.1, 2.2, and 2.3 did not require the submission of new 510(k) applications.
The RIO System was approved for CE Marking in December 2009.

Knee
MAKOplasty Products

Knee MAKOplasty
Application

Unlike
conventional knee replacement surgery, which requires extraction and
replacement of the entire joint, our knee MAKOplasty application enables
surgeons to isolate and resurface just one or two specific diseased
compartments of the joint through a minimally invasive incision, preserving
significantly more soft tissue and healthy bone of the knee. The precision
provided by our RIO system robotic arm and knee MAKOplasty application 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

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insert the
large implants involved in conventional total knee replacement surgery or a
manually executed resurfacing procedure. Because of the minimally invasive
nature of the knee MAKOplasty procedure, smaller incisions are possible, which
lead to less tissue damage and faster recoveries, thereby reducing the overall
costs of rehabilitation, medication and hospitalization. In addition, because
more of the patients natural anatomy is preserved and less trauma is inflicted
on the knee, we believe that patients who undergo knee MAKOplasty have the
potential to experience better functionality and more natural knee movements,
thereby achieving an improved post-operative quality of life. We believe that
our knee MAKOplasty application will make minimally invasive orthopedic
procedures, like unicompartmental and bicompartmental knee resurfacing, a
viable option for a greatly expanded pool of patients and physicians.

The
figure below illustrates a MAKOplasty knee resurfacing procedure.

(GRAPHIC)

The
MAKOplasty knee resurfacing procedure is performed by the surgeon using the
surgical planning and execution software integrated into our patient specific
visualization system. The figure below illustrates an actual MAKOplasty knee
resurfacing procedure and the corresponding virtual representation in the
patient specific visualization system.

(GRAPHIC)

The RESTORIS Family
of Knee Implant Systems

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

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

The RESTORIS MCK Multicompartmental Knee
Implant System

The
RESTORIS MCK multicompartmental knee implant system offers an implant geometry
to support the tissue and bone sparing goals of knee MAKOplasty. Free from the
limitations of manual instrumentation, RESTORIS MCK is designed to accurately
mimic human anatomy, providing better coverage of diseased compartments while
requiring less bone removal and tissue trauma than with traditional treatments.

The
RESTORIS MCK system, depicted in the figures below, enables surgeons to treat patients suffering from
osteoarthritis in any single compartment of the knee joint: the medial (inner),
lateral (outer), or patellofemoral (sub-kneecap). The RESTORIS MCK system also
enables bicompartmental treatment of the patellofemoral compartment in
combination with the medial compartment. Utilizing a modular, bicompartmental
system, a surgeon can use the pre- and intra-operative planning software in the
RIO system to produce a patient specific implant plan, the result of which is
the retention of a greater portion of the knee anatomy than patients treated
with a total knee arthroplasty procedure. Surgeons are able to offer inlay and
onlay implants medial configurations for both their unicompartmental and
bicompartmental procedures. The product offering of the RESTORIS MCK

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multicompartmental
knee implant system also features a patellofemoral component (under the
kneecap), which is inset into the knee compartment between the medial and
lateral (outer) compartments. Additionally, the surgeon has an array of patella
buttons to affix to the back of the kneecap to replace the worn surface. In
the second quarter of 2008, we received a 510(k) marketing clearance for our
novel unicompartmental knee implant and a 510(k) marketing clearance for our
patellofemoral knee implant, predecessor components of our proprietary RESTORIS
MCK multicompartmental knee implant system. In the fourth quarter of 2008, we
received 510(k) marketing clearance from the FDA for our RESTORIS MCK system.
Our RESTORIS MCK onlay unicompartmental implant system was approved for CE
Marking in April 2010 and our RESTORIS MCK onlay patellofemoral and
bicompartmental implant systems were approved for CE Marking in January 2011.

|                                                |                                                             
|----------------------------------------------- | ------------------------------------------------------------
|(GRAPHIC)RESTORIS MCK Unicondylar
Onlay Implant | (GRAPHIC)RESTORIS MCK PatellofemoralImplant and Patella Dome

|                                                          |                                                        |                                                
|--------------------------------------------------------- | ------------------------------------------------------ | -----------------------------------------------
|(GRAPHIC)RESTORIS MCK Unicondylar
Onlay Implant Placement | (GRAPHIC)RESTORIS MCK Patellofemoral
Implant Placement | (GRAPHIC)RESTORIS MCK Lateral
Implant Placement

|                                              |                                                        
|--------------------------------------------- | -------------------------------------------------------
|(GRAPHIC)RESTORIS MCK Bicompartmental
Implant | (GRAPHIC)RESTORIS MCK Bicompartmental
Implant Placement

The RESTORIS Unicompartmental Knee Implant
System

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

Patients
with relatively good tibial bone quality, including a sufficiently thick and
appropriately located bed of hardened sclerotic tibial bone, are generally
candidates for our RESTORIS inlay knee implant system. The RESTORIS onlay knee
implant system is designed to accommodate patients who lack tibia sclerotic
bone beds of sufficient quality. The metal support is placed horizontally on a
planar surface prepared on the tibia using the RIO system, supported by the
tibial cortical rim, rather than fitted into a pocket of the tibia. Some
surgeons also prefer to utilize the tibial cortical rim support in all cases.
In the first quarter of 2006, we received 510(k) marketing clearance for our
tibial inlay knee implant system, and in the fourth quarter of 2007, we
received 510(k) marketing clearance for our tibial onlay knee implant system
and on our combined inlay and onlay knee system, branded as RESTORIS. Our
RESTORIS onlay unicompartmental knee implant system was approved for CE marking
in January 2010.

Hip
MAKOplasty Products

We
believe that the RIO system has the potential to add clinical and economic
value in arthoplasty procedures in the hip joint, and we have directed
resources to research and development activities in this area. In February
2010, we received 510(k) marketing clearance from the FDA for our hip
MAKOplasty application and in October 2010, we initiated a multi-center
orthopedic surgeon preference evaluation program for our hip MAKOplasty
application, which is designed to solicit user feedback in advance of its full
commercial release, currently expected in the second half of 2011.

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Hip MAKOplasty Application

Our
hip MAKOplasty application utilizes the RIO systems tactile, visual and
auditory feedback to assist the surgeon in preparing the acetabulum (hip
socket) for optimal placement of the acetabular cup implant. The hip
application allows the surgeon to preoperatively plan the placement of the hip
implants on a three dimensional image of a pre-operative CT scan. The RIO
systems robotic arm then assists the surgeon in preparing the bone accurately
to the pre-operative surgical plan, as well as in the positioning of the hip
implant, which we believe may potentially decrease the likelihood and severity
of leg length discrepancy that may result from the current standard
instrumented method of implant placement, which involves the use of mechanical
jigs and visual alignment by the surgeon.

We
believe our hip MAKOplasty application has the potential to provide a surgeon
with the same consistently reproducible precision, accuracy, and dexterity as
our knee MAKOplasty application. In the same way that the cutting system of the
RIO robotic arm allows for the precise resection of bone in the knee joint, we
believe that surgeons will use the robotic arm to accurately prepare the
patients acetabulum for the cup implant. Moreover, unlike in knee MAKOplasty,
during the final insertion of the cup implant, the robotic arm assists the
surgeon in positioning the cup at the orientation that was planned by the
surgeon preoperatively. A recent study at Massachusetts General Hospital, which
was presented at the 2010 Meetings of The Hip Society, found that fifty percent
of the acetabular implant cups placed by the surgeons in the study using
commonly used mechanical jigs were placed outside of the optimal zone for
avoiding post-operative dislocation. We believe that our hip MAKOplasty
application provides the surgeon with an accurate preoperative surgical plan,
knowledge of the patients position on the operating room table and accurate
implant sizing. This information allows the surgeon to seat the implants
following the plan at a level of accuracy that we believe may result in optimal
implant position to resist dislocation, which is extremely difficult to
accomplish manually.

The
figure below illustrates a hip MAKOplasty procedure.

(GRAPHIC)

Hip Implant Systems

As
was the case with early knee MAKOplasty commercialization, we have entered into
a license, and currently plan to enter into additional licenses, to distribute
off-the-shelf hip implant systems from third-party suppliers for use with the
RIO system and the hip MAKOplasty application upon its full commercial release.
As further described below in Research and Development section below, we
entered into a Strategic Alliance Agreement with Pipeline Biomedical Holdings,
LLC in October 2010 to develop and supply potential future advanced implant technologies
for use with our RIO system including the future development of a proprietary
MAKO-branded, RESTORIS family of hip implant systems for use with the hip
MAKOplasty application. Should we elect to commercialize such implant systems,
we would seek the appropriate marketing clearance from the FDA and any other
required regulatory approvals for such implant systems.

The
figure below is an example of implanted hip implant system:

(GRAPHIC)

Disposable
Products

The
RIO system utilizes disposable products associated with our patient specific
visualization system and cutting instruments and other items that require
disposal after each use. Disposables are not only a potential source of
recurring revenue, but also an opportunity to differentiate our product
platform from those of less comprehensive solutions offered by competitors.

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Other Potential
Applications

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

Sales and Marketing

We
continue to expand the size of our sales and marketing organization, which is
primarily comprised of a direct sales force to sell RIO systems and to
commercialize and market MAKOplasty in the U.S. and to a lesser extent, independent
orthopedic product agents and distributors, who primarily generate RIO system
sales leads for us. As of February 28, 2011, our sales and marketing group
had a total of 110 employees, including 84 direct sales representatives,
who are responsible for sales and marketing activity throughout the U.S and 2
global market and sales development employees, who are responsible for defining
and executing our global commercialization strategy. We intend to continue
to increase the number of sales and marketing personnel as we expand our
business. We are currently developing a global market strategy and we believe
that our entry into global markets may include the use of independent
distributors to market, sell, and support our products.

A
portion of our customers acquire our
RIO system through a leasing arrangement with a third-party leasing
company. In these instances, we typically sell the RIO system to the leasing company, and our customer enters into
an independent leasing arrangement with the leasing company. We treat these
leasing transactions the same as sales transactions for purposes of recognizing
revenue for the sale.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Target High Volume Orthopedic Facilities.
Our sales representatives actively target hospitals with strong orthopedic
reputations and significant joint replacement practices. We believe that
adoption by such leading hospitals helps us to seed the market for MAKOplasty
and provides the validation and visibility necessary for more widespread
adoption.                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Target Facilities with a Strong Strategic Commitment to Grow an
Orthopedic Surgery Service Line. Our sales
representatives actively target hospitals that have demonstrated a commitment
to expand their orthopedic surgery service line. We believe that these
hospitals will benefit from the growth in service associated with treating a
large number of patients who, given only conventional surgical alternatives,
would have delayed surgery or opted for no surgery at all, as well as
attracting patients who seek an alternative to conventional surgical options.           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Establish and Promote MAKOplasty Centers of Excellence. The MAKOplasty Center of
Excellence is a joint marketing program that we promote in collaboration with
participating hospitals to educate surgeons and patients regarding the
benefits of MAKOplasty. 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,
2010, we had entered into 56 co-marketing agreements with hospitals to
establish MAKOplasty Centers of Excellence.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Drive Patient Demand for MAKOplasty. During
2010, we continued our marketing efforts to directly educate patients on the
benefits of MAKOplasty. We believe that patients are becoming increasingly
more involved in the healthcare decision making process and have the
potential to influence the adoption of new procedures such as MAKOplasty.
Currently, our representatives primarily support hospitals participating in
the MAKOplasty Center of Excellence program in their efforts to publicize the
benefits of MAKOplasty and educate patients.                               

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The
generation of recurring revenue through sales of our implants, disposable
products and service contracts is an important part of the MAKOplasty business
model. We anticipate that recurring revenue will constitute an increasing
percentage of our total revenue as we leverage each new installation of the RIO
system to generate recurring sales of implants and disposable products, and
potentially increase the number of procedure applications available for the RIO
system. We have designed our products so that our RIO system only works with
our implant products and we contractually require purchasers of the RIO system
to use only our implants in connection with providing MAKOplasty. We also offer
a four-year service contract that provides maintenance and support services
related to the RIO system beyond the basic warranty period.

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

Our
business is subject to quarterly seasonal fluctuations. Historically, our sales
of RIO systems have tended to be heaviest during the third month of each fiscal
quarter, with the heaviest quarter being the fourth fiscal quarter and the
lightest quarters being the first and third fiscal quarters. In addition,
historically, we have experienced lower procedure volume in the first and third
fiscal quarters and higher procedure volume in the fourth fiscal quarter. We
attribute these fluctuations to customary capital expenditure trends by
hospitals and election of surgery dates by patients. No one customer accounted
for more than ten percent of our total revenue for the years ended December 31,
2010 and 2009.

Research and Development

Continued
innovation through research and development is critical to our future success.
Most of our research and development activity is performed internally. We have
assembled an experienced team with recognized expertise in advanced robotics,
software, instrumentation and orthopedic implants and we expect to continue to
expand the size of our research and development team to support our ongoing
research and development efforts. As of February 28, 2011, our research and
development team, which is based at our headquarters in Fort Lauderdale,
Florida, consisted of 75 employees.

Our
research and development efforts are currently focused on improvements to our
current knee MAKOplasty and hip MAKOplasty applications, as well as
improvements to the RIO system based on customer feedback. By continually
researching improvements to our knee MAKOplasty solution and RIO system, we
hope to refine the operating room experience for the surgeon and staff and
identify new areas to enhance patient clinical outcomes. We are also conducting
advanced research on new robotic platforms as well as early stage development
on additional applications for the RIO system and corresponding implant systems
for the knee, hip, and other major joints.

In
October 2010, we entered into a Strategic Alliance Agreement with Pipeline
Biomedical Holdings, LLC, or Pipeline, to develop and supply potential future
advanced implant technologies for use with our RIO system, including the
development of a MAKO-branded RESTORIS family of hip implant systems for use
with the hip MAKOplasty application. Upon execution of the Strategic Alliance
Agreement on October 1, 2010, we issued and delivered to Pipeline 203,417
unregistered shares of our common stock as consideration for the rights granted
to us under the Strategic Alliance Agreement. We have no further obligation to
fund Pipelines research of implant technologies. The Strategic Alliance
Agreement contains provisions under which Pipeline will supply us with implants
developed under the Strategic Alliance Agreement.

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We
have historically spent a significant portion of our capital resources on
research and development. Our research and
development expenses were $15.0 million in 2010, $13.1 million in 2009, and
$12.5 million in 2008. We expect our research and development expenses to
increase as we continue to expand our research and development activities,
including the support of existing products and the research of potential future
products, including our hip MAKOplasty application and associated implant
systems.

Manufacturing and Assembly

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

Single
source suppliers currently provide us with many of the major components of the
RIO system. Our RESTORIS family of implant systems consists of implants that
are custom made to our specifications by several outside manufacturers.

We
generally purchase our components through purchase orders and do not have
long-term contracts with most of our suppliers. We have, however, entered into
long-term contractual arrangements with some of our suppliers, including
several single source suppliers, and we are currently negotiating long-term
contractual arrangements with many of our remaining suppliers. We also have
provided blanket purchase orders and have entered into long-term pricing
arrangements with certain suppliers who are not under a long-term contractual
arrangement such as key suppliers of the critical components of our products
and suppliers to whom we make significant payments for products and services.

By
providing blanket purchase orders and entering into long-term contracts and
pricing arrangements, we intend to develop and maintain buffer inventory levels
at various points in our supply chain to minimize supply risk, which may result
in increased excess inventory or obsolescence risk due to technological
advancements of our products or change in demand for our products. In addition,
we intend to achieve improvements in our manufacturing operations and in our
cost of revenue by continuing to improve our procurement and third-party
manufacturing processes. We have also continued to upgrade our management
information systems and to implement enhanced quality assurance, inventory and
cost controls to improve the efficiency of our manufacturing operations,
maintain product quality, reduce our cost of sales and increase our
profitability.

Our
operations and those of the third-party suppliers and manufacturers we use are
subject to extensive regulation by the FDA under its Quality System
Regulations, or QSR, as well as numerous post-market requirements. Our
operations and those of third-party suppliers and manufacturers will also be
subject to international regulatory requirements as we expand our operations or
business overseas. Our facility is FDA registered and we believe is compliant
with the FDAs QSR. We have instituted a quality management system to evaluate
and monitor compliance internally and by our third-party suppliers and
manufacturers. Our facility and the facilities of the third-party suppliers and
manufacturers we use are subject to periodic, announced and unannounced
inspections by regulatory authorities, including the FDA and other governmental
agencies. We were audited by the FDA in January 2009, during which we received
certain inspectional observations. We have addressed the observations and
submitted responses to the FDA on a voluntary basis. All inspectional
observations were resolved and we received the establishment inspection report
(EIR) from the FDA in August 2009. To date, our facilities have not been
inspected by any other regulatory authorities.

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Intellectual Property

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

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

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

Wholly Owned Patents
and Patent Applications

Prior
to February 2010, our largest licensing arrangement was with Z-Kat, Inc., or
Z-Kat, which was our predecessor company, and from whom we licensed or
sublicensed core technologies in CAS, haptics and robotics. In connection with
our formation in November 2004, we were granted an exclusive, irrevocable,
non-terminable license or sublicense to all intellectual property owned or
licensed by Z-Kat in the field of medical orthopedic surgery to the extent
Z-Kats licenses from third parties were exclusive. Our license from Z-Kat
included a limited license to Z-Kats CAS and haptic robotic intellectual
property portfolio for exclusive use in the field of orthopedics, subject to a
prior license to Biomet Manufacturing Corp. to use Z-Kats CAS intellectual
property, but not its haptic robotic intellectual property, in the field of
orthopedics. Because of the prior license to Biomet and pursuant to our license
with Z-Kat, we cannot use the CAS intellectual property on a stand alone basis;
we can only use the CAS intellectual property in combination with robotics
technology. Z-Kats license also granted to us the sole right to prosecute and
maintain all Z-Kat patents and patent applications that are licensed to us. In
2006, we obtained the right to take enforcement action against all third
parties with respect to any intellectual property rights held by Z-Kat in the
field of orthopedics. We had granted back to Z-Kat a fully paid, royalty-free,
nonexclusive sublicense to our intellectual property portfolio in all fields
other than orthopedic surgery. Through these and other arrangements, we had
rights to Z-Kats wholly owned and third-party licensed intellectual property
portfolio, which included a wide suite of intellectual property in the areas of
haptic robotics and patient specific visualization.

In
February 2010, we completed the acquisition of substantially all of the
intellectual property portfolio of Z-Kat. The terms of the asset purchase
agreement between us and Z-Kat terminated our prior licenses with Z-Kat,
including Z-Kats nonexclusive sublicense to our intellectual property
portfolio, and transferred to us ownership rights to certain intellectual
property assets for core technologies in CAS, haptics and robotics, including
U.S. and foreign patents and patent applications, proprietary software and
documentation, trade secrets and trademarks owned by Z-Kat, and certain
contractual and other rights to licensed patents, patent applications and other
intellectual property licensed to Z-Kat under licenses. We paid the purchase
price in full at the time of closing by issuing 230,458 unregistered shares of
our common stock to Z-Kat in a private placement. In connection with the
acquisition, we also entered into a new sublicense agreement with Z-Kat
pertaining to certain intellectual property for technologies in CAS licensed by
Z-Kat. The new sublicense agreement was terminated by MAKO in December 2010.
Certain of our rights under the asset purchase agreement remain subject to any
prior license granted by Z-Kat, including the license from Z-Kat to Biomet
Manufacturing Corp.

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As
of February 28, 2011, we held twelve wholly owned granted U.S. patents,
eighteen jointly owned granted U.S.
patents, forty-six wholly owned pending U.S. patent applications, and
three jointly owned pending U.S. patent applications. All of these patents and
patent applications are either used in our current products or relate to core
technologies used in our products, such as CAS, robotics, haptics and implants.
The first of our currently granted patents was filed in March 2003 and may
expire as late as March 2023, exclusive of any statutory extensions or
reductions. As of February 28, 2011, we also held fourteen wholly owned granted
foreign patents, seventy-four wholly owned foreign patent applications, and seven
jointly owned foreign patent applications. We are also continuing to pursue
additional U.S. and foreign patent applications on key inventions to
enhance our intellectual property portfolio.

Patents and Patent
Applications Licensed from Third Parties

As of February 28, 2011, we had licensed rights
to ninety-four U.S. and three foreign third-party granted patents, and we had licensed rights to
thirty-seven U.S. and three foreign third-party pending patent applications. The majority of these patents and
applications are either used in our current products or relate to core technologies used in our products, such as CAS,
robotics, haptics and implants. We regard some of these patents and applications as material to our intellectual property
portfolio because they deal with a core technology and potentially enable us to exclude others from practicing the claimed
technology. We also have rights to additional third-party patents and intellectual property that relate to our core
technologies, but are not currently used in our products. Of the licensed patents that we consider material, none will expire
by the end of 2011. The last licensed patent may expire as late as 2030.

License Arrangements with Third Parties

In
September 2005, we entered into a license agreement pursuant to which we
obtained an exclusive, worldwide license to patented technology relating to
bone registration and tracking for use in the field of human interactive
robotics in orthopedics and a nonexclusive license in the field of orthopedics
generally. We paid a one time licensing fee that provides a fully paid,
worldwide license for the life of the licensed patents.

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

In
May 2006, we entered into a sublicense agreement which grants us nonexclusive
rights in the field of CAS to a patent directed to core haptic technology. The
sublicense also included an option to license or sublicense five additional
patents, which we exercised in May 2007. We paid a one time sublicensing fee
(and a one time option fee) that provides a fully paid, worldwide license for
the life of the licensed patents.

In
May 2009, we entered into a license agreement for patents relating to our RIO
system, which we refer to as the robotic arm license. The robotic arm license
requires minimum running royalties on sales of our RIO systems. The minimum
running royalties are estimated to be approximately $1.0 million for the year
ended December 31, 2010, and increase annually thereafter through 2013. The
minimum running royalties for the year ended December 31, 2013 and for each
subsequent year through the term of the agreement are estimated to be
approximately $1.7 million annually.

In
August 2009, we entered into a research and development agreement with a
third-party sensor company associated with the potential future development of
intellectual property and technology related to sensing devices in orthopedics.
The agreement required an initial payment of $50,000 and required future
payments in the event that we decided to enter into a licensing and supply
agreement with the third-party sensor company following the end of the research
and development period. In August 2010, we exercised our option to enter into a
non-exclusive license and supply agreement for an upfront payment of $250,000
and in October 2010, we exercised our option to enter into an exclusive license
and supply agreement which required an upfront payment of $500,000 and a future
payment of $250,000, which is anticipated to be paid in the first quarter of
2011.

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Effective
as of January 2010, we entered into a research and license agreement associated
with potential future products for use with our RIO system. The agreement
required an upfront payment of $300,000 for research services upon the
execution of the agreement and requires an additional $500,000 to be paid
quarterly over two years beginning in January 2011. The payments for research
services are being expensed as research and development expense on a
straight-line basis from January 2010 through December 2012, the period in
which research services are being performed under the agreement. The agreement
also required a $200,000 upfront license payment upon execution of the
agreement, running royalty payments of 3% on sales of products and processes
covered under the Agreement and requires minimum royalty payments (inclusive of
running royalty payments) not to exceed $250,000 over the term of agreement.

As
noted above, in February 2010, Z-Kat assigned to us certain CAS licenses
previously licensed to Z-Kat and sublicensed to us. One of these assigned
licenses pertains to the image guided surgery technology incorporated into our
RIO system and requires running royalty payments of 2% on the components of the
RIO system covered by the license. Each of the assigned licenses are terminable
in our sole discretion.

In
addition to the agreements described above, we have entered into other license
agreements with third parties from time to time related to our current product
offerings and our research and development projects.

Competition

Our
success depends on convincing hospitals, surgeons and patients to utilize our
robotic arm technology to treat osteoarthritic disease. We face competition
from large, well-known companies that dominate the market for orthopedic
products, principally Biomet, Inc., DePuy Orthopedics, Inc., a
Johnson & Johnson company, Stryker Corporation, Zimmer Holdings, Inc.,
and Smith & Nephew, Inc. Each of these companies offers conventional
instruments and implants for use in conventional total and partial knee
replacement surgeries and total hip replacement surgeries, and some of these
companies offer patient specific instrumentation and implants for use in
conventional total and partial knee replacement surgeries, which may compete
with our MAKOplasty solution and negatively impact sales of our RIO system. A
number of these and other companies also offer CAS systems for use in
arthroplasty procedures that provide a minimally invasive means of viewing the
anatomical site. In addition, Biomet has a license from us to intellectual
property rights in computer assisted surgery, or CAS intellectual property, for
use in the field of orthopedics. The license is non-exclusive with respect to
use of CAS intellectual property in combination with robotics technology and
exclusive with respect to all other uses within the field of orthopedics, which
could enable them to compete with us.

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

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

Even
if our RIO system is commercially successful and becomes a market leader in the
field of orthopedics with robotic arm technology, our implant products may face
substantial competition from implants offered by the well-known companies
currently in the market for orthopedic products. We have designed our products
so that our RIO system only works with our implant products. We also
contractually require purchasers of our RIO system to use only our implants in
connection with MAKOplasty procedures. We cannot guarantee,

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however, that
these measures will be effective or that our customers will agree to such
contracts in the future. Accordingly, if use of the RIO system becomes more
prevalent, competitors may attempt to market their implant products for use
with the RIO system and compete directly with our implant products.

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

| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the safety
and efficacy of the procedure and product offerings, as documented through
published studies and other clinical reports;                             
| |   |                                                                                                                                                                 
| |  | product
benefits, including the ability to offer orthopedic surgeons a complete
solution for orthopedic procedures;                                             
| |   |                                                                                                                                                                 
| |  | the cost of
product offerings and the availability of product coverage and reimbursement
from third-party payors, insurance companies and others parties;       
| |   |                                                                                                                                                                 
| |  | 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 ability
to provide proprietary products protected by strong intellectual property
rights; and                                                               
| |   |                                                                                                                                                                 
| |  | the ability
to offer products that are intuitive and easy to learn and use.                                                                                     

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

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

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

| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | product
design, preclinical and clinical development and manufacture;
| |   |                                                                      
| |  | product
premarket clearance and approval;                            
| |   |                                                                      
| |  | product
safety, testing, labeling and storage;                       
| |   |                                                                      
| |  | record
keeping procedures;                                           

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| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
 marketing, sales and distribution; and                                                                                                                             
| |   |                                                                                                                                                                             
| |  | post-marketing
 surveillance, complaint handling, medical device reporting, reporting of
 deaths, serious injuries or device malfunctions and repair or recall of
 products.

FDA Premarket
Clearance and Approval Requirements

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

510(k) Marketing
Clearance Pathway

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

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

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

Version
1.3 of our TGS did not require submission of a 510(k) application. We received
510(k) marketing clearance from the FDA for the RIO system in the fourth
quarter of 2008. Versions 2.1, 2.2, and 2.3 of the RIO System did not require
submission of a 510(k) application.

We
received 510(k) marketing clearance from the FDA for an application that
assists a surgeon in acetabular reaming during total hip arthroplasty, the
predecessor application to our hip MAKOplasty application, in June 2009 for use
with the TGS platform and in September 2009 for use with the RIO system. In
February 2010, we received 510(k) marketing clearance for our hip MAKOplasty
application, which assists a surgeon in performing all components of a total
hip arthroplasty using the RIO system.

PMA Approval Pathway

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

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

Clinical Trials

Clinical
trials are generally required to support a PMA application and are sometimes
required for 510(k) marketing clearance. Such trials generally require an
investigational device exemption application, or IDE,

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

Post-Market Studies

To
date, none of our submissions to the FDA has required the submission of
clinical data and all of our studies to date have been post-market studies. As
of February 28, 2011, we have fifty-eight scientific studies, either recently
completed or in progress, which are aimed at measuring the clinical and
economic value of MAKOplasty as follows: eight studies are focused on
quantifying the accuracy of MAKOplasty procedures; nine studies are focused on
assessing basic clinical and radiographic outcomes; four studies are focused
evaluating the functional and kinematic outcomes of patients; sixteen studies
are focused on supporting implant design and product development; sixteen
studies are focused on codifying surgical technique, ergonomic robotic use, and
surgical indications; and five studies are focused on quantifying the economic
impact of less invasive and more accurate arthroplasty. As of February 28,
2011, we have three published book chapters related to MAKOplasty and robotic
surgery, eighteen published peer-reviewed manuscripts, seventy peer-reviewed
abstracts at conferences, and sixteen completed whitepapers.

Pervasive and
Continuing Regulation

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

| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product
 listing and establishment registration, which helps facilitate FDA
 inspections and other regulatory action;                                                                                                                    
| |   |                                                                                                                                                                                                                                          
| |  | QSR, which
 requires manufacturers, including third-party manufacturers, to follow
 stringent design, testing, control, documentation and other quality assurance
 procedures during all aspects of the design and manufacturing process;
| |   |                                                                                                                                                                                                                                          
| |  | labeling
 regulations and FDA prohibitions against the promotion of products for
 uncleared, unapproved or off-label use or indication;                                                                                                  
| |   |                                                                                                                                                                                                                                          
| |  | clearance of
 product modifications that could significantly affect safety or efficacy or
 that would constitute a major change in intended use of one of our cleared
 devices;                                                          

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| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approval of
 product modifications that affect the safety or effectiveness of one of our
 approved devices;                                                                                               
| |   |                                                                                                                                                                                                           
| |  | post-approval
 restrictions or conditions, including post-approval study commitments;                                                                                                                     
| |   |                                                                                                                                                                                                           
| |  | post-market
 surveillance regulations, which apply, when necessary, to protect the public
 health or to provide additional safety and effectiveness data for the device;                                  
| |   |                                                                                                                                                                                                           
| |  | the FDAs
 recall authority, whereby it can ask, or under certain conditions order,
 device manufacturers to recall from the market a product that is in violation
 of governing laws and regulations; and
| |   |                                                                                                                                                                                                           
| |  | notices of
 corrections or removals.                                                                                                                                                                      

We
must also register with the FDA as a medical device manufacturer and must
obtain all necessary state permits or licenses to operate our business. As a
manufacturer, we are subject to announced and unannounced inspections by the
FDA to determine our compliance with FDAs QSR and other regulations. We were
audited by the FDA in January 2009, all inspectional observations were
resolved, and we received the establishment inspection report (EIR) from the
FDA in August 2009.

Failure
to comply with applicable regulatory requirements can result in enforcement
action by the FDA, which may include any of the following sanctions:

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

International
Marketing Approvals

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

The
European Union has adopted numerous directives and standards regulating the
design, manufacture, clinical trials, labeling and adverse event reporting for
medical devices. Each European Union member state has implemented legislation
applying these directives and standards at the national level. Other countries,
such as Switzerland, have voluntarily adopted laws and regulations that mirror
those of the European Union with respect to medical devices. Devices that
comply with the requirements of the laws of the relevant member state applying
the applicable European Union directive are entitled to bear CE conformity
marking and, accordingly, can be commercially distributed throughout the member
states of the European Union and other countries that comply with or mirror
these directives. The method of assessing conformity varies depending on the
type and class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment by a Notified
Body, an independent and neutral institution appointed to conduct conformity
assessment. This third-party assessment consists of an audit of the
manufacturers quality system and clinical information, as well

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as technical
review of the manufacturers product. An assessment by a Notified Body in one
country within the European Union is required in order for a manufacturer to
commercially distribute the product throughout the European Union. In addition,
compliance with ISO 13845 on quality systems issued by the International
Organization for Standards, among other standards, establishes the presumption
of conformity with the essential requirements for a CE marking. In addition,
many countries apply requirements in their reimbursement, pricing or health
care systems that affect companies ability to market products.

In
November 2008, the British Standards Institute, or BSI, our Notified Body,
conducted an annual assessment of our quality management system, which
concluded that our quality management system complied with the requirements of
ISO13485 in all material respects. In December 2009, we received a major
nonconformance in our annual assessment by BSI. We implemented corrective
actions and in March 2010 the finding was officially closed by BSI. In December
2010, BSI conducted a full recertification audit of our quality management
system and discovered no major nonconformances. BSI found us in compliance with
the requirements of the Medical Devices Directive of the European Union and
recommended continuation of our certification allowing us to apply the CE Mark
to our products. We expect that BSI will continue to conduct annual audits to
assess our compliance with BSI certification standards.

The
RIO System and our classic RESTORIS onlay unicompartmental knee implant system
were approved for CE marking in December 2009 and January 2010, respectively.
Our RESTORIS MCK onlay unicompartmental implant system was approved for CE
marking in April 2010 and our RESTORIS MCK onlay patellofemoral and
bicompartmental implant systems were approved for CE marking in January 2011.

Health Care Laws and Regulations

Third-Party
Reimbursement

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

In
addition, in many foreign markets, including the countries in the European
Union, pricing of medical devices is subject to governmental control. In the
U.S., there have been, and we expect that there will continue to be, a number
of federal and state proposals to limit payments by governmental payors for
medical devices, and the procedures in which medical devices are used.

In
March 2010, comprehensive health care reform legislation was enacted through
the passage of the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Affordability Reconciliation Act, or the Health
Care Reform Legislation. Significant measures contained in the Health Care
Reform Legislation include initiatives to revise Medicare payment methodologies,
initiatives to promote quality indicators in payment methodologies, initiatives
related to the coordination and promotion of research on comparative clinical
effectiveness of different technologies and procedures, and annual reporting
requirements related to payments to physicians and teaching hospitals. The
Health Care Reform Legislation also includes new

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taxes
impacting certain health-related industries, including medical device
manufacturers. Beginning in 2013, each medical device manufacturer will have to
pay an excise tax (or sales tax) in an amount equal to 2.3% of the price for
which such manufacturer sells its medical devices. We believe that this excise
tax will apply to our products. In addition to the Health Care Reform
Legislation, various healthcare reform proposals have also emerged at the state
level. We cannot predict whether future healthcare initiatives will be
implemented at the federal or state level or internationally, or the effect any
future legislation or regulation will have on us. The taxes imposed by the
Health Care Reform Legislation and the expansion in governments role in the
U.S. healthcare industry may result in decreased profits to us, lower
reimbursements by payors for our products, and reduced medical procedure volumes,
all of which may adversely affect our business, financial condition and results
of operations, possibly materially.

Medicare and
Medicaid

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

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

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

We
believe that there are existing reimbursement codes that can be used for
MAKOplasty procedures performed in the hospital inpatient setting. Procedures
for hospital inpatient billing are referenced by international classifications
of diseases, clinical modification, or Expert ICD-9-CM, volume 3 procedure
codes. Knee arthroplasty is billed under the primary ICD-9-CM code 81.54
(Total Knee Replacement), which is assigned to

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MS-DRG 469
(Major Joint Replacement or Reattachment of Lower Extremity with Complication
or Comorbidity) and MS-DRG 470 (Major Joint Replacement or Reattachment of
Lower Extremity without Major Complication or Comorbidity) and the secondary
ICD-9-CM code 17.41 (Open Robotic Assisted Procedure), which is used for
tracking purposes only. Hip arthroplasty is billed under the primary ICD-9-CM
code 81.51 (Total Hip Arthroplasty), which is commonly assigned to MS-DRG 469
(Major Joint Replacement or Reattachment of Lower Extremity with Complication
or Comorbidity) and MS-DRG 470 (Major Joint Replacement or Reattachment of
Lower Extremity without Major Complication or Comorbidity) and the secondary
ICD-9-CM code 17.41 (Open Robotic Assisted Procedure), which is used for
tracking purposes only. We anticipate that Medicare will continue to reimburse
hospitals under MS-DRGs 469 and 470 for MAKOplasty procedures, but CMS can
revise MS-DRG assignments from year to year.

In
addition to payments to hospitals for procedures using our technology, Medicare
makes separate payments to physicians for their professional services. The
American Medical Association, or AMA, has developed a coding system known as
the Current Procedural Terminology, or CPT, codes, which have been adopted by
the Medicare program to describe and develop payment amounts for certain
physician services. The Medicare physician fee schedule uses CPT codes (and
other codes) as part of the determination of allowable payment amounts to
physicians. In determining appropriate payment amounts for surgeons, CMS
receives guidance from the AMA regarding the relative technical skill level,
level of resources used, and complexity of a new surgical procedure. Generally,
the FDA approval of a new product is necessary, but not necessarily sufficient,
for the designation of a new procedure code for a new surgical procedure using
that product. Codes are assigned by either the AMA (for CPT codes) or CMS (for
Medicare specific codes) and new codes usually become effective on
January 1st of each year. Physicians performing knee MAKOplasty
procedures using our technology submit bills under CPT codes 27446
(Arthroplasty, knee, condyle and plateau; medial OR lateral compartment),
27447 (Arthoplasty, knee, condyle and plateau, medical and lateral with or
without patella resurfacing), and 27438 (Arthoplasty, patella with
prosthesis). We cannot anticipate whether third-party payors will continue to
reimburse physicians under these codes for services performed in connection
with knee MAKOplasty procedures. Upon commercialization of our hip MAKOplasty
application, we anticipate that physicians performing hip MAKOplasty procedures
using our technology will submit bills under CPT codes 27130 (Arthoplasty,
acetabular and proximal femora prosthetic replacement (total hip arthroplasty),
with or without autograft or allograft) and 27132 (Conversion of previous hip
surgery to total hip arthroplasty, with or without autograft or allograft). We
cannot anticipate whether third-party payors will reimburse physicians under
these codes for services performed in connection with hip MAKOplasty
procedures.

Commercial Insurers

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

Fraud and Abuse Laws

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

Anti-Kickback Statutes and Federal False
Claims Act

The
federal healthcare programs Anti-Kickback Statute prohibits persons from
soliciting, offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of an individual,
or the furnishing or arranging for a good or service, for which payment may be
made under a federal

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healthcare
program such as Medicare or Medicaid. The definition of remuneration has been
broadly interpreted to include anything of value, including for example gifts,
certain discounts, the furnishing of free supplies, equipment or services,
credit arrangements, payments of cash and waivers of payments. The recently
enacted Health Care Reform Legislation amended the intent requirement of the
Anti-Kickback Statute. A person or entity no longer needs to have actual
knowledge of the Anti-Kickback Statute or specific intent in order to violate
it. Penalties for violations include criminal penalties and civil sanctions
such as fines, imprisonment and possible exclusion from Medicare, Medicaid and
other federal healthcare programs. In addition, some kickback allegations have
been claimed to violate the Federal False Claims Act, discussed in more detail
below.

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

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

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

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

When
an entity is determined to have violated the False Claims Act, it may be
required to pay up to three times the actual damages sustained by the
government, plus civil penalties of between $5,500 to $11,000 for each separate
false claim. There are many potential bases for liability under the False
Claims Act. Liability arises, primarily, when an entity knowingly submits, or
causes another to submit, a false claim for reimbursement to the federal
government. The recently enacted Health Care Reform Legislation provides that
the government may assert that a claim resulting from a violation of the
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of
the False Claims Act. The False Claims Act has been used to assert liability on
the basis of inadequate care, kickbacks and other improper referrals, and
improper use of Medicare numbers when detailing the provider of services, in
addition to the more predictable allegations as to misrepresentations with
respect to the services rendered. In addition, companies have been prosecuted
under the False Claims Act in connection with alleged off-label promotion of
products. Our future activities relating to the reporting of wholesale or
estimated retail prices for our products, the reporting of discount and rebate
information and other information affecting federal, state and third-party
reimbursement of our products, and the sale and marketing of our products, may
be subject to scrutiny under these laws.

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Additionally,
several bills have been passed or are pending, at both the state and federal
levels, that expand the anti-kickback laws to require, among other things,
extensive tracking and maintenance of databases regarding relationships to
physicians and healthcare providers. The recently enacted Health Care Reform Legislation
imposes new reporting and disclosure requirements on device manufacturers for
any transfer of value made or distributed to physicians and teaching
hospitals, effective March 30, 2013. The implementation of the infrastructure
to comply with these bills could be costly and any failure to provide the
required information may result in civil monetary penalties.

We
believe our current consulting agreements with physicians represent legitimate
compensation for needed documented services actually furnished to us. However,
engagement of physician consultants by orthopedic medical device manufacturers
has recently been subject to heightened scrutiny, and has resulted in four of
the major orthopedic medical device implant manufacturers entering deferred
prosecution agreements with the federal government and agreeing to pay
substantial amounts to the federal government in settlement of Anti-Kickback
Statute allegations, and all such companies submitting to supervision by a
court appointed monitor throughout the term of the 18 month agreements. In this
environment, our engagement of physician consultants in product development and
product training and education could subject us to similar scrutiny. We are
unable to predict whether we would be subject to actions under the
Anti-Kickback Statute or False Claims Act or any similar state law, or the
impact of such actions. However, the costs of defending such claims, as well as
any sanctions imposed or negative public perceptions resulting therefrom, could
have a material adverse effect on our financial performance.

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

HIPAA and Other Fraud and Privacy Regulations

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

In
addition to creating the two new federal healthcare crimes, regulations
implementing HIPAA also establish uniform standards governing the conduct of
certain electronic healthcare transactions and protecting the security and
privacy of individually identifiable health information maintained or
transmitted by healthcare providers, health plans and healthcare
clearinghouses, which are referred to as covered entities. Three standards
have been promulgated under HIPAAs regulations: the Standards for Privacy of
Individually Identifiable Health Information, which restrict the use and
disclosure of certain individually identifiable health information, the
Standards for Electronic Transactions, which establish standards for common
healthcare transactions, such as claims information, plan eligibility, payment
information and the use of electronic signatures, and the Security Standards,
which require covered entities to implement and maintain certain security
measures to safeguard certain electronic health information.

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In
2009, Congress passed the American Recovery and Reinvestment Act of 2009, or
ARRA, which included
sweeping changes to HIPAA, including an expansion of HIPAAs privacy and
security standards. ARRA includes the Health Information Technology for
Economic and Clinical Health Act, or HITECH, which, among other things, made
HIPAAs privacy and security standards directly applicable to business
associates of covered entities effective February 17, 2010. A business
associate is a person or entity that performs certain functions or activities on
behalf of a covered entity that involve the use or disclosure of protected
health information in connection with recognized health care operations
activities. We believe that we are neither a covered entity nor, as of February
17, 2010, a business associate of our hospital customers. As such, we believe
that we are not directly subject to these HIPAA standards; however, there is no
guarantee that the government will agree with our determination. If the
government determines that we are a business associate, we could be subject to
enforcement measures, including civil and criminal penalties and fines for
violations of the privacy or security standards. For the purpose of avoiding
risk associated with our exposure to individually identifiable health information,
we have voluntarily adopted and trained our personnel on an internal policy
addressing the fundamentals of HIPAA compliance. While the government intended
this legislation to reduce administrative expenses and burdens for the
healthcare industry, our compliance with certain provisions of these standards
entails significant costs for us.

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

Anti-Bribery Laws

Compliance
with complex foreign and U.S. laws and regulations that apply to our
international operations increases our cost of doing business in international
jurisdictions and could expose us or our employees to fines and penalties in
the U.S. and abroad. These numerous and sometimes conflicting laws and
regulations include U.S. laws such as the Foreign Corrupt Practices Act, or
FCPA, and foreign laws such as the United Kingdoms Bribery Act prohibiting corrupt
payments to government officials. The FCPA prohibits U.S. companies and their
officers, directors, employees, shareholders acting on their behalf and agents
from offering, promising, authorizing or making payments to foreign officials
for the purpose of obtaining or retaining business abroad or otherwise
obtaining favorable treatment. The FCPA also requires companies to maintain
records that fairly and accurately reflect transactions and maintain internal
accounting controls. In many countries, hospitals are government-owned and
healthcare professionals employed by such hospitals, with whom we regularly
interact, may meet the definition of a foreign official for purposes of the
FCPA. Additionally, recently enacted legislation increases the monetary reward
available to whistleblowers, which may result in increased scrutiny and
allegations of violations of these laws and regulations. Violations of these
laws and regulations could result in fines, criminal sanctions against us, our
officers, or our employees, prohibitions on the conduct of our business, and
damage to our reputation. Although we have implemented policies and procedures
designed to ensure compliance with these laws, there can be no assurance that
our employees, contractors, or agents will not violate our policies.

Employees

As
of February 28, 2011, we had 315 employees, 110 of whom were engaged in
sales and marketing, 75 in research and development, 65 in assembly,
manufacturing and service, 30 in regulatory, clinical affairs and quality
activities and 35 in general administrative and accounting activities. None of
our employees is covered by a collective bargaining agreement, and we consider
our relationship with our employees to be good.

Corporate Information

We
were incorporated in Delaware in November 2004. Our common stock is traded on
The NASDAQ Global Select Market under the ticker symbol MAKO. Our principal
executive offices are located at 2555 Davie Road, Fort Lauderdale, Florida
33317, and our telephone number is (954) 927-2044. From our Internet
website, http://www.makosurgical.com,
you may obtain additional information about us including:

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

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

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

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

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

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

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

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

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

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

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

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

We
believe our existing cash, cash equivalents, short-term investment balances,
and interest income we earn on these balances, if any, will be sufficient to
meet our anticipated cash requirements through at least the next twelve months.
To the extent our available cash, cash equivalents and short-term investment
balances are insufficient to satisfy our operating requirements after that
period, we will need to seek additional sources of funds, including selling additional
equity or debt securities or entering into a credit facility, or modify our
current business plan. The sale of additional equity and debt securities may
result in dilution to our current stockholders or may require us to grant a
security interest in our assets. If we raise additional funds through the
issuance of debt securities, these securities may have rights senior to those
of our common stock and could contain covenants that could restrict our
operations. We may require additional capital beyond our currently forecasted
amounts. Any such required additional capital may not be available on
reasonable terms, or at all.

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

| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | the revenue
 generated by sales of our current and future products;                    
| |   |                                                                                        
| |  | the expenses
 we incur in selling and marketing our products and supporting our growth;

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the costs
 and timing of regulatory clearance or approvals for new products or upgrades
 or changes to our current products;                                                        
| |   |                                                                                                                                                                                     
| |  | the rate of
 progress, cost, and success or failure of on-going development activities;                                                                                             
| |   |                                                                                                                                                                                     
| |  | the
 emergence of competing or complementary technological developments;                                                                                                            
| |   |                                                                                                                                                                                     
| |  | the costs of
 filing, prosecuting, defending and enforcing any patent or license claims and
 other intellectual property rights, or participating in litigation related
 activities;
| |   |                                                                                                                                                                                     
| |  | the terms
 and timing of any collaborative, licensing, or other arrangements that we may
 establish;                                                                                
| |   |                                                                                                                                                                                     
| |  | the
 acquisition of businesses, products and technologies; and                                                                                                                      
| |   |                                                                                                                                                                                     
| |  | general
 economic conditions and interest rates, including the current downturn.                                                                                                    

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

We
rely on third-party suppliers to manufacture and supply our implants and nearly
all components used in our RIO system, other than software. We currently rely
on a number of single source suppliers to provide us with many of the major components
of the RIO system. We currently do not have long-term contracts with most of
our suppliers. As a result, some of our suppliers are not required to provide
us with any guaranteed minimum production levels, and we cannot assure you that
we will be able to obtain sufficient quantities of key components in the
future. In addition, our reliance on third-party suppliers involves a number of
risks, including, among other things:

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

If
any of these risks materialize, it could significantly increase our costs and impact
our ability to meet demand for our products. If we are unable to satisfy
commercial demand for the RIO system or the RESTORIS

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

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

We
are an early-stage medical device company with a limited operating history. Our
products with 510(k) marketing clearance from the FDA are versions 1.0, 1.2 and
1.3 of our TGS, versions 2.0, 2.1, 2.2, and 2.3 of our RIO system, our hip
application, and inlay and onlay implant systems for use in unicompartmental
and bicompartmental knee resurfacing procedures. The future success of our business
depends on our ability to continue to develop and obtain regulatory clearances
or approvals for innovative and commercially successful products in our field,
which we may be unable to do in a timely manner, or at all. Our success and
ability to generate revenue or be profitable also depends on our ability to
establish our sales and marketing force, generate product sales and control
costs, all of which we may be unable to do. We have a limited history of
operations upon which you can evaluate our business and our operating expenses
are increasing. Our lack of any significant operating history also limits your
ability to make a comparative evaluation of us, our products and our prospects.

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

We
have sustained net losses in every fiscal year since our inception in 2004,
including a net loss attributable to common stockholders of $38.7 million for
the year ended December 31, 2010. As of December 31, 2010, we had total
stockholders equity of $121.8 million. We expect to continue to incur
significant operating losses as we increase our sales and marketing activities
and otherwise continue to invest capital in the development of our products and
our business generally. We also expect that our general and administrative
expenses will increase due to the planned increase in the number of employees
necessary to support the sales and marketing efforts associated with the
growing commercialization of MAKOplasty and an increased number of employees
necessary to support our continued growth in operations. Our losses have had
and will continue to have an adverse effect on our stockholders equity and working
capital. Any failure to achieve and maintain profitability would continue to
have an adverse effect on our stockholders equity and working capital and
could result in a decline in our stock price or cause us to cease operations.

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

We
rely on intellectual property that we license or sublicense from others,
including patented technology that is integral to our RIO system and RESTORIS
family of implant systems. As of February 28, 2011, we had licensed rights to
ninety-four U.S. and three foreign third-party granted patents, and we had
licensed rights to thirty-seven U.S. and three foreign third-party pending
patent applications. The majority of these patents and applications are either
used in our current products or relate to core technologies used in our
products, such as computer assisted surgery, or CAS, robotics, haptics and
implants. We regard some of these patents and applications as material to our intellectual property
portfolio because they deal with a core technology and potentially enable us to exclude others from practicing the claimed
technology. Of the licensed patents that we consider material, none will expire
by the end of 2011. Third parties may terminate a license in the event that we fail to
make required payments or for other causes. In the event a third party
terminates a license agreement, we cannot assure you that we could acquire
another license to adequately replace the product, technology or method covered
by the terminated license. If we fail to maintain our current licenses, our
ability to compete in the orthopedic market will be harmed.

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

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

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

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

In
November 2005, we obtained 510(k) marketing clearance from the FDA for version
1.0 of our TGS for use with our FDA cleared tibial knee inlay implant system.
We were not required to obtain premarket approval, or PMA. We were also not
required to conduct any clinical trials in support of our application for
510(k) marketing clearance. Modifications to our products, however, may require
new regulatory approvals or clearances or require us to recall or cease
marketing the modified products until these clearances or approvals are
obtained. Any modification to one of our 510(k) cleared products that would
constitute a major change in its intended use, or any change that could
significantly affect the safety or effectiveness of the device would require us
to obtain a new 510(k) marketing clearance and may even, in some circumstances,
require the submission of a PMA, if the change raises complex or novel
scientific issues or the product has a new intended use. The FDA requires every
manufacturer to make the determination regarding the need for a new 510(k)
submission in the first instance, but the FDA may review any manufacturers
decision. Since obtaining 510(k) marketing clearance for version 1.0 of our
TGS, we developed and commercially introduced several upgrades to our TGS that
we believe did not require additional clearances or approvals. Our Special
510(k) application for version 1.2, which the FDA converted to a Traditional
510(k) application and cleared in January 2008, incorporated these upgrades.
Since this 510(k) marketing clearance, we have made additional upgrades to the
system (namely, version 1.3) that we believe were cleared under our most recent
510(k) marketing clearance and therefore did not require additional filings for
clearance or approval. In the fourth quarter of 2008 we received 510(k)
marketing clearance from the FDA for the RIO system and for the RESTORIS MCK
multicompartmental knee implant system, which the RIO system is designed to
support. Since obtaining 501(k) marketing clearance for the RIO system, we have
made additional upgrades to the RIO system (namely, versions 2.1, 2.2, and 2.3)
that we believe were cleared under our 510(k) marketing clearance for the RIO
system and therefore did not require additional filings for clearance or
approval. In the first quarter of 2010, we received 510(k) marketing clearance
from the FDA for our RIO-enabled hip application. We may continue to make additional
modifications in the future to the RIO system without seeking additional
clearances or approvals if we believe such clearances or approvals are not
necessary. If the FDA disagrees and requires new clearances or approvals for
the modifications, we may be required to recall and stop marketing our products
as modified, which could cause us to redesign our products, conduct clinical
trials to support any modifications, and pay significant regulatory fines or
penalties. Any of these actions would harm our operating results.

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

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

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

We
expect to derive most of our revenue from capital sales of our RIO system,
future applications to the RIO system, including our RIO-enabled hip
application, recurring sales of implants and disposable products required for
each MAKOplasty procedure, and service plans that are sold with the RIO system.
Currently, the only line of products that has been commercially introduced and
received 510(k) marketing clearance is versions 1.0 and 1.2 of our TGS, the
off-the-shelf inlay and onlay knee implant systems for use in unicompartmental
knee resurfacing procedures, versions 2.0, 2.1, 2.2, and 2.3 of the RIO system
and our RESTORIS family of knee implant systems. Our future growth and success
is dependent on the successful commercialization of the RIO system and related
applications and the RESTORIS family of implant systems. If we are unable to achieve
commercial acceptance of MAKOplasty or obtain regulatory clearances or
approvals for future products, including products to treat other joints of the
human body, our revenue would be adversely affected and we would not become
profitable.

If our current and future MAKOplasty
solutions do not gain market acceptance, we will not be able to generate the
revenue necessary to develop a sustainable, profitable business.

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

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

We
believe that patients, surgeons and hospitals will only accept MAKOplasty or
purchase our products if they believe that MAKOplasty is a safe and effective
procedure with advantages over competing products and conventional arthroplasty
procedures. To date, we have collected only limited, short-term clinical data
with which to assess MAKOplastys clinical value. As of December 31, 2010, 5,869
MAKOplasty procedures had been performed since commercial introduction in 2006.
We have not collected, and are not aware that others have collected, any
long-term clinical data regarding the clinical value of MAKOplasty. The results
of short-term studies, such as our post-market studies, do not necessarily
predict long-term clinical results. As of February 28, 2011, we have three
published book chapters related to MAKOplasty and robotic surgery, eighteen
published peer-reviewed manuscripts, seventy peer-reviewed abstracts at
conferences, and sixteen completed whitepapers. We also have fifty-eight
scientific studies, either recently completed or in progress, which are aimed
at measuring the clinical and economic value of MAKOplasty as follows: eight
studies are focused on quantifying the accuracy of MAKOplasty procedures; nine
studies are focused on assessing basic clinical and radiographic outcomes; four
studies are focused evaluating the functional and kinematic outcomes of
patients; sixteen studies are focused on supporting implant design and product
development; sixteen studies are focused on codifying surgical technique,
ergonomic robotic use, and surgical indications; and five studies are focused
on quantifying the economic impact of less invasive and more accurate
arthroplasty. If longer-term or more extensive clinical studies that may be
performed by us or others indicate that MAKOplasty is a less safe or less
effective procedure than our current data suggest, patients may choose not to
undergo, and surgeons may choose not to perform, MAKOplasty. Furthermore,
unsatisfactory patient outcomes or patient injury could cause negative
publicity for our products, particularly in the early phases of product
introduction. The FDA could also rescind our marketing clearances if future
results and experience indicate that our products cause unexpected or serious
complications or other unforeseen negative effects. See Risks Related to
Regulatory Compliance. Surgeons may be slow to adopt our products if they
perceive liability risks arising from the use of these new products. As a
result, patients, surgeons and hospitals may not accept MAKOplasty or our
products and we may fail to become profitable and may be subject to significant
legal liability.

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

We
have limited experience as a company in the sales and marketing of our
products. We may not be successful in marketing and selling our products in the
U.S. and abroad through our direct sales force or with assistance from
independent orthopedic product agents and distributors. Our sales and marketing
organization is supported by clinical and technical representatives who provide
training, clinical and technical support and other services to our customers
before and during the surgery. As of February 28, 2011, we have 110 employees
in our sales and marketing organization, which includes all clinical and
technical representatives. To reach our revenue targets, we need to expand and
strengthen our U.S. direct sales force and, over time, our foreign sales
channels. Developing a sales and marketing organization is expensive and time
consuming and an inability to develop such an organization in a timely manner
could delay the successful adoption of our products. Additionally, any sales
and marketing organization that we develop may be competing against the
experienced and well funded sales and marketing organizations of some of our
competitors. We will face significant challenges and risks in developing our
sales and marketing organization, including, among others:

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

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

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

We
believe that to sell and market our products effectively, we must establish
relationships with key surgeons and hospitals in the field of orthopedic
surgery. Many of these key surgeons and hospitals already have long-standing
relationships with large, better known companies that dominate the medical
devices industry through collaborative research programs and other
relationships. Because of these existing relationships, some of which may be
contractually enforced, surgeons and hospitals may be reluctant to adopt
MAKOplasty, particularly if MAKOplasty competes with or has the potential to
compete with products supported through their own collaborative research
program or by these existing relationships. Even if these surgeons and
hospitals purchase our RIO system, they may be unwilling to enter into
collaborative relationships with us to promote joint marketing programs such as
the MAKOplasty Center of Excellence or to provide us with clinical and
financial data.

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

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

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

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

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

We
also may face competition from other medical device companies that may seek to
extend robotics technology and minimally invasive approaches and products that
they have developed for use in other parts of the

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human anatomy to
orthopedics. Even if these other companies currently do not have an established
presence in the field of orthopedics, they may attempt to apply their robotics
technology to the field of orthopedics to compete directly with us.

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

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

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

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

The
success of our business is dependent on our ability, either alone or with the
assistance of others, to develop new products, to introduce enhancements to our
existing products and to develop these new products and enhancements within
targeted time frames and budgets to meet customer expectations and
requirements. For certain products we have in the past and may in the future
utilize a surgeon preference evaluation process prior to full commercial
release. The actual timing of these product releases can vary dramatically
compared to our estimates for reasons that may or may not be within our
control, including clearance or approval by the FDA to market future products
and unfavorable clinical results or customer feedback prior to full commercial
release through a surgeon preference evaluation process. Customers may forego
purchases of our existing products and purchase our competitors products as a
result of delays in the introduction of our new products and enhancements or
failure by us to offer valuable and innovative products or enhancements at
competitive prices and in a timely manner. Announcements of new products by us
or by competitors may also result in a delay in or cancellation of purchasing
decisions in anticipation of such new products. Any such losses of new customers
would harm our business and financial results.

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

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

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

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

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

A
critical component of our sales and marketing efforts is the training of a
sufficient number of surgeons and hospital staff to properly perform
MAKOplasty. As of December 31, 2010, we had trained 324 surgeons on the use of
the RIO system to perform MAKOplasty. We rely on surgeons and hospital staff to
devote adequate time to learn to use our products. Convincing surgeons and
hospital staff to dedicate the time and energy necessary for adequate training
in the use of our system is challenging, and we cannot assure you we will be
successful in these efforts. If surgeons or hospital staff are not properly
trained, they may misuse or ineffectively use our products. If nurses or other
members of the hospital staff are not adequately trained to assist in using our
RIO system, surgeons may be unable to use our products. Insufficient training
may result in reduced system use, unsatisfactory patient outcomes, patient
injury and related liability or negative publicity, which could have an adverse
effect on our product sales or create substantial potential liabilities.

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

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

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

| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | timing and
 level of expenditures associated with new product development activities;                         
| |   |                                                                                                               
| |  | delays in
 shipment due, for example, to cancellations by customers, natural disasters
 or labor disturbances;

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                             
| |   |                                                                                                                                                                       
| |  | the wide
 range of product utilization among our relatively small customer base;                                                                                      
| |   |                                                                                                                                                                       
| |  | timing and
 level of expenditures associated with expansion of sales and marketing
 activities and our overall operations;                                            
| |   |                                                                                                                                                                       
| |  | disruptions
 in the supply or changes in the costs of raw materials, labor, product
 components or transportation services; and                                       
| |   |                                                                                                                                                                       
| |  | changes in
 third-party coverage and reimbursement, changes in government regulation, or
 a change in a customers financial condition or ability to obtain financing.

These
factors are difficult to forecast and may contribute to substantial
fluctuations in our quarterly revenue and substantial variation from our
projections, particularly during the periods in which our sales volume is low.
Moreover, many of our expenses, such as office leases and certain personnel
costs, are relatively fixed. We may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter.
Based on the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
These and other potential fluctuations also mean that you will not be able to
rely upon our operating results in any particular period as an indication of
future performance.

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

Sales
of the our RIO system generally include a warranty and maintenance obligation
for services for a period of approximately twelve months from the date the RIO
system is installed at a customers facility. We also provide technical and
other services to customers beyond the warranty period pursuant to a
supplemental service plan sold with each system. If product returns or warranty
claims are significant or exceed our expectations, we could incur unanticipated
reductions in sales or additional expenditures for parts and service. In
addition, our reputation could be damaged and our products may not achieve
market acceptance.

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

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

We
may, from time to time, elect to initiate a product action concerning one or
more of our products for the purpose of improving device performance. If any of
our products are defective, whether due to design or manufacturing defects,
improper use of the product or other reasons, we may voluntarily or
involuntarily undertake a product action to remove, repair, or replace the
product at our expense and, in some circumstances, to notify regulatory
authorities of such product action pursuant to a product recall. We are
required to submit a Medical Device Reporting, or MDR, report to the FDA for
any incident in which our product may have caused or contributed to a death or
serious injury or in which our product malfunctioned and, if the malfunction
were to recur, would likely cause or contribute to death or serious injury.

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

The
medical device industry has historically been subject to extensive litigation
over product liability claims. We have been, and anticipate that as part of our
ordinary course of business we will continue to be, subject to product
liability claims alleging defects in the design, manufacture or labeling of our
products. A product liability claim, regardless of its merit or eventual
outcome, could result in significant legal defense costs. Although we maintain
product liability insurance, the coverage is subject to deductibles and
limitations, and may not be adequate to cover future claims. Additionally, we
may be unable to maintain our existing product liability insurance in the
future at satisfactory rates or adequate amounts. A product liability claim,
regardless of its merit or eventual outcome could result in:

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

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

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

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

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Medicare
pays acute care hospitals a prospectively determined amount for inpatient
operating costs under the Medicare hospital inpatient prospective payment
system, or PPS. Under the Medicare hospital inpatient PPS, the prospective
payment for a patients stay in an acute care hospital is determined by the
patients condition and other patient data and procedures performed during the
inpatient stay using a classification system known as diagnosis related groups,
or DRGs. CMS implemented a revised version of the DRG system that uses Medicare
Severity DRGs, or MS-DRGs, instead of the DRGs Medicare previously used. The
MS-DRGs are intended to account more accurately for the patients severity of
illness when assigning each patients stay to a payment classification.
Medicare pays a fixed amount to the hospital based on the MS-DRG into which the
patients stay is assigned, regardless of the actual cost to the hospital of
furnishing the procedures, items and services provided. Accordingly, acute care
hospitals generally do not receive direct Medicare reimbursement under PPS for the
specific costs incurred in purchasing medical devices. Rather, reimbursement
for these costs is deemed to be included within the MS-DRG based payments made
to hospitals for the services furnished to Medicare eligible inpatients in
which the devices are utilized. Accordingly, a hospital must absorb the cost of
our products as part of the payment it receives for the procedure in which the
device is used. In addition, physicians that perform procedures in hospitals
are paid a set amount by Medicare for performing such services under the
Medicare physician fee schedule. Medicare payment rates for both systems are
established annually.

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

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

There
also can be no assurance that current levels of reimbursement will not be
decreased or eliminated in the future, or that future legislation, regulation,
or reimbursement policies of third-party payors will not otherwise adversely
affect the demand for our products or our ability to sell products on a
profitable basis. Our customers are currently using existing reimbursement
codes for knee arthroplasty. Knee arthroplasty performed in the hospital
inpatient setting is currently assigned to MS-DRG 469 (Major Joint Replacement
or Reattachment of Lower Extremity with Major Complication or Comorbidity) and
MS-DRG 470 (Major Joint Replacement or Reattachment of Lower Extremity without
Major Complication of Comorbidity), and surgeons currently bill Current
Procedural Terminology, or CPT, code 27446 (Arthroplasty, knee, condyle and
plateau; medial OR lateral compartment), code 27447 (Arthroplasty, knee
condyle and plateau, medial and lateral with or without patella resurfacing),
and code 27438 (Arthoplasty, patella with prosthesis), for services performed
in

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connection with knee
MAKOplasty procedures using our technology. Our customers also have available
Ambulatory Payment Classifications, or APC, code 0425 and CPT code 27446 for
unicompartmental arthroplasty, APC code 0048 and CPT code 27438 for
patellofemoral procedures, and CPT code 73700 (CT lower extremity without
contrast) for imaging services related to knee MAKOplasty. If unicompartmental
and bicompartmental knee resurfacing procedures gain market acceptance and the
number of such procedures increases, CMS and other payors may establish billing
codes for unicompartmental and bicompartmental knee resurfacing procedures that
provide for a smaller reimbursement amount than knee arthroplasty, which could
adversely affect our financial results and business.

Upon
commercialization of our hip MAKOplasty application, we anticipate that our
customers will use existing reimbursement codes for hip arthroplasty. Hip
arthroplasty performed in the hospital inpatient setting is currently assigned
to MS-DRG 469 (Major Joint Replacement or Reattachment of Lower Extremity with
Major Complication or Comorbidity) and MS-DRG 470 (Major Joint Replacement or
Reattachment of Lower Extremity without Major Complication of Comorbidity),
and we anticipate that surgeons will bill Current Procedural Terminology, or
CPT, codes 27130 (Arthoplasty, acetabular and proximal femora prosthetic
replacement (total hip arthroplasty), with or without autograft or allograft)
and 27132 (Conversion of previous hip surgery to total hip arthroplasty, with
or without autograft or allograft), for services performed in connection with
hip MAKOplasty procedures using our technology. We anticipate that our
customers also will have available CPT codes 73700 (CT lower extremity without
contrast) and 72192 (CT pelvis without contrast material) for imaging
services related to hip MAKOplasty. If CMS and other payors do not reimburse
physicians under these codes for services performed in connection with hip
MAKOplasty procedures, our financial results and business could be adversely
affected.

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

Healthcare
reforms, changes in healthcare policies and changes to third-party coverage and
reimbursements, including recently enacted legislation reforming the U.S.
healthcare system, may affect demand for our systems and products and may have
a material adverse effect on our financial condition and results of operations.

In
March 2010,
comprehensive health care reform legislation was enacted through the passage of the Patient
Protection and Affordable Care Act and the Health Care, as amended by the
Education Affordability Reconciliation Act, or the Health Care Reform
Legislation. This legislation includes new taxes impacting certain health-related
industries, including medical device manufacturers. Beginning in 2013, each
medical device manufacturer will have to pay an excise tax (or sales tax) in an
amount equal to 2.3% of the price for which such manufacturer sells its medical
devices. We believe that this excise tax will apply to our products. Other
significant measures contained in the Health Care Reform Legislation include
initiatives to revise Medicare payment methodologies, initiatives to promote
quality indicators in payment methodologies, initiatives related to the
coordination and promotion of research on comparative clinical effectiveness of
different technologies and procedures, and annual reporting requirements
related to payments to physicians and teaching hospitals. The Health Care Reform
Legislation also includes significant new fraud and abuse measures, lowering
the governments thresholds to find violations and increasing potential
penalties for such violations.

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In
addition to the Health Care Reform Legislation discussed above, various
healthcare reform proposals have also emerged at the state
level. We cannot predict whether future healthcare initiatives will be
implemented at the federal or state level or internationally, or the effect any
future legislation or regulation will have on us. The taxes imposed by the new
Health Care Reform Legislation and the expansion in governments role in the
U.S. healthcare industry may result in decreased profits to us, lower
reimbursements by payors for our products, and reduced medical procedure
volumes, all of which may adversely affect our business, financial condition
and results of operations, possibly materially.

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

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

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

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

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

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

Our
future revenue and operating results will depend on our ability to manage the
anticipated growth of our business. We have experienced significant growth in
the scope of our operations and the number of our employees since our
inception. This growth has placed significant demands on our management, as
well as our

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financial and operations
resources. In order to achieve our business objectives, we must continue to
grow. However, continued growth presents numerous challenges, including:

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

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

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

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

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

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

Our operations are vulnerable to
interruption or loss due to hurricanes, storm, fire, terrorist attacks, failure
or breach of our computer systems or information technology, or other events
beyond our control, which could adversely affect our business.

We
currently conduct all of our management activities, most of our research and
development activities and assemble many of our products at a single location
in Fort Lauderdale, Florida. We have taken various

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precautions to safeguard our
facilities, such as obtaining insurance, installing hurricane shutters,
establishing health and safety protocols and securing off-site storage of
computer data. However, a casualty due to a hurricane, storm or other natural
disasters, a fire, terrorist attack, or other unanticipated problems at this
location or any of our third-party contracted facilities could cause substantial
delays in our operations, delay or prevent assembly of our RIO systems and
shipment of our implants, damage or destroy our equipment and inventory, and
cause us to incur substantial expenses. Furthermore, we are dependent upon our
computer systems and information technology and any failure, interruption, or
security breach, such as a computer virus or unauthorized access, of such
computer systems or information technology could cause substantial delays in
our operations, interrupt our business, and result in a loss of data. Our
insurance does not cover losses caused by certain events such as floods or
other activities and may not be adequate to cover our losses in any particular
case. Any damage, loss or delay could seriously harm our business and have an
adverse effect on our financial results.

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

Prior
to February 2010, we licensed or sublicensed intellectual property from Z-Kat
and entered into various licensing and related arrangements with Z-Kat. In
February 2010, we terminated our prior licenses with Z-Kat, including Z-Kats
nonexclusive sublicense to our intellectual property portfolio, and entered
into an asset purchase agreement with Z-Kat pursuant to which we obtained
ownership rights to certain intellectual property assets owned by Z-Kat, and
certain intellectual property licensed to Z-Kat. We also entered into a new
license agreement with Z-Kat, since terminated, pursuant to which we obtained
an exclusive sublicense to certain intellectual property for technologies in
CAS and robotics in the medical field. We believe that certain of our
directors, executive officers and key employees hold equity or contract
interests in Z-Kat. Accordingly, each of these individuals may face continuing
potential conflicts of interest regarding these transactions as a result of
their interests in Z-Kat. Dr. Ferré may face additional conflicts of interest
regarding these transactions if he serves on the board of directors of Z-Kat.
To address these potential conflicts of interest, we have adopted a Related
Person Transaction Policy. In addition, the audit committee of our board of
directors, under the terms of its charter, must review and approve all related
person transactions. We cannot, however, assure you that any conflicts will be
resolved in our favor, and as a result, our business could be harmed.

Changes to, and interpretations of,
financial accounting standards may affect our reported results of operations.

A
change in accounting standards or practices can have a significant effect on
our reported results and may even affect our reporting of transactions
completed before the change is effective. New accounting pronouncements and
varying interpretations of accounting pronouncements have occurred and may
occur in the future. Changes to existing standards or the questioning of
current practices may adversely affect our reported financial results or the
way we conduct our business.

We use estimates, make judgments and apply
certain methods in measuring the progress of our business, in determining our
financial results and in applying our accounting policies. As these estimates,
judgments, and methods change, our assessment of the progress of our business
and our results of operations could vary.

Generally
accepted accounting principles and accompanying accounting pronouncements,
interpretations, and practices for many areas of our business are very complex
and involve significant and sometimes subjective judgments. The methods,
estimates, and judgments we use in applying our accounting policies have a
significant impact on our results of operations. Such methods, estimates, and
judgments are, by their nature, subject to substantial risks, uncertainties,
and assumptions, and factors may arise over time that lead us to change our
methods, estimates, and judgments. For example, changes to our standard terms
for sales of our products or new product or service introductions could lead to
changes in the application of our accounting policies. Changes in any of our
assumptions may adversely affect our reported financial results.

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Risks Related to Our Intellectual
Property

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

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

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

Non-payment
or delay in payment of patent fees or annuities, whether intentional or
unintentional, may also result in the loss of patents or patent rights
important to our business. Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties. In addition, many countries limit
the enforceability of patents against third parties, including government
agencies or government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value of the patent.
In addition, the laws of some foreign countries do not protect intellectual
property rights to the same extent as do the laws of the U.S., particularly in
the field of medical products and procedures.

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

Proprietary
trade secrets, copyrights, trademarks and unpatented know-how are also very
important to our business. We rely on a combination of trade secrets,
copyrights, trademarks, confidentiality agreements and other contractual
provisions and technical security measures to protect certain aspects of our
technology, especially where we do not believe that patent protection is
appropriate or obtainable. We require our employees and consultants to execute
confidentiality agreements in connection with their employment or consulting
relationships with us. We also require our employees and consultants to
disclose and assign to us all inventions conceived during the term of their
employment or engagement while using our property or which relate to our
business. We also have taken precautions to initiate reasonable safeguards to
protect our information technology systems. However, these measures may not be
adequate to safeguard our proprietary intellectual property and conflicts may,
nonetheless, arise regarding ownership of inventions. Such conflicts may lead
to the loss or impairment of our intellectual property or to expensive litigation
to defend our rights against competitors who may be better

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funded and have superior
resources. Our employees, consultants, contractors, outside clinical
collaborators and other advisors may unintentionally or willfully disclose our
confidential information to competitors. In addition, confidentiality
agreements may be unenforceable or may not provide an adequate remedy in the
event of unauthorized disclosure. Enforcing a claim that a third party
illegally obtained and is using our trade secrets is expensive and time
consuming, and the outcome is unpredictable. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how. Unauthorized
parties may also attempt to copy or reverse engineer certain aspects of our products
that we consider proprietary. As a result, third parties may be able to use our
proprietary technology or information, and our ability to compete in the market
would be harmed.

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

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

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

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

We
cannot be certain that we will successfully defend against allegations of
infringement of third-party patents and intellectual property rights. In the
event that we become subject to a patent infringement or other intellectual
property lawsuit and if the other partys patents or other intellectual
property were upheld as valid and enforceable and we were found to infringe the
other partys patents or violate the terms of a license to which we are a
party, we could be required to pay damages. We could also be prevented from
selling our products unless we could obtain a license to use technology or
processes covered by such patents or were able to redesign the product to avoid
infringement. A license may not be available at all or on commercially
reasonable terms or we may not be able to redesign our products to avoid
infringement. Modification of our products or development of new

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products could require us to
conduct clinical trials and to revise our filings with the FDA and other
regulatory bodies, which would be time consuming and expensive. In these
circumstances, we may be unable to sell our products at competitive prices or
at all, our business and operating results could be harmed and our stock price
may decline. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.

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

Many
of our employees and consultants were previously employed at universities or
other medical device companies, including our competitors or potential competitors.
We could in the future be subject to claims that these employees or
consultants, or we, have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation
may be necessary to defend against these claims. If we fail in defending
against such claims, a court could order us to pay substantial damages and
prohibit us from using technologies or features that are essential to our
products and processes, if such technologies or features are found to
incorporate or be derived from the trade secrets or other proprietary
information of the former employers. In addition, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or
their work product could hamper or prevent our ability to commercialize certain
potential products, which could severely harm our business. Even if we are
successful in defending against these claims, such litigation could result in
substantial costs and be a distraction to management.

Risks Related to Regulatory
Compliance

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

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

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

In
the U.S., before we can market a new medical device, or a new use of, or claim
for, or significant modification to, an existing product, we must first receive
either premarket clearance under Section 510(k) of the FDCA, or approval of a
PMA from the FDA, unless an exemption applies. In the 510(k) marketing
clearance process, the FDA must determine that a proposed device is
substantially equivalent to a device legally on the market, known as a
predicate device, with respect to intended use, technology and safety and
effectiveness, in order to clear the proposed device for marketing. Clinical
data is sometimes required to support substantial equivalence. The PMA approval
pathway requires an applicant to demonstrate the safety and effectiveness of
the device based, in part, on data obtained in clinical trials. Both of these
processes can be expensive and lengthy and entail significant user fees, unless
exempt. The FDAs 510(k) marketing clearance process usually takes from

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three to 12 months, but it
can last longer. The process of obtaining PMA approval is much more costly and
uncertain than the 510(k) marketing clearance process. It generally takes from
one to three years, or even longer, from the time the PMA application is
submitted to the FDA until an approval is obtained. There is no assurance that
we will be able to obtain FDA clearance or approval for any of our new products
on a timely basis, or at all. The FDA is currently considering proposals to
reform its 510(k) marketing clearance process and such proposals could include
increased requirements for clinical data and a longer review period. We cannot
predict which of the 510(k) marketing clearance reforms currently being
discussed and/or proposed might be enacted by the FDA and whether the FDA will
propose additional modifications to the regulations governing medical devices
in the future. Any such modification could have a material adverse effect on
our ability to commercialize our products.

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

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

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

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

As
we modify existing products or develop new products in the future, including
new instruments, we apply for permission to affix to such products a European
Union CE mark, which is a legal requirement for medical devices intended for
sale in the European Union. In addition, we will be subject to annual
regulatory audits in order to maintain those CE mark permissions. In November
2008, the British Standards Institute, or BSI, an independent global notified body,
conducted an annual assessment of our quality management system, which
concluded that our quality management system complied with the requirements of
ISO13485 in all material respects. As a result of the change in classification
of orthopedic implants in the European Union, we have updated our ISO
certifications to include class III devices, such as orthopedic implants. In
December 2009, we received a major nonconformance in our annual assessment by
BSI. We implemented corrective actions and in March 2010 the finding was
officially closed by BSI. In December 2010, BSI conducted a full
recertification audit of our quality management system and discovered no major
nonconformances. BSI found us in compliance with the requirements of the
Medical Devices Directive of the European Union and recommended continuation of
our certification allowing us to apply the CE Mark to our products. BSI will
continue to conduct annual audits to assess our compliance with BSI
certification standards. In connection with achieving CE marking, which is a
legal requirement for medical devices intended for sale in the European Union,
we have also submitted design dossiers to BSI for the purpose of review and
approval. We do not know whether we will be able to obtain permission to affix
the CE mark for new or modified products or that we will continue to meet the
quality and safety standards required to maintain the permissions we have
already received. If we are unable to maintain permission to affix the CE mark
to our products, we will no longer be able to sell our products in member countries of the European
Union or other areas of the world that require CE approval of medical devices.

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

We
and some of our third-party manufacturers and suppliers are required to comply
with the FDAs Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our products. We
and our manufacturers and suppliers are also subject to the regulations of
foreign jurisdictions regarding the manufacturing process if we market our
products overseas. The FDA enforces the QSR through periodic inspections of
manufacturing facilities. In January 2009, the FDA conducted its first audit of
our facility, during which we received certain inspectional observations. We
have addressed the observations and submitted a response to the FDA on a
voluntary basis. All inspectional observations were resolved and we received a
copy of the establishment inspection report (EIR) and a cover letter from the
FDA in August 2009. To date, our facilities have not been inspected by any
other regulatory authorities. We anticipate that we and certain of our
third-party manufacturers and suppliers will be subject to inspections by
regulatory authorities in the future. If our facilities or those of our
manufacturers or suppliers fail to take satisfactory corrective action in
response to an adverse QSR inspection, the FDA could take enforcement action,
including any of the following sanctions:

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

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

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

Manufacturers
may, on their own initiative, initiate a product action, including a
non-reportable market withdrawal or a reportable product recall, for the
purpose of correcting a material deficiency, improving device performance, or
other reasons. Additionally, the FDA and similar foreign governmental
authorities have the authority to require an involuntary recall of commercialized
products in the event of material deficiencies or defects in design, or
manufacture or labeling. In the case of the FDA, the authority to require a
recall must be based on an FDA finding that there is a reasonable probability
that the device would cause serious injury or death. In addition, foreign
governmental bodies have the authority to require the recall of our products in
the event of material deficiencies or defects in design or manufacture. Product
actions involving any of our products would divert managerial and financial
resources and have an adverse effect on our financial condition and results of
operations. During the year ended December 31, 2010, we initiated one product
action, which was reportable to the FDA pursuant to the correction / removal
guidelines, related to a defect in the RIOs camera systems. In November 2010,
Northern Digital Inc., or NDI, the supplier of our camera systems, notified us
of a defect in the camera systems. We isolated the affected camera systems and
reported the product action to FDA in December 2010. During 2010, we closed a
reportable recall which was initiated in 2009. This reportable recall was
associated with a fiber optic cable used to connect the robotic arm to the
camera stand and was communicated to the FDA in July 2009. We internally closed
the action in November 2009 and received a closure notification from the FDA on
May 18, 2010. In January 2011, we initiated a voluntary field corrective action
concerning a

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software error discovered
during product surveillance. Under certain circumstances, the error value
calculated by the RIO system, designed for safety and accuracy of the
MAKOplasty procedure, could be incorrect. This incorrect error value could lead
to a possible incorrect interpretation of the registration accuracy of the RIO
system, which could then result in bone resection that is not consistent with
the preoperative surgical plan. We released a software update in February 2011
designed to correct this error.

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

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

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

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

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

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

Our
promotional materials and training methods must comply with FDA and other
applicable laws and regulations, including the prohibition of the promotion of
a medical device for a use that has not been cleared or approved by FDA. Use of
a device outside its cleared or approved indications is known as off-label
use. We believe that the specific surgical procedures for which our products
are marketed fall within the scope of the surgical applications that have been
cleared by the FDA. However, physicians may use our products off-label, as

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

We may be subject to fine, penalties, or
licensure requirements, or legal liability, if it is determined that our
MAKOplasty Specialists are practicing medicine without a license.

State
laws prohibit the practice of medicine without a license. Our MAKOplasty
Specialists provide pre-operative and intra-operative clinical and technical
support to our customers, including assistance setting up the equipment,
participation in the pre-operative planning process, and facilitation of the
surgeons use of the RIO system during surgery. We do not believe that our
MAKOplasty Specialists are engaged in the practice of medicine, but rather are
assisting our customers in the safe and proper usage of our equipment and
products. Nevertheless, a governmental authority or individual actor could
allege the activities of our MAKOplasty Specialists to constitute the practice
of medicine. A state may seek to have us discontinue the services provided by
our MAKOplasty Specialists or subject us to fine, penalties or licensure
requirements. Any determination that our MAKOplasty Specialists are practicing
medicine without a license may result in significant liability to us.

The application of state certificate of
need regulations could substantially limit our ability to sell our products and
grow our business.

Some
states require healthcare providers to obtain a certificate of need or similar
regulatory approval prior to the acquisition of high-cost capital equipment
such as our RIO system. In some states, the process required of our customers
to obtain this certificate is lengthy and could result in a longer sales cycle
for our RIO system. Further, in many cases, only a limited number of these
certificates are available. As a result, our customers may be unable to obtain
a certificate of need for the purchase of our RIO system which could cause our
sales to decline.

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

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

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

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the federal
 healthcare programs Anti-Kickback Statute, which prohibits, among other
 things, persons or entities from soliciting, receiving, offering or providing
 remuneration, directly or indirectly, in return for or to induce either the
 referral of an individual for, or the purchase order or recommendation of,
 any item or service for which payment may be made under a federal healthcare
 program such as the Medicare and Medicaid programs;                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | federal
 false claims laws which prohibit, among other things, individuals or entities
 from knowingly presenting, or causing to be presented, claims for payment
 from Medicare, Medicaid, or other third-party payors that are false or
 fraudulent, or are for items or services not provided as claimed, and which
 may apply to entities like us to the extent that our interactions with
 customers may affect their billing or coding practices;                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | the federal
 Health Insurance Portability and Accountability Act of 1996, or HIPAA, which
 established new federal crimes for knowingly and willfully executing a scheme
 to defraud any healthcare benefit program or making false statements in
 connection with the delivery of or payment for healthcare benefits, items or
 services, as well as leading to regulations imposing certain requirements
 relating to the privacy, security and transmission of individually
 identifiable health information;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | the Health
 Information Technology for Economic and Clinical Health Act, or HITECH, which
 made HIPAAs privacy and security standards directly applicable to business
 associates of covered entities; 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.                                                                   

Additionally,
several bills have been passed or are pending, at both the state and federal
levels, that expand the anti-kickback laws to require, among other things,
extensive tracking and maintenance of databases regarding relationships to
physicians and healthcare providers. The recently enacted Health Care
Reform Legislation imposes new reporting and disclosure requirements on device
manufacturers for any transfer of value made or distributed to physicians and
teaching hospitals, effective March 30, 2013. The implementation of the infrastructure to comply with these bills
could be costly and any failure to provide the required information may
result in civil monetary penalties.

While
we do not believe that the provisions of HITECH which make HIPAAs privacy and
security standards directly applicable to business associates of covered
entities apply to us since we do not believe that we are a business associate,
there is no guarantee that the government will agree with our determination
that we are not a business associate. If the government determines that we are
a business associate, compliance with the provisions of HITECH could be costly,
and we could be subject to enforcement measures, including civil and criminal
penalties and fines.

The
orthopedic medical device industry is, and in recent years has been, under
heightened scrutiny as the subject of government investigations and enforcement
actions involving manufacturers who allegedly offered unlawful inducements to
potential or existing customers in an attempt to procure their business,
specifically

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including arrangements with
physician consultants. We have arrangements with surgeons, hospitals and other
entities which may be subject to scrutiny. For example, we have consulting
agreements with orthopedic surgeons using or considering the use of our present
and future RIO system and MAKOplasty implants and disposable products, for
assistance in product development, and professional training and education, among
other things. Payment for some of these consulting services has been in the
form of stock options or royalties rather than per hour or per diem amounts
that would require verification of time worked. We may continue in the future
to make payment for these consulting services in the form of royalties or also
possibly in the form of part time employment. In addition, we sometimes allow
hospitals a period of evaluation of our products at no charge.

If
our operations are found to be in violation of any of the laws described above
or any other governmental regulations that apply to us, including the Foreign
Corrupt Practices Act, we may be subject to penalties, including civil and
criminal penalties, damages, fines, exclusion from the Medicare and Medicaid
programs and the curtailment or restructuring of our operations. Any penalties,
damages, fines, exclusions, curtailment or restructuring of our operations
could adversely affect our ability to operate our business and our financial
results. The risk of our being found in violation of these laws is increased by
the fact that many of these laws are broad and their provisions are open to a
variety of interpretations. Any action against us for violation of these laws,
even if we successfully defend against it, could cause us to incur significant
legal expenses and divert our managements attention from the operation of our
business. If the surgeons or other providers or entities with whom we do
business are found to be non-compliant with applicable laws, they may be
subject to sanctions, which could also have a negative impact on our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not
applicable.

ITEM 2. PROPERTIES

We
lease approximately 68,000 square feet of office and warehouse space in
Fort Lauderdale, Florida, which is used as our headquarters and for the
assembly of our products. Our lease expires on March 31, 2021. Thereafter, we
have the right to renew our lease for two five-year terms upon prior written
notice and the fulfillment of certain conditions. We believe that this facility
is adequate to meet our needs through at least 2016, but additional space may
be required in the future to accommodate our anticipated growth.

ITEM 3.LEGAL
PROCEEDINGS

None

ITEM 4.RESERVED

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PART II

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

Market Information

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

The
following table sets forth the range of the high and low intraday prices for
the period of January 1, 2009 through December 31, 2010 as reported by The
NASDAQ Global Market.

|                |  |      |       |      |   |       |  |     |       |  |   |      | 
|--------------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | ---- | 
|                |  | 2010 |       | 2009 |  
|                |  | High |       | Low  |   | High  |  | Low |      
|First
 Quarter  |  | $    | 14.38 |      | $ | 10.90 |  | $   | 9.18  |  | $ | 6.18 | 
|Second
 Quarter |  | $    | 14.90 |      | $ | 11.77 |  | $   | 9.74  |  | $ | 6.59 | 
|Third
 Quarter  |  | $    | 12.65 |      | $ | 9.45  |  | $   | 10.00 |  | $ | 6.86 | 
|Fourth
 Quarter |  | $    | 15.73 |      | $ | 9.28  |  | $   | 11.65 |  | $ | 8.47 | 

Our
stock transfer records indicated that as of February 28, 2011, there were
approximately 49 holders of record of our common stock.

Dividend Policy

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

Equity Compensation Plan Information

The
following table summarizes our equity compensation plans as of December 31,
2010.

|                                                                |  |                                                                                                    |     |                                                                    |  |                                                                                                                                                                    |       |  |  |         |     | 
|--------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----- |  |  | ------- | --- | 
|Plan Category                                                   |  | (a)
 Number of Shares of 
 Our Common Stock 
 to be Issued Upon
 Exercise of 
 Outstanding Options |     | (b)
 Weighted-
 Average 
 Exercise Price of
 Outstanding 
 Options |  | (c)Number
 of Shares of Our
 Common Stock Remaining
 Available for Future Issuance
 Under Equity Compensation 
 Plans (Exceeding Securities
 Reflected in Col (a)) |      
|Equity compensation plans approved by our
 security holders     |  | 4,405,000                                                                                          | (1) |                                                                    |  | $                                                                                                                                                                  | 8.35  |  |  | 671,000 | (2) | 
|Equity compensation plans not approved by
 our security holders |  | 15,000                                                                                             | (3) |                                                                    |  | $                                                                                                                                                                  | 12.10 |  |  | 0       |     | 
|TOTAL                                                           |  | 4,420,000                                                                                          | (1) |                                                                    |  | $                                                                                                                                                                  | 8.36  |  |  | 671,000 | (2) | 

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

(2) This
number includes 467,000 shares available for future issuance under our 2008
Employee Stock Purchase Plan. The 2008 Omnibus Incentive Plan contains an
evergreen provision whereby the authorized shares increase on January 1 of
each year in an amount equal to the least of (i) 2,500,000 shares,
(ii) 4% of the total number of

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shares of the
Companys common stock outstanding on December 31 of the preceding year,
and (iii) a number of shares determined by the Companys board of
directors that is less than (i) and (ii).

(3) On July 6,
2010, we entered into an agreement for the provision of certain consulting
services to us in consideration for cash compensation and a non-qualified stock
option to purchase 15,000 shares of our common stock. This stock option has an
exercise price of $12.10, which was the closing price per share of our common
stock on July 6, 2010, the grant date, and vests and becomes exercisable
ratably quarterly over one year starting on the grant date.

Unregistered Sales of Equity Securities

On
October 1, 2010, we entered into a strategic alliance agreement with Pipeline
Biomedical Holdings, LLC, or Pipeline, to develop and supply potential future advanced
implant technologies for use with our RIO system in consideration for 203,417
shares of our common stock. These shares were issued in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

Uses of Proceeds from Sale of Registered
Securities

Not
applicable.

Issuer Purchases of Equity Securities

Not
applicable.

Performance Graph1

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

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

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


|
|
|
|

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

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COMPARISON OF 34-MONTH CUMULATIVE TOTAL
RETURN
Among 
MAKO Surgical Corp.
The NASDAQ Composite Index
and 
The NASDAQ Medical Equipment Index

(LINE GRAPH)

|                         |  |           |  |           |  |           |  |           |  |            |  |           |  |           |  |           |  |            | 
|------------------------ |  | --------- |  | --------- |  | --------- |  | --------- |  | ---------- |  | --------- |  | --------- |  | --------- |  | ---------- | 
|                         |  |           |  |           |  |           |  |           |  |            |  |           |  |           |  |           |  |            | 
|                         |  | 2/14/2008 |  | 3/31/2008 |  | 6/30/2008 |  | 9/30/2008 |  | 12/31/2008 |  | 3/31/2009 |  | 6/30/2009 |  | 9/30/2009 |  | 12/31/2009 | 
|MAKO Surgical Corp.      |  | $100.00   |  | $97.93    |  | $79.74    |  | $78.98    |  | $72.77     |  | $84.10    |  | $98.26    |  | $95.42    |  | $120.92    | 
|NASDAQ Composite         |  | $100.00   |  | $97.71    |  | $98.30    |  | $89.27    |  | $67.61     |  | $65.53    |  | $78.67    |  | $90.99    |  | $ 97.28    | 
|NASDAQ Medical Equipment |  | $100.00   |  | $93.88    |  | $90.03    |  | $87.10    |  | $59.87     |  | $52.40    |  | $68.08    |  | $83.64    |  | $ 87.31    | 

|                         |  |           |  |           |  |           |  |            |  |  |  |  |  |  |  |  |  |  | 
|------------------------ |  | --------- |  | --------- |  | --------- |  | ---------- |  |  |  |  |  |  |  |  |  |  | 
|                         |  |           |  |           |  |           |  |            |  |  |  |  |  |  |  |  |  |  | 
|                         |  | 3/31/2010 |  | 6/30/2010 |  | 9/30/2010 |  | 12/31/2010 |  |  |  |  |  |  |  |  |  |  | 
|MAKO Surgical Corp.      |  | $146.84   |  | $135.62   |  | $104.36   |  | $165.80    |  |  |  |  |  |  |  |  |  |  | 
|NASDAQ Composite         |  | $102.80   |  | $ 90.43   |  | $101.55   |  | $113.73    |  |  |  |  |  |  |  |  |  |  | 
|NASDAQ Medical Equipment |  | $ 97.28   |  | $ 89.60   |  | $ 90.78   |  | $  93.11   |  |  |  |  |  |  |  |  |  |  | 

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

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

|                                                                                |  |                          |          |      |   |          |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------ | -------- | ---- | - | -------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|(in thousands, except per share data)                                           |  | Years Ended December 31, |         
|                                                                                |  |                          |          |      |   |          |   |      |         |      |  
|                                                                                |  | 2010                     |          | 2009 |   | 2008     |   | 2007 |         | 2006 |  
|Statements of Operations Data                                                   |  |                          |          |      |   |          |   |      |         |      |   |         |   |   |         |  
|Revenue                                                                         |  | $                        | 44,296   |      | $ | 34,208   |   | $    | 2,944   |      | $ | 771     |   | $ | 63      |  
|Cost of revenue                                                                 |  |                          | 18,173   |      |   | 21,454   |   |      | 3,312   |      |   | 583     |   |   | 77      |  
|Gross profit (loss)                                                             |  |                          | 26,123   |      |   | 12,754   |   |      | (368    | )    |   | 188     |   |   | (14     | )
|Operating costs and expenses:                                                   |  |                          |          |      |   |          |   |      |         |      |   |         |   |   |         |  
|Selling, general and administrative                                             |  |                          | 47,041   |      |   | 32,072   |   |      | 23,292  |      |   | 12,042  |   |   | 5,023   |  
|Research and development                                                        |  |                          | 14,975   |      |   | 13,127   |   |      | 12,472  |      |   | 8,269   |   |   | 5,192   |  
|Depreciation and amortization                                                   |  |                          | 3,043    |      |   | 1,951    |   |      | 1,828   |      |   | 1,297   |   |   | 644     |  
|Total operating costs and expenses                                              |  |                          | 65,059   |      |   | 47,150   |   |      | 37,592  |      |   | 21,608  |   |   | 10,859  |  
|Loss from operations                                                            |  |                          | (38,936  | )    |   | (34,396  | ) |      | (37,960 | )    |   | (21,420 | ) |   | (10,873 | )
|Net loss                                                                        |  | $                        | (38,687  | )    | $ | (34,023  | ) | $    | (37,082 | )    | $ | (20,658 | ) | $ | (10,617 | )
|Net loss attributable to common stockholders                                    |  | $                        | (38,687  | )    | $ | (34,023  | ) | $    | (37,647 | )    | $ | (24,318 | ) | $ | (12,493 | )
|Net loss per share  Basic and diluted attributable to common
 stockholders (1) |  | $                        | (1.13    | )    | $ | (1.22    | ) | $    | (2.20   | )    | $ | (14.75  | ) | $ | (8.03   | )
|Weighted average common shares outstanding  Basic and diluted (2)              |  |                          | 34,349   |      |   | 27,806   |   |      | 17,096  |      |   | 1,649   |   |   | 1,555   |  
|                                                                                |  |                          |          |      |   |          |   |      |         |      |   |         |   |   |         |  
|(in
 thousands)                                                                 |  | As
 of December 31,      |         
|                                                                                |  |                          |         
|                                                                                |  | 2010                     |          | 2009 |   | 2008     |   | 2007 |         | 2006 |  
|Balance Sheet Data:                                                             |  |                          |          |      |   |          |   |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents                                                       |  | $                        | 27,108   |      | $ | 17,159   |   | $    | 62,547  |      | $ | 9,615   |   | $ | 2,108   |  
|Short-term investments                                                          |  |                          | 46,401   |      |   | 44,686   |   |      | 1,077   |      |   | 3,084   |   |   | 1,400   |  
|Long-term investments                                                           |  |                          | 23,283   |      |   | 9,368    |   |      | ―       |      |   | ―       |   |   | ―       |  
|Total assets                                                                    |  |                          | 137,079  |      |   | 99,103   |   |      | 86,533  |      |   | 29,190  |   |   | 12,754  |  
|Long-term debt, net of current portion                                          |  |                          | ―        |      |   | ―        |   |      | ―       |      |   | ―       |   |   | ―       |  
|Redeemable convertible preferred stock                                          |  |                          | ―        |      |   | ―        |   |      | ―       |      |   | 59,487  |   |   | 25,911  |  
|Accumulated deficit                                                             |  |                          | (152,882 | )    |   | (114,195 | ) |      | (80,172 | )    |   | (42,843 | ) |   | (19,366 | )
|Total stockholders equity (deficit)                                            |  |                          | 121,771  |      |   | 90,794   |   |      | 66,514  |      |   | (42,837 | ) |   | (19,437 | )

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

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

Overview

We
are an emerging medical device company that markets our advanced robotic arm
solution and orthopedic implants for orthopedic procedures. We offer
MAKOplasty, an innovative, restorative surgical solution that enables
orthopedic surgeons to consistently, reproducibly and precisely treat patient
specific osteoarthritic disease. In February 2008, our common stock began
trading on The NASDAQ Global Market under the ticker symbol MAKO in
connection with the closing of our initial public offering.

We
have incurred net losses in each year since our inception and, as of December
31, 2010, we had an accumulated deficit of $152.9 million. We expect to
continue to incur significant operating losses as we increase our sales and
marketing activities and otherwise continue to invest capital in the
development and expansion of our products and our business generally. We expect
that our general and administrative expenses will increase to support the sales
and marketing efforts associated with the growing commercialization of
MAKOplasty and to support our continued growth in operations. We also expect
our research and development expenses to increase as we continue to expand our
research and development activities, including the support of existing products
and the research of potential future products, including our hip MAKOplasty
application and associated implant systems.

Recent
key milestones in the development of our business include the following:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   During
 the year ended December 31, 2010, we sold 33 RIO systems, including two to
 international distributors, increasing our commercial installed base to 67
 RIO systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   During
 the year ended December 31, 2010, a total of 3,485 MAKOplasty procedures were
 performed, representing a 118% increase over the same period in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   In
 February 2010, we received 510(k) marketing clearance from the FDA for our
 hip MAKOplasty application, which assists a surgeon in performing all
 components of a total hip arthroplasty using the RIO system. We believe this
 represents achievement of a necessary milestone towards what we anticipate
 will be our continuing development and future commercialization of a hip
 MAKOplasty application.                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   The
 RIO System and our classic RESTORIS onlay unicompartmental knee implant
 system were approved for European Union CE marking in December 2009 and
 January 2010, respectively, which is a legal requirement for medical devices
 intended for sale in Europe. Our RESTORIS MCK onlay unicompartmental implant
 system was approved for CE marking in April 2010 and our RESTORIS MCK onlay
 patellofemoral and bicompartmental implant systems were approved for CE
 marking in January 2011.                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   During
 the second quarter of 2010, we launched a clinical research study in
 partnership with Glasgow Royal Infirmary, Strathclyde University and National
 Health Services in Glasgow, Scotland. In connection with the clinical
 research study, we placed a RIO system at the Glasgow Royal Infirmary. The
 system is being utilized in a three-year randomized prospective clinical
 trial with the objective of demonstrating the clinical, functional and
 ultimately, economic benefits of knee MAKOplasty. Glasgow Royal Infirmary
 reported that 23 procedures were performed at its site during the year ended
 December 31, 2010.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   In
 October 2010, the first hip MAKOplasty procedure was completed as part of our
 surgeon preference evaluation process, designed to solicit user feedback in
 advance of MAKOs full commercial release of our hip MAKOplasty application,
 currently expected in the second half of 2011. As of December 31, 2010, 23
 hip MAKOplasty procedures were performed as part of our surgeon preference
 evaluation process.                                                                                                                                                                                                                    

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We
believe that the keys to growing our business are expanding the acceptance and
application of knee MAKOplasty to unicompartmental and multicompartmental knee
resurfacing procedures and introducing other potential future applications,
including the hip MAKOplasty application and associated implant systems. To
successfully commercialize our products and grow our business, we must gain
market acceptance for MAKOplasty procedures.

Factors That May Influence Future Results of
Operations

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

Revenue

Revenue
is generated from: (1) unit sales of our RIO system, including associated
instrumentation, installation services and training; (2) sales of implants and
disposable products; and (3) sales of warranty and maintenance services. Future
revenue from sales of our products is difficult to predict and we expect that
it will only modestly reduce our continuing and increasing losses resulting
from selling, general and administrative expenses, research and development
expenses and other activities for at least the next two or three years. Our
future revenue may also be adversely affected by the current general economic
downturn and the resulting tightening of the credit markets, which may cause
purchasing decisions to be delayed or cause our customers to experience
difficulties in securing adequate funding to buy our products.

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

During
the fourth quarter of 2010, we determined that we had incorrectly recognized
revenue and expenses associated with the initial warranty obligation and
maintenance services included in all previous RIO system sales. Accordingly, in
the fourth quarter of 2010, we recorded an adjustment to decrease revenue by
$1.2 million, to reverse the accrual for our warranty and maintenance
obligation by $552,000 and to increase net loss by $644,000, or $(0.02) per
basic and diluted share. The adjustment arose over the quarters throughout 2009
and 2010 and did not materially affect our trend in earnings. As the adjustment
was related to the correction of an error, we performed the analysis required
by Staff Accounting Bulletin 99, Materiality,
and Staff Accounting Bulletin 108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements. Based on this analysis, we
concluded that the effect of the error was not material to the quarters and
years in the two year period ended December 31, 2010 from both a quantitative
and qualitative perspective.

Cost of Revenue

Cost
of revenue primarily consists of the direct costs associated with the
manufacture of RIO systems, implants and disposable products for which revenue
has been recognized in accordance with our revenue recognition policy. Costs
associated with providing services are expensed as incurred. Cost of revenue
also includes the allocation of manufacturing overhead costs, royalties related
to the sale of products covered by licensing arrangements and write-offs of
obsolete, impaired or excess inventory.

For
the year ended December 31, 2010, we wrote-off $2.6 million, or $(0.08) per
basic and diluted share, of excess RESTORIS unicompartmental knee implant
system, or RESTORIS Classic, implants and related instrumentation. Excess
implants of $1.4 million was charged to cost of revenue  procedures, cancellation

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charges of
$208,000 was charged to cost of revenue  service and other and excess
instrumentation of $1.0 million was charged to selling, general and
administrative expenses. These charges were necessitated by the rapid adoption
of the RESTORIS MCK multicompartmental knee implant system, or RESTORIS MCK,
and the corresponding decline in the usage of RESTORIS Classic. RESTORIS
Classic was introduced in the third quarter of 2008 and was modeled after
existing well-known unicompartmental designs. In connection with the launch of
the RIO system, in the second quarter of 2009, we launched our next generation
RESTORIS MCK which was designed as a premium addition to the RESTORIS product
family with the goal of delivering a more natural feeling knee by preserving
bone and providing anatomical features such as high flexion.

Selling, General and
Administrative Expenses

Our
selling, general and administrative expenses consist primarily of compensation,
including stock-based compensation and benefits, for sales, marketing, clinical
research, operations, regulatory, quality, executive, finance, legal and
administrative personnel. Other significant expenses include costs associated
with sales and marketing activities, marketing and advertising materials, insurance,
professional fees for legal and accounting services, consulting fees, travel
expenses, facility and related operating costs, and recruiting expenses. Our
selling, general and administrative expenses are expected to continue to
increase due to the planned increase in the number of employees necessary to
support the sales and marketing efforts associated with the growing
commercialization of MAKOplasty and an increased number of employees necessary
to support our continued growth in operations. In addition, we expect to incur
additional costs associated with securing and protecting our intellectual
property rights as necessary to support our future product offerings.

Research and
Development Expenses

Costs
related to research, design and development of products are charged to research
and development expense as incurred. These costs include direct salary and
benefit costs for research and development employees including stock-based
compensation, cost for materials used in research and development activities
and costs for outside services. We expect our research and development expense
to increase as we continue to expand our research and development activities,
including the support of existing products and the research and development of
potential future products, including our hip MAKOplasty application and
associated implant systems.

Critical Accounting Policies and Significant
Judgments and Estimates

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

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

Revenue Recognition

Revenue
is generated: (1) from unit sales of our RIO system, including associated
instrumentation, installation services and training; (2) from sales of implants
and disposable products; and (3) sales of warranty and maintenance services. We
recognize revenue in accordance with Accounting Standards Codification, or ASC,
605-10-S99, Revenue Recognition, when persuasive evidence of an arrangement
exists, the fee is fixed or

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determinable,
collection of the fee is probable and delivery has occurred. For all sales, we
use either a signed agreement or a binding purchase order as evidence of an
arrangement.

Our
multiple-element arrangements are generally comprised of the following elements
that qualify as separate units of accounting: (1) RIO system sales; (2) sales
of implants and disposable products; and (3) warranty and maintenance services
on the RIO system hardware. Our revenue recognition policies generally result
in revenue recognition at the following points:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | RIO system
 sales: Revenues related to RIO system sales are recognized upon installation
 of the system and training of at least one surgeon, which typically occurs
 prior to or concurrent with the RIO system installation.                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2. | Procedure
 revenue: Revenues from the sale of implants and disposable products utilized
 in MAKOplasty procedures are recognized at the time of sale (i.e., at the
 time of the related surgical procedure).                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 3. | Service
 revenue: Revenues from warranty and maintenance services on the RIO system
 hardware are deferred and recognized ratably over the service period until no
 further obligation exists. Sales of our RIO system generally include a
 one-year warranty and maintenance obligation for services. Upon installation
 of the RIO system, we defer the revenue attributable to the warranty and
 maintenance obligation and recognize it ratably over the warranty and
 maintenance period. Costs associated with providing warranty and maintenance
 services are expensed to cost of revenue as incurred.

A
portion of our end-user customers acquire the RIO system through a leasing
arrangement with one of a number of qualified third-party leasing companies. In
these instances, we typically sell the RIO system to the third-party leasing
company, and the end-user customer enters into an independent leasing
arrangement with the third-party leasing company. We recognize RIO system
revenue for a RIO system sale to a third-party leasing company on the same
basis as a RIO system sale directly to an end-user customer. We sell implants
and disposable products utilized in MAKOplasty procedures directly to end-user
customers under a separate agreement.

Our
sales contracts generally do not provide the customer with a right of return.
If such a right is provided, all related revenues would be deferred until such
right expires or is waived. In a limited number of RIO system sales, our
agreement with a customer provides for a customer acceptance period, which
typically does not exceed three months, following which the customer may either
accept or return the RIO system. No system revenue is recognized for these RIO
system sales until the customer has unconditionally accepted the RIO system.

Effective
January 1, 2010, we early adopted the Financial Accounting Standards Board, or
FASB, Accounting Standard Update No. 2009-13, Multiple-Deliverable Revenue
Arrangementsa consensus of the FASB Emerging Issues Task Force, or
ASU 2009-13, and Update No. 2009-14, Certain Revenue Arrangements That Include Software
Elements, a consensus of the FASB Emerging Issues Task Force, or ASU
2009-14, on a prospective basis for applicable transactions originating or
materially modified after December 31, 2009. In accordance with ASU 2009-13 (as
codified under ASC 605-25, Multiple-Element Arrangements) and ASU
2009-14, we allocate arrangement consideration to the RIO systems and
associated instrumentation, our implants and disposables and our warranty and
maintenance services based upon the relative selling-price method. Under this
method, revenue is allocated at the time of sale to all deliverables based on
their relative selling price using a specific hierarchy. The hierarchy is as
follows: vendor-specific objective evidence, or VSOE, of fair value of the
respective elements, third-party evidence of selling price, or TPS, or best
estimate of selling price, or ESP.

We
allocate arrangement consideration using ESP for our RIO system, TPS for our
implants and disposables and VSOE of fair value for our warranty and
maintenance services. VSOE of fair value is based on the price charged when the
element is sold separately. TPS is established by evaluating largely
interchangeable competitor products or services in stand-alone sales. ESP is
established by determine the price at which we would transact a sale if the
product was sold on a stand-alone basis. We determine ESP for our systems by
considering

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multiple
factors including, but not limited to, geographies, type of customer, and
market conditions. We regularly review ESP and maintain internal controls over
the establishment and updates of these estimates.

Our
RIO system includes software that is essential to the functionality of the
product. Since the RIO systems software and non-software components function
together to deliver the RIO systems essential functionality, they are
considered one deliverable that is excluded from the software revenue
recognition guidance under ASU 2009-13 and ASU 2009-14.

Prior
to the adoption of ASU 2009-13 and ASU 2009-14, we accounted for the sale of
the RIO systems and associated instrumentation pursuant to ASC 985-605, Software 
Revenue Recognition, which required us to allocate arrangement
consideration to the RIO systems and associated instrumentation based upon VSOE
of fair value of the respective elements. Had the new accounting guidance been
applied to revenue at the beginning of 2009, the resultant revenue and net loss
for the year ended December 31, 2009 would have been substantially the
same.

Subsequent
to December 31, 2008, we no longer manufacture our Tactile Guidance System, or
TGS, to which associated TGS sales arrangements required us to provide upgrades
and enhancements, through and including the delivery of the RIO system. We
commercially released the RIO system in the first quarter of 2009. Sales
arrangements for RIO systems do not require us to provide upgrades and
enhancements. As a result, revenues related to RIO system sales are generally recognized
upon installation of the system and training of at least one surgeon.

For
sales of TGS units through December 31, 2008, VSOE of fair value was not
established for upgrades and enhancements (through and including delivery of
the RIO system), which the TGS sales arrangements required us to provide.
Accordingly, prior to delivery of the RIO system, sales of TGS units were
recorded as deferred revenue and the direct cost of revenue associated with the
sale of TGS units was recorded as deferred cost of revenue. Revenue for all
previously deferred TGS sales was recognized in our statement of operations
during the year ended December 31, 2009, upon delivery of the RIO system. As of
December 31, 2010, the deferred revenue balance of $3.2 million consists
primarily of deferred service revenue for warranty and maintenance services on
the RIO system hardware.

Allowance for
Doubtful Accounts

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

Inventory Valuation

Inventory
is stated at the lower of cost or market value on a first-in, first-out basis.
Inventory costs include direct materials, direct labor and manufacturing
overhead. We review our inventory periodically to determine net realizable
value and consider product upgrades in our periodic review of realizability. We
write down inventory, if required, based on forecasted demand and technological
obsolescence. These factors are impacted by market and economic conditions,
technology changes and new product introductions and require estimates that may
include uncertain elements. For the year ended December 31, 2010, we wrote-off of $1.4 million of excess RESTORIS
classic implants as discussed in Factors Which May Influence Future Results of
Operations above.

Beginning
with the fourth quarter of 2008, manufacturing overhead costs have been
capitalized and included in inventory. As of December 31, 2010 and December 31,
2009, capitalized manufacturing overhead included in inventory was
approximately $1.7 million and $1.1 million, respectively. Prior to 2009, such
overhead costs were fully expensed as selling, general and administrative
expense as capitalizable amounts were not significant.

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Valuation Allowance
for Deferred Income Tax Assets

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

Impairment of
Long-Lived Assets

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

Determination of
Stock-Based Compensation

We
recognize compensation expense for our stock-based awards in accordance with
ASC 718, Compensation-Stock
Compensation. ASC 718 requires the recognition of compensation
expense, using a fair value based method, for costs related to all share-based
payments including stock options. ASC 718 requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model.

We
account for stock-based compensation arrangements with non-employees in
accordance with the ASC 505-50, Equity-Based Payments to Non-Employees. We record the expense of such
services based on the estimated fair value of the equity instrument using the
Black-Scholes-Merton pricing model. The value of the equity instrument is
charged to expense over the term of the service agreement.

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

During
the year ended December 31, 2010, we recognized $6.4 million of
stock-based compensation expense including stock option grants, restricted
stock grants, and compensation expense relating to shares issued under our
employee share purchase plan, leaving $13.0 million to be recognized in future
periods. Total unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures, and is expected to be recognized over a
remaining weighted average period of 2.4 years as of December 31, 2010.

Results of Operations

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Revenue.
Revenue was $44.3 million for the year ended December 31, 2010, compared to
$34.2 million for the year ended December 31, 2009. The increase in revenue of
$10.1 million, or 29%, was primarily due to a $10.2 million, or 69%, increase
in RIO system revenue and a $10.1 million, or 133%, increase in procedure
revenue and was partially offset by the recognition of $11.3 million of revenue
during the year ended December 31, 2009 from 17 previously deferred unit sales
of our TGS. The $10.2 million increase in RIO system revenue was attributable
to $24.9 million of revenue from 33 unit sales of our RIO system, including 31
domestic commercial sales and two international demonstration systems, as
compared to the recognition of $14.7 million of revenue from 19 unit sales of
our RIO system during the year ended December 31, 2009. The $10.1 million

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increase in
procedure revenue was attributable to an increase in MAKOplasty procedures
performed during the year ended December 31, 2010 as compared with the year
ended December 31, 2009. There were 3,485 MAKOplasty procedures performed
during the year ended December 31, 2010 compared to 1,602 MAKOplasty procedures
performed during the year ended December 31, 2009. The increase in MAKOplasty
procedures performed was driven by the continued adoption of knee MAKOplasty,
both in terms of utilization per commercial site and total commercial installed
base. Revenue for the year ended December 31, 2010 was reduced by $2.2 million,
of which $1.2 million related to system sales prior to the fourth quarter, for
the deferral of system revenue related to the first year warranty and
maintenance services provided by MAKO.
This deferred revenue will be recognized in service revenue over a
twelve-month period. In accordance with our revenue recognition policy,
recognition of revenue on unit sales of our TGS was deferred until delivery of
the RIO system, which we commercially released in the first quarter of
2009. We expect our revenue to continue
to increase as unit sales of our RIO system increase in future periods and the
number of MAKOplasty procedures performed increases in future periods.

Cost of Revenue.  Cost
of revenue was $18.2 million for the year ended December 31, 2010, compared to
$21.5 million for the year ended December 31, 2009. The decrease in cost of
revenue of $3.3 million, or 15%, was primarily due to the recognition of $8.8
million of the direct cost of revenue during the year ended December 31, 2009
from 17 previously deferred unit sales of our TGS, including the cost of
providing the RIO system upgrades, as described in the Critical Accounting Policies
and Significant Judgments and Estimates section above. This was partially
offset by the recognition of the cost of revenue from 33 unit sales of our RIO
system during the year ended December 31, 2010 as compared to the recognition
of the cost of revenue from 19 unit sales of our RIO system during the year
ended December 31, 2009 and to an increase in knee MAKOplasty procedures
performed. Cost of revenue for the year ended December 31, 2010 was also
impacted by a write-off of approximately $1.4 million of excess RESTORIS
Classic implants and an adjustment to reverse the accrual for our warranty and
maintenance obligation by $552,000 as discussed in Factors Which May Influence
Future Results of Operations above. We expect our cost of revenue to continue
to increase as unit sales of our RIO system increase in future periods and the
number of MAKOplasty procedures performed increases in future periods.

Selling,
General and Administrative.  Selling,
general and administrative expense was $47.0 million for the year ended
December 31, 2010, compared to $32.1 million for the year ended December
31, 2009. The increase of $14.9 million, or 47%, was primarily due to an
increase in sales, marketing and operations costs associated with the production
and commercialization of our products and an increase in general and
administrative costs to support our continued growth. Our total number of
employees increased from 232 as of December 31, 2009 to 291 as of December 31,
2010. Of the 59 employee increase, 35 were in Sales and Marketing. Selling,
general and administrative expense for the year ended December 31, 2010 was
also impacted by a write-off of $1.0 million of excess RESTORIS classic
instrumentation as discussed in Factors Which May Influence Future Results of
Operations above. Selling, general and administrative expense for the year
ended December 31, 2010 also included $5.4 million of stock-based compensation
expense compared to $3.3 million for the year ended December 31, 2009. The
increase in stock-based compensation expense was primarily due to additional
option grants and restricted stock grants made in 2009 and 2010. We expect our
selling, general and administrative expenses to continue to increase
substantially due to our planned increase in the number of employees necessary
to support the sales and marketing efforts associated with the growing
commercialization of our products and an increased number of employees
necessary to support our continued growth in operations.

We
loan instrumentation to our customers, which are used to perform MAKOplasty
procedures in conjunction with using the RIO system. These loaned instrument
sets, or implant instruments, are comprised of tools and equipment that
facilitate the implantation of our implants. Implant instruments loaned to
customers are not part of the tangible product sold and title of loaned
instrument remains with the Company. To better reflect the economics of the
implant instruments and enhance comparability with other companies in our
industry, depreciation expense on implant instruments has been reclassified
from cost of revenue  procedures to selling, general and administrative
expense beginning in the first quarter of 2010. Depreciation expense for
implant instruments was $464,000, $250,000 and $134,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.

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Research and
Development.  Research and development
expense was $15.0 million for the year ended December 31, 2010, compared
to $13.1 million for the year ended December 31, 2009. The increase of
$1.9 million, or 14%, was primarily due to an increase in research and
development activities associated with on-going development of our RIO system,
our MAKO implant systems and potential future products, including our hip MAKOplasty
application and associated implant systems. We expect our research and
development expense to increase as we continue to expand our research and
development activities, including the support of existing products and the
research of potential future products, including our hip MAKOplasty application
and associated implant systems.

Depreciation
and Amortization. Depreciation and amortization
expense was $3.0 million for the year ended December 31, 2010, compared to $2.0
million for the year ended December 31, 2009. The increase of $1.0 million, or
56%, was primarily due to an increase in depreciation of property and equipment
as a result of purchases made during 2010 and 2009 due to the growth in our
business, the expansion of our facilities in 2010 to accommodate an increase in
employees necessary to support such growth.

Interest and
Other Income.  Interest and other income was
$317,000 for the year ended December 31, 2010, compared to $432,000 for the
year ended December 31, 2009. The decrease of $115,000, or 27%, was primarily
due to lower yields realized on our cash, cash equivalents and investments for
the year ended December 31, 2010 compared with the same period of 2009 which is
attributable to a cash investment strategy which emphasizes the security of the
principal invested and fulfillment of liquidity needs.

Income Taxes.  No
federal income taxes were recognized for the year ended December 31, 2010 and
2009, due to net operating losses in each period. State and local income taxes
were $68,000 for the year ended December 31, 2010, compared to $56,000 for the
year ended December 31, 2009. Income taxes recognized to date have not been
significant due to net operating losses we have incurred in each period since
our inception in November 2004. In addition, no current or deferred income
taxes were recorded for the years ended December 31, 2010 and 2009, as all
income tax benefits were fully offset by a valuation allowance against our net
deferred income tax assets.

Year
Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Revenue.
Revenue was $34.2 million for the year ended December 31, 2009, compared to
$2.9 million for the year ended December 31, 2008. The increase in revenue of
$31.3 million was primarily due to $14.7 million of revenue from 19 unit sales
of our RIO system and the recognition of approximately $11.3 million of revenue
from 17 previously deferred unit sales of our TGS. In accordance with our
revenue recognition policy, recognition of revenue on unit sales of our TGS was
deferred until delivery of the RIO system, which we commercially released in
the first quarter of 2009. Prior to 2009, recognized revenue was primarily
generated from the sale of implants and disposable products utilized in knee
MAKOplasty procedures. Total revenue was also positively impacted by a $5.1
million increase in procedure revenue attributable to an increase in knee
MAKOplasty procedures performed during the year ended December 31, 2009 as
compared with the year ended December 31, 2008. There were 1,602 knee
MAKOplasty procedures performed during the year ended December 31, 2009
compared to 601 knee MAKOplasty procedures performed during year ended December
31, 2008.

Cost of Revenue.
Cost of revenue was $21.5 million for the year ended December 31, 2009,
compared to $3.3 million for the year ended December 31, 2008. The increase in
cost of revenue of $18.2 million was primarily due to the cost of revenue from
19 unit sales of our RIO system, the recognition of the direct cost of revenue
from 17 previously deferred unit sales of our TGS, including the cost of
providing the RIO system upgrades, as described in the Critical Accounting
Policies and Significant Judgments and Estimates section above, and an
increase in knee MAKOplasty procedures performed.

Selling,
General and Administrative. Selling, general and
administrative expense was $32.1 million for the year ended December 31, 2009,
compared to $23.3 million for the year ended December 31, 2008. The increase of
$8.8 million, or 38%, was primarily due to an increase in sales, marketing and
operations costs

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associated with the production
and commercialization of our products and an increase in general and
administrative costs to support growth and costs associated with operating as a
public company. Selling, general and administrative expense for the year ended
December 31, 2009 also included $3.3 million of stock-based compensation
expense compared to $1.9 million for the year ended December 31, 2008. The
increase in stock-based compensation expense was primarily due to additional
option and restricted stock grants made in 2009.

Research and
Development. Research and development expense was
$13.1 million for the year ended December 31, 2009, compared to $12.5 million
for the year ended December 31, 2008. The increase of $655,000, or 5%, was
primarily due to an increase in research and development activities associated
with on-going development of our RIO system, our MAKO implant systems and
potential future products. This was partially offset by a nonrecurring charge
of $949,000 incurred in the first quarter of 2008 associated with the vesting
in full, upon completion of our IPO in February 2008, of restricted common
stock issued pursuant to business consultation agreements entered into in
December 2004.

Depreciation
and Amortization. Depreciation and amortization
expense was $2.0 million for the year ended December 31, 2009, compared to $1.8
million for the year ended December 31, 2008. The increase of $123,000, or 7%,
was primarily due to an increase in depreciation of property and equipment as a
result of purchases made during 2009 and 2008.

Interest and
Other Income. Interest and other income was $432,000
for the year ended December 31, 2009, compared to $988,000 for the year ended
December 31, 2008. The decrease of $556,000, or 56%, was primarily due to lower
yields realized on our cash, cash equivalents and investments for the year
ended December 31, 2009 compared with the same period of 2008.

Interest and
Other Expense. Interest and other expense was $3,000
for the year ended December 31, 2009, compared to $110,000 for the year ended
December 31, 2008. Through February 2008, interest and other expense consisted
primarily of the amortization of a $590,000 discount associated with a deferred
license fee payment of $4.0 million which had been fully amortized and paid
upon the completion of our IPO in February 2008.

Income Taxes.
No federal income taxes were recognized for the year ended December 31, 2009
and 2008, due to net operating losses in each period. State and local income
taxes were $56,000 for the year ended December 31, 2009. Income taxes
recognized to date have not been significant due to net operating losses we
have incurred in each period since our inception in November 2004. In addition,
no current or deferred income taxes were recorded for the year ended December
31, 2009 and 2008, as all income tax benefits were fully offset by a valuation
allowance against our net deferred income tax assets.

Liquidity and Capital Resources

|                                                     |  |      |         |        |   |        |  |        |         |      |   |         |   |   |         |  
|---------------------------------------------------- |  | ---- | ------- | ------ | - | ------ |  | ------ | ------- | ---- | - | ------- | - | - | ------- | -
|(in thousands)                                       |  |      |         |        |   |        |  |        |         |      |   |         |   |   |         |  
|                                                     |  | 2010 |         | Change |   | 2009   |  | Change |         | 2008 |  
|Cash and cash equivalents                            |  | $    | 27,108  |        | $ | 9,949  |  |        | 17,159  |      | $ | (45,388 | ) | $ | 62,547  |  
|Short-term investments                               |  |      | 46,401  |        |   | 1,715  |  |        | 44,686  |      |   | 43,609  |   |   | 1,077   |  
|Long-term investments                                |  |      | 23,283  |        |   | 13,915 |  |        | 9,368   |      |   | 9,368   |   |   | ―       |  
|Total cash, cash equivalents, and investments        |  | $    | 96,792  |        | $ | 25,579 |  | $      | 71,213  |      | $ | 7,589   |   | $ | 63,624  |  
|                                                     |  |      |         |        |   |        |  |        |         |      |   |         |   |   |         |  
|Cash used in operating activities                    |  | $    | (30,292 | )      | $ | 15,280 |  | $      | (45,572 | )    | $ | (15,752 | ) | $ | (29,820 | )
|Cash used in investing activities                    |  |      | (20,076 | )      |   | 34,104 |  |        | (54,180 | )    |   | (50,631 | ) |   | (3,549  | )
|Cash provided by financing activities                |  |      | 60,317  |        |   | 5,953  |  |        | 54,364  |      |   | (31,937 | ) |   | 86,301  |  
|Net increase (decrease) in cash and cash equivalents |  | $    | 9,949   |        | $ | 55,337 |  | $      | (45,388 | )    | $ | (98,320 | ) | $ | 52,932  |  

We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of December 31, 2010, we
had an accumulated deficit of $152.9 million and have financed our
operations principally through the sale of our equity securities.

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In
November 2010, we completed a public offering of our common stock, issuing
6,325,000 shares at a price per share of $9.44, resulting in net proceeds of
approximately $59.3 million, after expenses.

As
of December 31, 2010, we had approximately $96.8 million in cash, cash
equivalents and investments. Our cash and investment balances are held in a
variety of interest bearing instruments, including notes and bonds from U.S.
government agencies, certificates of deposit and investment grade rated U.S.
corporate debt.

Net Cash Used in
Operating Activities

Net
cash used in operating activities primarily reflects the net loss for those
periods, which was reduced in part by depreciation and amortization,
stock-based compensation, inventory write-downs and property and equipment
write-downs. For the year ended December 31, 2010, inventory write-downs of
$1.7 million and property and equipment write-downs of $1.2 million were
incurred primarily due to the write-off of excess RESTORIS Classic implants and
instrumentation as discussed in Factors Which May Influence Future Results of
Operations above. Net cash used in operating activities was also affected by
changes in operating assets and liabilities. Included in changes in operating
assets and liabilities for the year ended December 31, 2010 are approximately
$6.1 million of increases to inventory necessitated by increased sales of
implants and disposable products to support the growth of knee MAKOplasty and
preparation for the anticipated launch of our hip MAKOplasty application, $5.0
million of increases to accounts receivable due to increased sales in 2010,
which was partially offset by $4.0 million of increases to other accrued
liabilities and accrued compensation and employee benefits. Included in changes
in operating assets and liabilities for the year ended December 31, 2009 are
approximately $11.0 million and $3.6 million of decreases to the deferred
revenue balance and deferred cost of revenue balance, respectively, due to the
recognition of 17 previously deferred unit sales of our TGS, $7.4 million of
increases in inventory necessitated by the commercial release of the RIO
system, the commercial release of the RESTORIS MCK implant system and increased
sales of implants and disposable products and $3.8 million of increases in
accounts receivable due to increased sales in the fourth quarter of 2009 as
compared to the fourth quarter of 2008. In accordance with our revenue
recognition policy, recognition of revenue and direct cost of revenue
associated with the unit sales of our TGS was deferred until delivery of the
RIO system, which we commercially released in the first quarter of 2009.

Net Cash Used in
Investing Activities

Net
cash used in investing activities for the year ended December 31, 2010 was
primarily attributable to the purchase of investments of $65.8 million and
purchases of property and equipment of $2.6 million, which was partially offset
by proceeds of $49.7 million from sales and maturities of investments.
Purchases of investments in 2010 were primarily driven by net proceeds of $59.3
million received in a public offering of our common stock in November 2010. Net
cash used in investing activities for the year ended December 31, 2009 was
primarily attributable to the purchase of investments of $60.0 million and
purchases of property and equipment of $790,000, which was partially offset by
proceeds of $6.7 million from sales and maturities of investments.

Net Cash Provided by
Financing Activities

Net
cash provided by our financing activities for the year ended December 31, 2010
was primarily attributable to net proceeds of $59.3 million received in public
offering of our common stock in November 2010. Net cash provided by our
financing activities for the year ended December 31, 2009 was primarily
attributable to net proceeds of $54.3 million received in connection with our
equity financing in August 2009.

Operating Capital
and Capital Expenditure Requirements

To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
continue to commercialize our RIO system and RESTORIS MCK multicompartmental
knee implant system, continue research and development of existing and future
products, including our hip

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MAKOplasty
application and associated implant systems, and continue development of the
corporate infrastructure required to sell and market our products and support
operations. We also expect to experience increased cash requirements for
inventory and property and equipment in conjunction with the continued
commercialization of our RESTORIS MCK multicompartmental knee implant system
and our RIO system and introducing other potential future applications,
including our hip MAKOplasty application and associated implant systems.

In
executing our current business plan, we believe our existing cash, cash
equivalents and investment balances, and interest income we earn on these
balances will be sufficient to meet our anticipated cash requirements for at
least the next twelve months. To the extent our available cash, cash
equivalents and investment balances are insufficient to satisfy our operating
requirements, we will need to seek additional sources of funds, including
selling additional equity, debt or other securities or entering into a credit
facility, or modify our current business plan. The sale of additional equity
and convertible debt securities may result in dilution to our current
stockholders. If we raise additional funds through the issuance of debt
securities, these securities may have rights senior to those of our common
stock and could contain covenants that could restrict our operations and
issuance of dividends. We may also require additional capital beyond our
currently forecasted amounts. Any required additional capital, whether
forecasted or not, may not be available on reasonable terms, or at all. If we
are unable to obtain additional financing, we may be required to reduce the
scope of, delay or eliminate some or all of our planned research, development
and commercialization activities, which could materially harm our business and
results of operations.

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

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

Contractual Obligations

The
following table summarizes our outstanding contractual obligations as of
December 31, 2010 and the effect those obligations are expected to have on
our liquidity and cash flows in future periods:

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|                                      |  |                        |        |               |   |           |  |           |       |      |   |       |  |   |       | 
|------------------------------------- |  | ---------------------- | ------ | ------------- | - | --------- |  | --------- | ----- | ---- | - | ----- |  | - | ----- | 
|(in thousands)                        |  | Payment
 Due by Period |       
|                                      |  |                        |        | December
 31, |   | After    
|                                      |  | Total                  |        | 2011          |   | 2012-2013 |  | 2014-2015 |       | 2015 |  
|Contractual Obligations               |  |                        |        |               |   |           |  |           |       |      |   |       |  |   |       | 
|Minimum royalty payments 
 licenses  |  | $                      | 14,150 |               | $ | 1,069     |  | $         | 3,538 |      | $ | 4,068 |  | $ | 5,475 | 
|Operating lease  real
 estate        |  |                        | 5,823  |               |   | 290       |  |           | 689   |      |   | 1,161 |  |   | 3,683 | 
|Purchase commitments and
 obligations |  |                        | 8,005  |               |   | 8,005     |  |           | ―     |      |   | ―     |  |   | ―     | 
|Development agreement
 obligations    |  |                        | 1,000  |               |   | 750       |  |           | 250   |      |   | ―     |  |   | ―     | 
|Total                                 |  | $                      | 28,978 |               | $ | 10,114    |  | $         | 4,477 |      | $ | 5,229 |  | $ | 9,158 | 

Our
commitments for minimum royalty payments relate to payments under various
licenses and sublicenses as discussed in Item 8, Financial Statements and
Supplementary Data, Note 7 to the Financial Statements. Our commitments for
operating leases relate to the lease for our headquarters in
Fort Lauderdale, Florida. Our commitments for purchase commitments and
obligations include an estimate of open purchase orders and contractual
obligations in the ordinary course of business, including commitments with
contract manufacturers and suppliers, for which we have not received the goods
or services. Our commitments for development agreement obligations relate to
payments under development agreements as discussed in Item 8, Financial
Statements and Supplementary Data, Notes 5 and 7 to the Financial Statements.

Off-Balance Sheet Arrangements

We
do not have any off-balance sheet arrangements.

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

Our
exposure to market risk is confined to our cash, cash equivalents, investments
and exchange rate risk on international sales. The goals of our cash investment
policy are the security of the principal invested and fulfillment of liquidity
needs, with the need to maximize value being an important consideration. To
achieve our goals, we maintain a portfolio of cash equivalents and investments
in a variety of securities including notes and bonds from U.S. government
agencies, certificates of deposit and investment grade rated U.S. corporate
debt. The securities in our investment portfolio are not leveraged and are
classified as available-for-sale. We currently do not hedge interest rate
exposure or exchange rate risk. We do not believe that a variation in market
rates of interest would significantly impact the value of our investment
portfolio. We do not believe that a variation in the value of the U.S. dollar
relative to foreign currencies would significantly impact our results of
operations.

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

MAKO SURGICAL CORP.

Index to the Financial Statements

|                                                                                                                                               |  |   
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Reports of
 Independent Registered Public Accounting Firm                                                                                      |  | 81
|Balance Sheets
 as of December 31, 2010 and 2009                                                                                               |  | 83
|Statements of
 Operations for the years ended December 31, 2010, 2009 and 2008                                                                 |  | 84
|Statements of
 Redeemable Convertible Preferred Stock and Stockholders Equity (Deficit) for
 the years ended December 31, 2010, 2009 and 2008 |  | 85
|Statements of
 Cash Flows for the years ended December 31, 2010, 2009 and 2008                                                                 |  | 87
|Notes to
 Financial Statements                                                                                                                 |  | 88

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Table of Contents

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of
Directors and Stockholders
MAKO Surgical Corp.

We have audited the accompanying balance sheets of MAKO Surgical Corp.
as of December 31, 2010 and 2009, and the related statements of operations,
redeemable convertible preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2010.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MAKO Surgical Corp.
at December 31, 2010 and 2009, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), MAKO Surgical Corp.s
internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2011 expressed an unqualified opinion thereon.

|                     |                             
|-------------------- | ----------------------------
|                     | /s/ ERNST & YOUNG LLP       
|                     | Certified Public Accountants
|Boca Raton,
 Florida |                             
|March 10,
 2011      |                             

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of
Directors and Stockholders
MAKO Surgical Corp.

We have audited MAKO Surgical Corp.s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). MAKO Surgical
Corp.s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, MAKO Surgical Corp. maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheets of MAKO
Surgical Corp. as of December 31, 2010 and 2009, and the related statements of
operations, redeemable convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2010 of MAKO Surgical Corp. and our report dated March 10, 2011
expressed an unqualified opinion thereon.

|                     |                             
|-------------------- | ----------------------------
|                     | /s/ ERNST & YOUNG LLP       
|                     | Certified Public Accountants
|Boca Raton,
 Florida |                             
|March 10,
 2011      |                             

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MAKO SURGICAL CORP.

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

|                                                                                                                                                                 |  |              |          |      |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | ---- | - | -------- | -
|                                                                                                                                                                 |  | December 31, |         
|                                                                                                                                                                 |  | 2010         |          | 2009 |  
|ASSETS                                                                                                                                                           |  |              |          |      |   |          |  
|Current Assets:                                                                                                                                                  |  |              |          |      |   |          |  
|Cash and cash equivalents                                                                                                                                        |  | $            | 27,108   |      | $ | 17,159   |  
|Short-term investments                                                                                                                                           |  |              | 46,401   |      |   | 44,686   |  
|Accounts receivable                                                                                                                                              |  |              | 11,560   |      |   | 6,536    |  
|Inventory                                                                                                                                                        |  |              | 10,504   |      |   | 10,190   |  
|Prepaids and other assets                                                                                                                                        |  |              | 1,283    |      |   | 532      |  
|Total current assets                                                                                                                                             |  |              | 96,856   |      |   | 79,103   |  
|Long-term investments                                                                                                                                            |  |              | 23,283   |      |   | 9,368    |  
|Property and equipment, net                                                                                                                                      |  |              | 9,212    |      |   | 6,205    |  
|Intangible assets, net                                                                                                                                           |  |              | 7,530    |      |   | 4,234    |  
|Other assets                                                                                                                                                     |  |              | 198      |      |   | 193      |  
|Total assets                                                                                                                                                     |  | $            | 137,079  |      | $ | 99,103   |  
|                                                                                                                                                                 |  |              |          |      |   |          |  
|LIABILITIES AND
 STOCKHOLDERS EQUITY                                                                                                                            |  |              |          |      |   |          |  
|Current Liabilities:                                                                                                                                             |  |              |          |      |   |          |  
|Accounts payable                                                                                                                                                 |  | $            | 1,518    |      | $ | 1,159    |  
|Accrued compensation and employee benefits                                                                                                                       |  |              | 5,546    |      |   | 3,709    |  
|Other accrued liabilities                                                                                                                                        |  |              | 5,064    |      |   | 2,872    |  
|Deferred revenue                                                                                                                                                 |  |              | 3,071    |      |   | 548      |  
|Total current liabilities                                                                                                                                        |  |              | 15,199   |      |   | 8,288    |  
|                                                                                                                                                                 |  |              |          |      |   |          |  
|Deferred revenue, non-current                                                                                                                                    |  |              | 109      |      |   | 21       |  
|Total liabilities                                                                                                                                                |  |              | 15,308   |      |   | 8,309    |  
|                                                                                                                                                                 |  |              |          |      |   |          |  
|Commitments and contingencies (Note 7)                                                                                                                           |  |              | ―        |      |   | ―        |  
|                                                                                                                                                                 |  |              |          |      |   |          |  
|Stockholders equity:                                                                                                                                            |  |              |          |      |   |          |  
|Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares
 issued and outstanding as of December 31, 2010 and 2009                                      |  |              | ―        |      |   | ―        |  
|Common stock, $0.001 par value; 135,000,000 authorized; 39,945,467 and
 33,036,378 shares issued and outstanding as of December 31, 2010 and 2009,
 respectively |  |              | 40       |      |   | 33       |  
|Additional paid-in capital                                                                                                                                       |  |              | 274,712  |      |   | 204,977  |  
|Accumulated deficit                                                                                                                                              |  |              | (152,882 | )    |   | (114,195 | )
|Accumulated other comprehensive loss                                                                                                                             |  |              | (99      | )    |   | (21      | )
|Total stockholders equity                                                                                                                                       |  |              | 121,771  |      |   | 90,794   |  
|Total liabilities and stockholders equity                                                                                                                       |  | $            | 137,079  |      | $ | 99,103   |  

See accompanying notes.

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MAKO SURGICAL CORP.

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

|                                                                            |  |                          |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                            |  | Years Ended December 31, |        
|                                                                            |  | 2010                     |         | 2009 |   | 2008    |  
|Revenue:                                                                    |  |                          |         |      |   |         |   |   |         |  
|Procedures                                                                  |  | $                        | 17,620  |      | $ | 7,550   |   | $ | 2,457   |  
|Systems  RIO                                                               |  |                          | 24,928  |      |   | 14,715  |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                          | ―       |      |   | 11,297  |   |   | ―       |  
|Service and other                                                           |  |                          | 1,748   |      |   | 646     |   |   | 487     |  
|Total revenue                                                               |  |                          | 44,296  |      |   | 34,208  |   |   | 2,944   |  
|Cost of revenue:                                                            |  |                          |         |      |   |         |   |   |         |  
|Procedures                                                                  |  |                          | 5,960   |      |   | 3,087   |   |   | 1,387   |  
|Systems  RIO                                                               |  |                          | 11,171  |      |   | 9,032   |   |   | 1,692   |  
|Systems  RIO upgrades                                                      |  |                          | ―       |      |   | 5,183   |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                          | ―       |      |   | 3,606   |   |   | ―       |  
|Service and other                                                           |  |                          | 1,042   |      |   | 546     |   |   | 233     |  
|Total cost of revenue                                                       |  |                          | 18,173  |      |   | 21,454  |   |   | 3,312   |  
|Gross profit (loss)                                                         |  |                          | 26,123  |      |   | 12,754  |   |   | (368    | )
|Operating costs and expenses:                                               |  |                          |         |      |   |         |   |   |         |  
|Selling, general and administrative                                         |  |                          | 47,041  |      |   | 32,072  |   |   | 23,292  |  
|Research and development                                                    |  |                          | 14,975  |      |   | 13,127  |   |   | 12,472  |  
|Depreciation and amortization                                               |  |                          | 3,043   |      |   | 1,951   |   |   | 1,828   |  
|Total operating costs and expenses                                          |  |                          | 65,059  |      |   | 47,150  |   |   | 37,592  |  
|Loss from operations                                                        |  |                          | (38,936 | )    |   | (34,396 | ) |   | (37,960 | )
|Interest and other income                                                   |  |                          | 317     |      |   | 432     |   |   | 988     |  
|Interest and other expenses                                                 |  |                          | ―       |      |   | (3      | ) |   | (110    | )
|Loss before income taxes                                                    |  |                          | (38,619 | )    |   | (33,967 | ) |   | (37,082 | )
|Income tax expense                                                          |  |                          | 68      |      |   | 56      |   |   | ―       |  
|Net loss                                                                    |  |                          | (38,687 | )    |   | (34,023 | ) |   | (37,082 | )
|Accretion of preferred stock                                                |  |                          | ―       |      |   | ―       |   |   | (44     | )
|Dividends on preferred stock                                                |  |                          | ―       |      |   | ―       |   |   | (521    | )
|Net loss attributable to common
 stockholders                               |  | $                        | (38,687 | )    | $ | (34,023 | ) | $ | (37,647 | )
|Net loss per share  Basic and diluted
 attributable to common stockholders |  | $                        | (1.13   | )    | $ | (1.22   | ) | $ | (2.20   | )
|Weighted average common shares outstanding
  Basic and diluted             |  |                          | 34,349  |      |   | 27,806  |   |   | 17,096  |  

See accompanying notes.

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MAKO SURGICAL CORP.

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

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

(continued)

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MAKO SURGICAL CORP.

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

|                                                                  |  |                                   |   |                |   |               |  |                              |        |                      |   |                                     |  |                                        |         |   |   |          |   |   |     |   |   |         |  
|----------------------------------------------------------------- |  | --------------------------------- | - | -------------- | - | ------------- |  | ---------------------------- | ------ | -------------------- | - | ----------------------------------- |  | -------------------------------------- | ------- | - | - | -------- | - | - | --- | - | - | ------- | -
|                                                                  |  | Redeemable
 Convertible Preferred |   | Common
 Shares |   | Stock
 Amount |  | Additional
 Paid-in
 Capital |        | Accumulated
 Deficit |   | Other
 Comprehensive
 Income (Loss) |  | Total
 Stockholders
 Equity (Deficit) |        
|                                                                  |  | Shares                            |   | Amount         |   |               |  |                              |        |                      |  
|Balance at December 31, 2008                                      |  |                                   |  |                | $ |              |  |                              | 24,685 |                      | $ | 25                                  |  | $                                      | 146,607 |   | $ | (80,172  | ) | $ | 54  |   | $ | 66,514  |  
|Issuance of common stock in equity financing                      |  |                                   |  |                |   |              |  |                              | 8,050  |                      |   | 8                                   |  |                                        | 54,300  |   |   |         |   |   |    |   |   | 54,308  |  
|Issuance of common stock under employee stock purchase plan       |  |                                   |  |                |   |              |  |                              | 72     |                      |   |                                    |  |                                        | 455     |   |   |         |   |   |    |   |   | 455     |  
|Issuance of common stock upon exercise of options and warrants    |  |                                   |  |                |   |              |  |                              | 140    |                      |   |                                    |  |                                        | 149     |   |   |         |   |   |    |   |   | 149     |  
|Stock-based compensation expense                                  |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        | 3,032   |   |   |         |   |   |    |   |   | 3,032   |  
|Restricted common stock compensation expense                      |  |                                   |  |                |   |              |  |                              | 145    |                      |   |                                    |  |                                        | 982     |   |   |         |   |   |    |   |   | 982     |  
|Receipt of 56,045 shares delivered in payment of payroll taxes    |  |                                   |  |                |   |              |  |                              | (56    | )                    |   |                                    |  |                                        | (492    | ) |   |         |   |   |    |   |   | (492    | )
|Equity financing costs                                            |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        | (56     | ) |   |         |   |   |    |   |   | (56     | )
|Change in unrealized gain (loss) on available-for-sale securities |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   |         |   |   | (75 | ) |   | (75     | )
|Net loss                                                          |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   | (34,023  | ) |   |    |   |   | (34,023 | )
|                                                                  |  |                                   |   |                |   |               |  |                              |        |                      |   |                                     |  |                                        |         |   |   |          |   |   |     |   |   |         |  
|Total comprehensive loss                                          |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   |         |   |   |    |   |   | (34,098 | )
|Balance at December 31, 2009                                      |  |                                   |  |                |   |              |  |                              | 33,036 |                      |   | 33                                  |  |                                        | 204,977 |   |   | (114,195 | ) |   | (21 | ) |   | 90,794  |  
|Issuance of common stock in equity financing                      |  |                                   |  |                |   |              |  |                              | 6,325  |                      |   | 6                                   |  |                                        | 59,277  |   |   |         |   |   |    |   |   | 59,283  |  
|Issuance of common stock under employee stock purchase plan       |  |                                   |  |                |   |              |  |                              | 86     |                      |   |                                    |  |                                        | 765     |   |   |         |   |   |    |   |   | 765     |  
|Issuance of common stock upon exercise of options and warrants    |  |                                   |  |                |   |              |  |                              | 199    |                      |   |                                    |  |                                        | 611     |   |   |         |   |   |    |   |   | 611     |  
|Stock-based compensation expense                                  |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        | 5,027   |   |   |         |   |   |    |   |   | 5,027   |  
|Restricted common stock compensation expense                      |  |                                   |  |                |   |              |  |                              | 97     |                      |   |                                    |  |                                        | 1,344   |   |   |         |   |   |    |   |   | 1,344   |  
|Receipt of 28,307 shares delivered in payment of payroll taxes    |  |                                   |  |                |   |              |  |                              | (28    | )                    |   |                                    |  |                                        | (342    | ) |   |         |   |   |    |   |   | (342    | )
|Issuance of stock to a related party for intangible assets        |  |                                   |  |                |   |              |  |                              | 230    |                      |   | 1                                   |  |                                        | 3,053   |   |   |         |   |   |    |   |   | 3,054   |  
|Change in unrealized loss on available-for-sale securities        |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   |         |   |   | (78 | ) |   | (78     | )
|Net loss                                                          |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   | (38,687  | ) |   |    |   |   | (38,687 | )
|Total comprehensive loss                                          |  |                                   |  |                |   |              |  |                              |       |                      |   |                                    |  |                                        |        |   |   |         |   |   |    |   |   | (38,765 | )
|Balance at December 31, 2010                                      |  |                                   |  |                | $ |              |  |                              | 39,945 |                      | $ | 40                                  |  | $                                      | 274,712 |   | $ | (152,882 | ) | $ | (99 | ) | $ | 121,771 |  

See accompanying notes.

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MAKO SURGICAL CORP.

Statements of
Cash Flows(in thousands)

|                                                                                                                                                         |  |                          |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                                                         |  | Years Ended December 31, |        
|                                                                                                                                                         |  | 2010                     |         | 2009 |   | 2008    |  
|Operating activities:                                                                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Net loss                                                                                                                                                 |  | $                        | (38,687 | )    | $ | (34,023 | ) | $ | (37,082 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                                                                             |  |                          |         |      |   |         |   |   |         |  
|Depreciation                                                                                                                                             |  |                          | 2,445   |      |   | 1,769   |   |   | 1,502   |  
|Amortization of intangible assets                                                                                                                        |  |                          | 1,070   |      |   | 682     |   |   | 660     |  
|Stock-based compensation                                                                                                                                 |  |                          | 6,371   |      |   | 4,014   |   |   | 3,323   |  
|Inventory write-down                                                                                                                                     |  |                          | 1,701   |      |   | 1,081   |   |   | 730     |  
|Amortization of premium on investment securities                                                                                                         |  |                          | 480     |      |   | 188     |   |   | ―       |  
|Loss on asset impairment                                                                                                                                 |  |                          | 1,248   |      |   | 51      |   |   | ―       |  
|Accrued interest expense on deferred license fee                                                                                                         |  |                          | ―       |      |   | ―       |   |   | 45      |  
|Changes in operating assets and liabilities:                                                                                                             |  |                          |         |      |   |         |   |   |         |  
|Accounts receivable                                                                                                                                      |  |                          | (5,024  | )    |   | (3,809  | ) |   | (514    | )
|Inventory                                                                                                                                                |  |                          | (6,087  | )    |   | (7,358  | ) |   | (7,056  | )
|Prepaid and other assets                                                                                                                                 |  |                          | (751    | )    |   | (49     | ) |   | (173    | )
|Other assets                                                                                                                                             |  |                          | (57     | )    |   | (16     | ) |   | (7      | )
|Accounts payable                                                                                                                                         |  |                          | 359     |      |   | (650    | ) |   | 298     |  
|Accrued compensation and employee benefits                                                                                                               |  |                          | 1,837   |      |   | 1,371   |   |   | 1,305   |  
|Other accrued liabilities                                                                                                                                |  |                          | 2,192   |      |   | (1,411  | ) |   | 1,603   |  
|Deferred cost of revenue                                                                                                                                 |  |                          | ―       |      |   | 3,608   |   |   | (2,682  | )
|Deferred revenue                                                                                                                                         |  |                          | 2,611   |      |   | (11,020 | ) |   | 8,228   |  
|Net cash used in operating activities                                                                                                                    |  |                          | (30,292 | )    |   | (45,572 | ) |   | (29,820 | )
|Investing activities:                                                                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Purchase of investments                                                                                                                                  |  |                          | (65,828 | )    |   | (59,961 | ) |   | (1,990  | )
|Proceeds from sales and maturities of investments                                                                                                        |  |                          | 49,692  |      |   | 6,721   |   |   | 4,047   |  
|Acquisition of property and equipment                                                                                                                    |  |                          | (2,628  | )    |   | (790    | ) |   | (1,606  | )
|Acquisition of intangible assets                                                                                                                         |  |                          | (1,312  | )    |   | (150    | ) |   | ―       |  
|Payment of deferred license fee                                                                                                                          |  |                          | ―       |      |   | ―       |   |   | (4,000  | )
|Net cash used in investing activities                                                                                                                    |  |                          | (20,076 | )    |   | (54,180 | ) |   | (3,549  | )
|Financing activities:                                                                                                                                    |  |                          |         |      |   |         |   |   |         |  
|Proceeds from issuance of common stock in equity financing, net of
 underwriting fees                                                                    |  |                          | 59,708  |      |   | 54,861  |   |   | 40,202  |  
|Equity financing costs                                                                                                                                   |  |                          | (425    | )    |   | (609    | ) |   | (469    | )
|Proceeds from initial public offering of common stock, net of
 underwriting fees                                                                         |  |                          | ―       |      |   | ―       |   |   | 47,430  |  
|Initial public offering costs                                                                                                                            |  |                          | ―       |      |   | ―       |   |   | (908    | )
|Proceeds from employee stock purchase plan                                                                                                               |  |                          | 765     |      |   | 455     |   |   | ―       |  
|Exercise of common stock options and warrants for cash                                                                                                   |  |                          | 611     |      |   | 149     |   |   | 46      |  
|Payment of payroll taxes relating to vesting of restricted stock                                                                                         |  |                          | (342    | )    |   | (492    | ) |   | ―       |  
|Net cash provided by financing activities                                                                                                                |  |                          | 60,317  |      |   | 54,364  |   |   | 86,301  |  
|Net increase (decrease) in cash and cash equivalents                                                                                                     |  |                          | 9,949   |      |   | (45,388 | ) |   | 52,932  |  
|Cash and cash equivalents at beginning of year                                                                                                           |  |                          | 17,159  |      |   | 62,547  |   |   | 9,615   |  
|                                                                                                                                                         |  |                          |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                                                                                 |  | $                        | 27,108  |      | $ | 17,159  |   | $ | 62,547  |  
|Non-cash investing and financing activities:                                                                                                             |  |                          |         |      |   |         |   |   |         |  
|Receipt of 28,307 and 56,045 shares of common stock delivered in
 payment of payroll taxes for the years ended December 31, 2010 and 2009,
 respectively |  | $                        | 342     |      | $ | 492     |   | $ | ―       |  
|Transfers of inventory to property and equipment                                                                                                         |  |                          | 2,259   |      |   | 3,760   |   |   | 999     |  
|Issuance of stock to a related party for intangible assets                                                                                               |  |                          | 3,054   |      |   | ―       |   |   | ―       |  
|Accretion of redeemable convertible preferred stock                                                                                                      |  |                          | ―       |      |   | ―       |   |   | 44      |  
|Accrued dividends on redeemable convertible preferred stock                                                                                              |  |                          | ―       |      |   | ―       |   |   | 521     |  
|Conversion of redeemable convertible preferred stock into 10,945,080
 common shares                                                                      |  |                          | ―       |      |   | ―       |   |   | 53,667  |  
|Reclassification of accrued dividends on redeemable convertible
 preferred stock to additional paid-in capital                                           |  |                          | ―       |      |   | ―       |   |   | 6,385   |  
|Reclassification of deferred initial public offering costs to
 additional paid-in capital                                                                |  |                          | ―       |      |   | ―       |   |   | 3,636   |  

See accompanying notes.

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MAKO SURGICAL CORP.

Notes to Financial Statements

1. Description of the Business

MAKO
Surgical Corp. (the Company or MAKO) is an emerging medical device company
that markets its advanced robotic arm solution and orthopedic implants for
orthopedic procedures called MAKOplasty®. The Company was incorporated in
the State of Delaware on November 12, 2004 and is headquartered in
Fort Lauderdale, Florida. The Companys common stock trades on The NASDAQ
Global Select Market under the ticker symbol MAKO.

In
November 2010, the Company completed a public offering of its common stock,
issuing 6,325,000 shares at a price per share of $9.44, resulting in net
proceeds of approximately $59.3 million, after expenses.

2. Summary of Significant Accounting Policies

Basis
of Presentation and Use of Estimates

The
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require managements most
significant, difficult and subjective judgments include revenue recognition,
allowance for doubtful accounts, inventory valuation, valuation allowance for
deferred income tax assets, impairment of long-lived assets and the
determination of stock-based compensation. Actual results could differ
significantly from these estimates.

Liquidity
and Operations

In
executing its current business plan, the Company believes its existing cash,
cash equivalents and investment balances and interest income earned on these
balances will be sufficient to meet its anticipated cash requirements for at
least the next twelve months. To the extent the Companys available cash, cash
equivalents and investment balances are insufficient to satisfy its operating
requirements, the Company will need to seek additional sources of funds,
including selling additional equity, debt or other securities or entering into
a credit facility, or modifying its current business plan. The sale of
additional equity and convertible debt securities may result in dilution to the
Companys current stockholders. If the Company raises additional funds through
the issuance of debt securities, these securities may have rights senior to
those of its common stock and could contain covenants that could restrict the
Companys operations and issuance of dividends. The Company may also require
additional capital beyond its currently forecasted amounts. Any required
additional capital, whether forecasted or not, may not be available on
reasonable terms, or at all. If the Company is unable to obtain additional
financing, the Company may be required to reduce the scope of, delay or
eliminate some or all of its planned research, development and
commercialization activities, which could materially harm its business and
results of operations.

Concentrations
of Credit Risk and Other Risks and Uncertainties

Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, investments, and
accounts receivable. The Companys cash and cash equivalents are held in demand
and money market accounts at four large financial institutions. The Companys
investments are held in a variety of interest bearing instruments, including
notes and bonds from U.S. government agencies, certificates of deposit and
investment grade rated U.S. corporate debt at three large financial
institutions. Such deposits are generally in excess of insured limits. The
Company has not experienced any historical losses on its deposits of cash and
cash equivalents.

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

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

The
Company expects to derive most of its revenue from capital sales of its RIO
system, future applications to the RIO system, including the RIO-enabled hip
application, recurring sales of implants and disposable products required for
each MAKOplasty procedure, and service plans that are sold with the RIO system.
If the Company is unable to achieve commercial acceptance of MAKOplasty or
obtain regulatory clearances or approvals for future products, including
products to treat other joints of the human body, its revenue would be
adversely affected and the Company would not become profitable.

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

Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
280, Segment
Reporting, establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Companys chief operating decision maker is its CEO. The Companys CEO reviews
financial information presented on an aggregate basis for purposes of
allocating resources and evaluating financial performance. The Company has one
business activity and there are no segment managers who are held accountable
for operations, operating results and plans for products or components below
the aggregate Company level. Accordingly, the Company reports as a single
operating segment. To date, substantially all of the Companys revenue is from
companies located in the United States. No one customer accounted for more than
10% of the Companys total revenue for the years ended December 31, 2010 and
2009. The following table presents information about the Companys revenue by
significant customer for the year ended December 31, 2008:

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|               |  |                          |       | 
|-------------- |  | ------------------------ | ----- | 
|(in thousands) |  | Year Ended
 December 31, |      
|               |  | 2008                     |      
|Company A      |  | $                        | 417   | 
|Company B      |  |                          | 277   | 
|Company C      |  |                          | 493   | 
|Company D      |  |                          | 274   | 
|Others         |  |                          | 996   | 
|Net Revenue    |  | $                        | 2,457 | 

Cash
and Cash Equivalents

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

Fair
Value of Financial Instruments

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

Allowance
for Doubtful Accounts

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

Inventory

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

Beginning
with the fourth quarter of 2008, manufacturing overhead costs have been
capitalized and included in inventory. As of December 31, 2010 and 2009,
capitalized manufacturing overhead included in inventory was approximately $1.7
million and $1.1 million, respectively. Prior to 2009, such overhead costs were
fully expensed as selling, general and administrative expense as capitalizable
amounts were not significant.

Property
and Equipment

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

The
Company loans instrumentation to its customers, who use the instrumentation to
perform MAKOplasty procedures in conjunction with using the RIO system. These
loaned instrument sets are comprised

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of tools and
equipment that facilitate the implantation of the Companys implants (Implant
Instruments). Implant Instruments loaned to customers are not part of the
tangible product sold and title of Implant Instruments remains with the
Company. Accordingly, Implant Instruments are classified as a long-lived asset
and included as a component of property and equipment. Undeployed Implant
Instruments are carried at cost, net of allowances for excess and obsolete
instruments. Implant Instruments in the field are carried at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method based on an estimated useful life of five years. The Company reviews
instruments for impairment whenever events or changes in circumstances indicate
that the carrying value of an instrument may not be recoverable. To better
reflect the economics of the Implant Instruments and enhance comparability with
other companies in our industry, depreciation expense on Implant Instruments
has been reclassified from cost of revenue  procedures to selling, general and
administrative expense beginning in the first quarter of 2010. Depreciation
expense for implant instruments was $464,000, $250,000 and $134,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.

Prior
to 2010, Implant Instruments were included as components of a RIO system sale
and undeployed Implant Instruments were classified as inventory. Beginning in
the first quarter of 2010, Implant Instruments are no longer included as
components of a RIO system sale. To better reflect the economics of the Implant
Instruments no longer being sold, undeployed Implant Instruments have been
reclassified from inventory to property and equipment. As of December 31, 2010,
approximately $1.2 million of undeployed Implant Instruments have been included
as property and equipment.

The
Company also enters into RIO system consignment arrangements for clinical
evaluation and clinical research purposes with terms ranging from one to three
years. Under the terms of such arrangements, the Company installs a RIO system
at the customer site and retains title to the RIO system, while the customer
has use of the RIO system and purchases the Companys implants and disposables
products. Depreciation expense on consigned RIO systems and instruments is
classified in selling, general and administrative expense and is computed using
the straight-line method based on the estimated useful life of three years. As
of December 31, 2010, the Company had three consigned RIO systems.

Service
and demonstration RIO systems and instruments consist of RIO systems,
associated instrumentation, service tools and equipment, and MAKOplasty
procedure models used for sales demonstrations, surgeon training, and temporary
RIO system placements at customer sites under warranty and extended warranty
agreements. Service and demonstration RIO systems and instruments are
classified as a long-lived asset and included as a component of property and
equipment. Depreciation expense on service and demonstration RIO systems and
instruments is classified in selling, general and administrative expense and is
computed using the straight-line method based on an estimated useful life of
three years.

Intangible
Assets

The
Companys intangible assets are comprised of patents, patent applications and
licenses to intellectual property rights. These intangible assets are carried
at cost, net of accumulated amortization. Amortization is recorded using the
straight-line method over their respective useful lives, which range from 5 to
13 years based on the respective anticipated lives of the underlying patents
and patent applications.

Impairment
of Long-Lived Assets

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

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Revenue
Recognition

Revenue
is generated: from (1) unit sales of the Companys RIO system, including
associated instrumentation, installation services and training; (2) sales of
implants and disposable products; and (3) sales of warranty and maintenance
services. The Company recognizes revenue in accordance with Accounting
Standards Codification (ASC) 605-10-S99, Revenue Recognition, when persuasive
evidence of an arrangement exists, the fee is fixed or determinable, collection
of the fee is probable and delivery has occurred. For all sales, the Company
uses either a signed agreement or a binding purchase order as evidence of an
arrangement.

The
Companys multiple-element arrangements are generally comprised of the
following elements that qualify as separate units of accounting: (1) RIO system
sales; (2) sales of implants and disposable products; and (3) warranty and
maintenance services on the RIO system hardware. The Companys revenue
recognition policies generally result in revenue recognition at the following
points:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | RIO system
 sales: Revenues related to RIO system sales are recognized upon installation
 of the system and training of at least one surgeon, which typically occurs
 prior to or concurrent with the RIO system installation.                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | Procedure
 revenue: Revenues from the sale of implants and disposable products utilized
 in MAKOplasty procedures are recognized at the time of sale (i.e., at the
 time of the related surgical procedure).                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | Service
 revenue: Revenues from warranty and maintenance services on the RIO system
 hardware are deferred and recognized ratably over the service period until no
 further obligation exists. Sales of the Companys RIO system generally
 include a one-year warranty and maintenance obligation for services. Upon
 installation of the RIO system, the Company defers the revenue attributable
 to the warranty and maintenance obligation and recognizes it ratably over the
 warranty and maintenance period. Costs associated with providing warranty and
 maintenance services are expensed to cost of revenue as incurred.

A
portion of the Companys end-user customers acquire the RIO system through
a leasing arrangement with one of a number of qualified third-party leasing
companies. In these instances, the Company typically sells the RIO system to the
third-party leasing company, and the end-user customer enters into an
independent leasing arrangement with the third-party leasing company. The
Company recognizes RIO system revenue for a RIO system sale to a third-party
leasing company on the same basis as a RIO system sale directly to an end-user
customer. The Company sells implants and disposable products utilized in
MAKOplasty procedures directly to end-user customers under a separate
agreement.

The
Companys sales contracts generally do not provide the customer with a right of
return. If such a right is provided, all related revenues would be deferred
until such right expires or is waived. In a limited number of RIO system sales,
the Companys agreement with a customer provides for a customer acceptance
period, which typically does not exceed three months, following which the
customer may either accept or return the RIO system. No system revenue is
recognized for these RIO system sales until the customer has unconditionally
accepted the RIO system.

Effective
January 1, 2010, the Company early adopted the Financial Accounting Standards
Board (FASB) Accounting Standard Update No. 2009-13, Multiple-Deliverable
Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force
(ASU 2009-13) and Update No. 2009-14, Certain Revenue Arrangements That Include Software
Elements, a consensus of the FASB Emerging Issues Task Force (ASU
2009-14) on a prospective basis for applicable transactions originating or
materially modified after December 31, 2009. In accordance with ASU 2009-13 (as
codified under ASC 605-25, Multiple-Element Arrangements) and ASU
2009-14, the Company allocates arrangement consideration to the RIO systems and
associated instrumentation, its implants and disposables and its warranty and
maintenance services based upon the relative selling-price method. Under this
method, revenue is allocated at the time of sale to all deliverables based on
their relative selling price using a specific hierarchy. The hierarchy is as
follows: vendor-specific objective evidence (VSOE) of
fair value of the respective elements, third-party evidence of selling price
(TPS), or best estimate of selling price (ESP).

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The
Company uses ESP for its RIO system, TPS for its implants and disposables and
VSOE of fair value for its warranty and maintenance services to allocate
arrangement consideration. VSOE of fair value is based on the price charged
when the element is sold separately. TPS is established by evaluating largely
interchangeable competitor products or services in stand-alone sales. ESP is
established by determine the price at which the Company would transact a sale
if the product was sold on a stand-alone basis. The Company determines ESP for
its systems by considering multiple factors including, but not limited to,
geographies, type of customer, and market conditions. The Company regularly
reviews ESP and maintains internal controls over the establishment and updates
of these estimates.

The
Companys RIO system includes software that is essential to the functionality
of the product. Since the RIO systems software and non-software components
function together to deliver the RIO systems essential functionality, they are
considered one deliverable that is excluded from the software revenue
recognition guidance under ASU 2009-13 and ASU 2009-14.

Prior
to the adoption of ASU 2009-13 and ASU 2009-14, the Company accounted for the
sale of the RIO systems and associated instrumentation pursuant to ASC 985-605,
Software
 Revenue Recognition, which required the Company to allocate
arrangement consideration to the RIO systems and associated instrumentation
based upon VSOE of fair value of the respective elements. Had the new
accounting guidance been applied to revenue at the beginning of 2009, the
resultant revenue and net loss for the year ended December 31, 2009 would
have been substantially the same.

Subsequent
to December 31, 2008, the Company no longer manufactures TGS units, to which
associated TGS sales arrangements required it to provide upgrades and
enhancements, through and including the delivery of the RIO system. The Company
commercially released the RIO system in the first quarter of 2009. Sales
arrangements for RIO systems do not require the Company to provide upgrades and
enhancements. As a result, revenues related to RIO system sales are generally
recognized upon installation of the system and training of at least one
surgeon.

For
sales of TGS units through December 31, 2008, VSOE of fair value was not
established for upgrades and enhancements (through and including delivery of
the RIO system), which the TGS sales arrangements required the Company to
provide. Accordingly, prior to delivery of the RIO system, sales of TGS units
were recorded as deferred revenue and the direct cost of revenue associated
with the sale of TGS units was recorded as deferred cost of revenue. Revenue
for all previously deferred TGS sales was recognized in the Companys statement
of operations during the year ended December 31, 2009, upon delivery of the RIO
system. As of December 31, 2010, the deferred revenue balance consists
primarily of deferred service revenue as discussed below.

Costs
associated with establishing an accrual for royalties covered by licensing
arrangements related to the sale of RIO systems are expensed upon installation
and are included in cost of revenue - systems, in the statements of operations.

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Deferred Revenue and Deferred Cost
of Revenue

Deferred
revenue consists of deferred service revenue and deferred system revenue.
Deferred service revenue results from the advance payment for services to be
delivered over a period of time, usually in one-year increments. Service
revenue is recognized ratably over the service period. Deferred system revenue
arises from timing differences between the installation of RIO systems and
satisfaction of all revenue recognition criteria consistent with the Companys
revenue recognition policy. Deferred revenue expected to be realized within one
year is classified as a current liability. The deferred revenue balance as of
December 31, 2010 consists primarily of deferred service revenue for warranty
and maintenance services on the RIO system hardware.

Foreign
Currency Transactions

Gains
or losses from foreign currency transactions are included in interest and other
income. To date, realized gains and losses recognized from foreign currency
transactions were not significant.

Research
and Development Costs

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

Shipping
and Handling Costs

Costs
incurred for shipping and handling are included in cost of revenue at the time
the expense is incurred.

Software
Development Costs

Software
development costs are included in research and development and are expensed as
incurred. After technological feasibility is established, material software
development costs are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenue, whichever is greater. To date, the
period between achieving technological feasibility, which the Company has
defined as the establishment of a working model which typically occurs when the
verification and validation testing is complete, and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs to date.

Stock-Based
Compensation

The
Company recognizes compensation expense for its stock-based awards in
accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires the
recognition of compensation expense, using a fair value based method, for costs
related to all stock-based payments including stock options. ASC 718 requires
companies to estimate the fair value of stock-based payment awards on the date
of grant using an option-pricing model.

The
Company accounts for stock-based compensation arrangements with non-employees
in accordance with the ASC 505-50, Equity-Based Payments to Non-Employees. The
Company records the expense of such services based on the estimated fair value
of the equity instrument using the Black-Scholes-Merton pricing model. The
value of the equity instrument is charged to expense over the term of the
service agreement.

See
Note8 for a detailed discussion of the various stock
option plans and related stock-based compensation.

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Advertising
Costs

Advertising
costs are expensed as incurred. Advertising costs were approximately $1.6
million, $1.3 million and $1.4 million for the years ended December 31, 2010,
2009 and 2008, respectively.

Income
Taxes

The
Company accounts for income taxes under ASC 740, Income Taxes. Deferred income
taxes are determined based upon differences between financial reporting and
income tax bases of assets and liabilities and are measured using the enacted
income tax rates and laws that will be in effect when the differences are
expected to reverse. The Company recognizes any interest and penalties related
to unrecognized tax benefits as a component of income tax expense.

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

Operating
Leases

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

Net
Loss Per Share

The
Company calculated net loss per share in accordance with ASC 260, Earnings per
Share. Basic earnings per share (EPS) is calculated by dividing the net
income or loss attributable to common stockholders by the weighted average
number of common shares outstanding for the period, without consideration for
common stock equivalents. Diluted EPS is computed by dividing the net income or
loss attributable to common stockholders by the weighted average number of
common shares outstanding for the period and the weighted average number of
dilutive common stock equivalents outstanding for the period determined using
the treasury stock method. The following table sets forth potential shares of
common stock that are not included in the calculation of diluted net loss per
share because to do so would be anti-dilutive as of the end of each period
presented:

|                                   |  |              |       |      |  |       |  |  |       | 
|---------------------------------- |  | ------------ | ----- | ---- |  | ----- |  |  | ----- | 
|(in thousands)                     |  | December 31, |      
|                                   |  | 2010         |       | 2009 |  | 2008  | 
|Stock
 options outstanding         |  |              | 4,405 |      |  | 3,478 |  |  | 2,193 | 
|Warrants to
 purchase common stock |  |              | 2,039 |      |  | 2,065 |  |  | 2,076 | 
|Unvested
 restricted stock         |  |              | 503   |      |  | 222   |  |  | 267   | 

Reclassifications

Certain
reclassifications have been made to the prior periods statement of operations
to conform to the current periods presentation. The Company reclassified
depreciation expense on its Implant Instruments from cost of revenue 
procedures to selling, general and administrative expense as described in
greater detail in Property and Equipment above. In addition, the Company
reclassified its income tax expense from selling, general and administrative
expense to income tax expense.

3. Investments

The
Companys investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
included in other comprehensive income within stockholders

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equity.
Realized gains and losses, interest and dividends, amortization of premium and
discount on investment securities and declines in value determined to be
other-than-temporary on available-for-sale securities are included in interest
and other income. During the years ended December 31, 2010, 2009 and 2008,
realized gains and losses recognized on the sale of investments were not
significant. The cost of securities sold is based on the specific
identification method.

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

As
of December 31, 2010

|                         |  |                 |        |                          |   |                           |  |             |      |   |   |        | 
|------------------------ |  | --------------- | ------ | ------------------------ | - | ------------------------- |  | ----------- | ---- | - | - | ------ | 
|(in thousands)           |  | Amortized
 Cost |        | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |     
|Short-term investments:  |  |                 |        |                          |   |                           |  |             |      |   |   |        | 
|U.S. government agencies |  | $               | 34,483 |                          | $ | 4                         |  | $           | (16  | ) | $ | 34,471 | 
|Certificates of deposit  |  |                 | 10,453 |                          |   | 1                         |  |             | (28  | ) |   | 10,426 | 
|U.S. corporate debt      |  |                 | 1,501  |                          |   | 3                         |  |             | ―    |   |   | 1,504  | 
|Long-term investments:   |  |                 |        |                          |   |                           |  |             |      |   |   |        | 
|U.S. government agencies |  |                 | 17,251 |                          |   | 2                         |  |             | (8   | ) |   | 17,245 | 
|Certificates of deposit  |  |                 | 6,095  |                          |   | ―                         |  |             | (57  | ) |   | 6,038  | 
|Total investments        |  | $               | 69,783 |                          | $ | 10                        |  | $           | (109 | ) | $ | 69,684 | 

As
of December 31, 2009

|                         |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|------------------------ |  | --------------- | ------ | ------------------------ | - | ------------------------- |  | ----------- | --- | - | - | ------ | 
|(in thousands)           |  | Amortized
 Cost |        | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |    
|Short-term investments:  |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|U.S. government agencies |  | $               | 32,860 |                          | $ | 31                        |  | $           | (24 | ) | $ | 32,867 | 
|Certificates of deposit  |  |                 | 10,297 |                          |   | 1                         |  |             | (25 | ) |   | 10,273 | 
|U.S. corporate debt      |  |                 | 1,532  |                          |   | 14                        |  |             | ―   |   |   | 1,546  | 
|Long-term investments:   |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|U.S. government agencies |  |                 | 5,418  |                          |   | ―                         |  |             | (18 | ) |   | 5,400  | 
|Certificates of deposit  |  |                 | 2,462  |                          |   | ―                         |  |             | (10 | ) |   | 2,452  | 
|U.S. corporate debt      |  |                 | 1,506  |                          |   | 10                        |  |             | ―   |   |   | 1,516  | 
|Total investments        |  | $               | 54,075 |                          | $ | 56                        |  | $           | (77 | ) | $ | 54,054 | 

As
of December 31, 2010 and December 31, 2009, all short-term investments had
maturity dates of less than one year. As of December 31, 2010 and December 31,
2009, all long-term investments had maturity dates between one and three years.

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

|                         |  |                                                     |        |                                                                |   |                                               |  |                                           |   |  |   |   | 
|------------------------ |  | --------------------------------------------------- | ------ | -------------------------------------------------------------- | - | --------------------------------------------- |  | ----------------------------------------- | - |  | - | - | 
|(in thousands)           |  | Fair Value Measurements at the Reporting Date Using |       
|                         |  | December
31, 2010                                   |        | Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) |   | Significant
Other
Observable
Inputs
(Level 2) |  | Significant
Unobservable
Inputs
(Level 3) |  
|Short-term
investments:  |  |                                                     |        |                                                                |   |                                               |  |                                           |   |  |   |   | 
|U.S. government agencies |  | $                                                   | 34,471 |                                                                | $ | 34,471                                        |  | $                                         | ― |  | $ | ― | 
|Certificates of deposit  |  |                                                     | 10,426 |                                                                |   | 10,426                                        |  |                                           | ― |  |   | ― | 
|U.S. corporate debt      |  |                                                     | 1,504  |                                                                |   | 1,504                                         |  |                                           | ― |  |   | ― | 
|Long-term
investments:   |  |                                                     |        |                                                                |   |                                               |  |                                           |   |  |   |   | 
|U.S. government agencies |  |                                                     | 17,245 |                                                                |   | 17,245                                        |  |                                           | ― |  |   | ― | 
|Certificates of deposit  |  |                                                     | 6,038  |                                                                |   | 6,038                                         |  |                                           | ― |  |   | ― | 
|Total
investments        |  | $                                                   | 69,684 |                                                                | $ | 69,684                                        |  | $                                         | ― |  | $ | ― | 

No
investments measured at fair value on a recurring basis used Level 3 or
significant unobservable inputs for the year ended December 31, 2010. There have
been no transfers between Level 1 and Level 2 measurements during the year
ended December 31, 2010.

4. Selected Balance Sheet Components

|                |  |              |        |      |   |        | 
|--------------- |  | ------------ | ------ | ---- | - | ------ | 
|(in thousands)  |  | December 31, |       
|                |  | 2010         |        | 2009 |  
|Inventory:      |  |              |        |      |   |        | 
|Raw
materials   |  | $            | 2,522  |      | $ | 2,770  | 
|Work-in-process |  |              | 972    |      |   | 932    | 
|Finished
goods  |  |              | 7,010  |      |   | 6,488  | 
|Total
inventory |  | $            | 10,504 |      | $ | 10,190 | 

The
Company incurred inventory write-offs totaling approximately $1.7 million and
$1.1 million during the years ended December 31, 2010 and 2009, respectively.

For
the year ended December 31, 2010, the Company wrote-off $2.6 million, or
$(0.08) per basic and diluted share, of excess RESTORIS unicompartmental knee
implant system (RESTORIS Classic) implants and related instrumentation.
Excess implants of $1.4 million was charged to cost of revenue  procedures,
cancellation charges of $208,000 was charged to cost of revenue  service and
other and excess instrumentation of $1.0 million was charged to selling, general
and administrative expenses. These charges were necessitated by the rapid
adoption of the RESTORIS MCK multicompartmental knee implant system (RESTORIS
MCK) and the corresponding decline in the usage of RESTORIS Classic. RESTORIS
Classic was introduced in the third quarter of 2008 and was modeled after
existing well-known unicompartmental designs. In connection with the launch of
the RIO system, in the second quarter of 2009, the Company launched its next
generation RESTORIS MCK which was designed as a premium addition to the
RESTORIS product family with the goal of delivering a more natural feeling knee
by preserving bone and providing anatomical features such as high flexion.

Write-offs
of $1.1 million in 2009 primarily relate to technology changes associated with
the launch of the RIO system in 2009 and disposal of spare TGS inventory
associated with the launch of the RIO system.

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The
Company reviews its inventory periodically to determine net realizable value
and considers product upgrades in its periodic review of realizability.
Depending on demand for the Companys products and technical obsolescence,
additional future write-offs of the Companys inventory may occur.

|                                               |  |              |        |                       |   |        |   |  |                                    | 
|---------------------------------------------- |  | ------------ | ------ | --------------------- | - | ------ | - |  | ---------------------------------- | 
|(in thousands)                                 |  | December 31, |        | Estimated
Useful Life |  
|                                               |  | 2010         |        | 2009                  |   |       
|Property and equipment:                        |  |              |        |                       |   |        |   |  |                                    | 
|Consigned
RIO systems and instruments          |  | $            | 3,287  |                       | $ | 2,551  |   |  | 3-5 years                          | 
|Service and
demo RIO systems and instruments   |  |              | 4,029  |                       |   | 2,354  |   |  | 3 years                            | 
|Computer
equipment and software                |  |              | 2,960  |                       |   | 2,160  |   |  | 3-5 years                          | 
|Manufacturing
and laboratory equipment         |  |              | 1,945  |                       |   | 1,654  |   |  | 3-5 years                          | 
|Undeployed
implant instruments                 |  |              | 1,226  |                       |   | ―      |   |  | See note 2                         | 
|Office
furniture and equipment                 |  |              | 1,038  |                       |   | 882    |   |  | 7 years                            | 
|Leasehold
improvements                         |  |              | 738    |                       |   | 607    |   |  | Lesser of 5-10 years or lease term | 
|                                               |  |              | 15,223 |                       |   | 10,208 |   |  |                                    | 
|Less
accumulated depreciation and amortization |  |              | (6,011 | )                     |   | (4,003 | ) |  |                                    | 
|Total
property and equipment, net              |  | $            | 9,212  |                       | $ | 6,205  |   |  |                                    | 

|                           |  |              |       |      |   |       | 
|-------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|(in thousands)             |  | December 31, |      
|                           |  | 2010         |       | 2009 |  
|Other accrued liabilities: |  |              |       |      |   |       | 
|Accrued
royalties          |  | $            | 833   |      | $ | 413   | 
|Accrued
consulting fees    |  |              | 792   |      |   | 231   | 
|Other                      |  |              | 3,439 |      |   | 2,228 | 
|                           |  | $            | 5,064 |      | $ | 2,872 | 

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5. Related Party Transactions

Securities
Purchase Agreement

In
October 2008, the Company entered into a Securities Purchase Agreement for an
equity financing of up to approximately $60 million, with initial gross
proceeds of approximately $40.2 million, which the Company closed on October
31, 2008, and conditional access to an additional $20 million. The financing
resulted in net proceeds to the Company of approximately $39.7 million, after
expenses of approximately $525,000. In connection with the financing, the
Company issued and sold to the participating investors 6,451,613 shares of its
common stock at a purchase price of $6.20 per share and issued to participating
investors, at the purchase price of $0.125 per warrant, warrants to purchase
1,290,323 shares of common stock at an exercise price of $7.44 per share. The
warrants became exercisable on April 29, 2009 and have a seven-year term.

Subject
to the Companys satisfaction of certain business related milestones before
December 31, 2009, the Company had the right (the Call Right) to require
certain participants in the financing to purchase an additional $20 million of
common stock and warrants to purchase common stock. The Company did not
exercise its Call Right, which expired on December 31, 2009, to require these
participants to purchase an additional $20 million of common stock. At the
initial closing, the investors that agreed to provide the additional $20
million investment received warrants to purchase an additional 322,581 shares
of common stock at a purchase price of $0.125 per warrant and an exercise price
of $6.20 per share. These warrants became exercisable on December 31, 2009 and
have a seven-year term.

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

Asset
Purchase Agreement

In
February 2010, the Company completed the acquisition of substantially all of
the intellectual property portfolio of Z-Kat, Inc. (Z-Kat). The terms of the
Asset Purchase Agreement between the Company and Z-Kat (the Asset Purchase
Agreement) terminated the Companys prior licenses with Z-Kat, including
Z-Kats nonexclusive sublicense to the Companys intellectual property
portfolio, and transferred to the Company ownership rights to certain
intellectual property assets for core technologies in computer assisted surgery
(CAS), haptics and robotics, including U.S. and foreign patents and patent
applications, proprietary software and documentation, trade secrets and
trademarks owned by Z-Kat, and certain contractual and other rights to patents,
patent applications and other intellectual property licensed to Z-Kat under
licenses. In connection with the acquisition, the Company also entered into a
new sublicense agreement with Z-Kat (the License Agreement) pertaining to
certain intellectual property for technologies in CAS licensed by Z-Kat. The
License Agreement was terminated by MAKO in December 2010. Certain of the
Companys rights under the Asset Purchase Agreement remain subject to any prior
license granted by Z-Kat, including a license to Biomet Manufacturing Corp. In
consideration for consummation of the transactions contemplated by the Asset
Purchase Agreement and License Agreement, the Company issued 230,458 shares of
its unregistered common stock to Z-Kat in a private placement, which was
treated as a related party transaction because certain directors and executive
officers of the Company had a material interest in Z-Kat by virtue of their
ownership of Z-Kat stock. The Company and Z-Kat are not entities under common
control. The Asset Purchase Agreement and License Agreement were approved by
the independent members of the board of directors and audit committee of the
Company. The value of the intellectual property acquired under the Asset
Purchase Agreement of $3.1 million was based on the closing price per share of
$13.25 of the Companys common stock on February 25, 2010, the date the
transaction was closed, and was recorded as an intangible asset and is being
amortized over its estimated useful life of eight years.

License
Agreement

In
August 2009, the Company entered into a License Agreement (the Sensor
Agreement) with a third-party sensor company associated with the potential
future development of intellectual property and technology

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related to
sensing devices in orthopedics. The Sensor Agreement required an initial payment
of $50,000 and required future payments in the event that the Company decided
to enter into a licensing and supply agreement with the third-party sensor
company following the end of the research and development period. In August
2010, the Company exercised its option to enter into a non-exclusive license
and supply agreement for an upfront payment of $250,000 (the Non-Exclusive
License Payment). The Non-Exclusive License Payment was recorded as an
intangible asset and will be amortized over its estimated useful life of ten
years. In October 2010, the Company exercised its option to enter into an
exclusive license and supply agreement which required an upfront payment of
$500,000 and a future payment of $250,000 which is anticipated to be paid in the
first quarter of 2011 (the Exclusive License Payments). The Exclusive License
Payments will be recorded as an intangible asset and amortized over its
estimated useful life of approximately five years. The Sensor Agreement was
treated as a related party transaction because certain directors of the Company
had a material interest in the third-party sensor company by virtue of their
ownership of the third-party sensor companys outstanding stock. The Company
and the third-party sensor company are not entities under common control.

6. Intangible Assets

The
Companys intangible assets are comprised of purchased patents, patent
applications and licenses to intellectual property rights (the Licenses). The
Licenses are amortized on a straight line basis over their estimated useful
lives which range from approximately 5 to 13 years. See Note 7 for
additional discussion of Licenses.

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

|                                         |  |              |        |                                      |  |        |  |                                      |        |   |  |     | 
|---------------------------------------- |  | ------------ | ------ | ------------------------------------ |  | ------ |  | ------------------------------------ | ------ | - |  | --- | 
|                                         |  | December 31, |       
|(in thousands)                           |  | 2010         |        | 2009                                 | 
|                                         |  | Amount       |        | Weighted
Average
Amortization
Period |  | Amount |  | Weighted
Average
Amortization
Period |       
|Licenses                                 |  | $            | 7,880  |                                      |  | 9.4    |  | $                                    | 6,679  |   |  | 9.9 | 
|Z-Kat
intellectual property (see Note 5) |  |              | 3,166  |                                      |  | 8.0    |  |                                      | ―      |   |  |     | 
|                                         |  |              | 11,046 |                                      |  | 9.0    |  |                                      | 6,679  |   |  | 9.9 | 
|Less:
accumulated amortization           |  |              | (3,516 | )                                    |  |        |  |                                      | (2,445 | ) |  |     | 
|Intangible
assets, net                   |  | $            | 7,530  |                                      |  |        |  | $                                    | 4,234  |   |  |     | 

Amortization
expense related to intangible assets was approximately $1.1 million, $682,000
and $660,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.

The
estimated future amortization expense of intangible assets for the next five
years as of December 31, 2010 is as follows:

|               |  |   |       | 
|-------------- |  | - | ----- | 
|(in thousands) |  |   |       | 
|2011           |  | $ | 1,279 | 
|2012           |  |   | 1,279 | 
|2013           |  |   | 1,273 | 
|2014           |  |   | 1,245 | 
|2015           |  |   | 1,198 | 
|Total          |  | $ | 6,274 | 

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7. Commitments and Contingencies

Operating Leases

In
September 2010, the Company entered into an expanded ten year operating lease
for the Companys existing headquarters in Fort Lauderdale, Florida, to allow
for expansion to support anticipated growth, and terminated the previous lease.
Under the new lease, the Company has the option to renew its facility lease for
two consecutive five year periods. The lease provides for periodic rent
increases and requires the Company to pay the operating costs including taxes,
insurance and maintenance. Rent expense on a straight-line basis was $624,000,
$613,000 and $498,000 for the years ended December 31, 2010, 2009 and
2008, respectively. The rent expense for the years ended December 31,
2010, 2009 and 2008 included the Companys monthly variable operating costs of
the facility.

Future
minimum lease commitments, excluding monthly variable operating costs, under
the Companys operating lease as of December 31, 2010 are as follows:

|               |  |   |       | 
|-------------- |  | - | ----- | 
|(in thousands) |  |   |       | 
|2011           |  | $ | 290   | 
|2012           |  |   | 337   | 
|2013           |  |   | 352   | 
|2014           |  |   | 504   | 
|2015           |  |   | 657   | 
|Thereafter     |  |   | 3,683 | 
|Total          |  | $ | 5,823 | 

Purchase Commitments

At
December 31, 2010, the Company was committed to make future purchases for
inventory related items and instrumentation under various purchase arrangements
with fixed purchase provisions aggregating approximately $8.0 million.

License and Royalty
Agreements

The
Asset Purchase Agreement with Z-Kat includes licenses with third-party
intellectual property rights for which the Company is obligated to make ongoing
royalty payments of 2% on the sale of certain products or components thereof
and minimum annual payments totaling $75,000.

See
Note 5 for further discussion of the Asset Purchase Agreement.

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

In
May 2009, the Company entered into a license agreement for patents relating to
its RIO system (the Robotic Arm License). The Robotic Arm License requires
running royalty payments of 1.8% on sales of Companys RIO systems and requires
annual minimum royalty payments on sales of the Companys RIO systems

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inclusive of
the running royalty payments. The minimum running royalties are estimated to be
approximately $1.0 million for the year ended December 31, 2010, and increase
annually thereafter through 2013. The minimum running royalties for the year
ended December 31, 2013 and for each subsequent year through the term of the
agreement are estimated to be approximately $1.7 million annually.

Effective
as of January 2010, the Company entered into a research and license agreement
(the Research and License Agreement) associated with potential future
products for use with the Companys RIO system. The Research and License
Agreement required an upfront payment of $300,000 for research services upon
the execution of the agreement and requires an additional $500,000 to be paid
quarterly over two years beginning in January 2011. The payments for research
services are being expensed as research and development expense on a
straight-line basis from January 2010 through December 2012, the period in
which research services are being performed under the Research and License
Agreement. The Research and License Agreement required a $200,000 upfront
license payment upon execution of the agreement, running royalty payments of 3%
on sales of products and processes covered under the Agreement and requires
minimum royalty payments (inclusive of running royalty payments) not to exceed
$250,000 over the term of agreement.

The
Company has other license agreements related to current product offerings and
research and development projects. Upfront license fees paid for these
agreements total approximately $2.1 million. Royalty payments related to these
agreements are anticipated to range between 1% and 6% of future sales of the
Companys RIO system and components thereof and/or products. These royalty
payments are subject to certain minimum annual royalty payments as shown in the
schedule below. The terms of these license agreements continue until the
related licensed patents and intellectual property rights expire, which is expected
to range between 6 and 16 years. The net expense related to the Companys
license and royalty agreements was approximately $2.0 million, $1.5 million and
$525,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.

As
of December 31, 2010, future annual minimum royalty payments under the
licenses and sublicenses are anticipated to be as follows:

|               |  |   |        | 
|-------------- |  | - | ------ | 
|(in thousands) |  |   |        | 
|2011           |  | $ | 1,069  | 
|2012           |  |   | 1,554  | 
|2013           |  |   | 1,984  | 
|2014           |  |   | 2,034  | 
|2015           |  |   | 2,034  | 
|Thereafter     |  |   | 5,475  | 
|               |  | $ | 14,150 | 

Development Agreements

In
June 2009, the Company entered into a Research and Development License and
Supply Agreement (the R&D Agreement) associated with a potential future
implant system for RIO-enabled hip MAKOplasty procedures. The R&D Agreement
required an up-front payment of $450,000, and requires future milestone
payments based on development progress. The aggregate milestone payments the
Company is obligated to pay under the R&D Agreement are $1.6 million assuming
the achievement of all development milestones. Through December 31, 2010, the
Company paid the $450,000 up-front payment and $1.1 million of milestone
payments which became due upon the achievement of the related milestones. The
aggregate up-front payment and milestone payments of $2.0 million the Company
is required to pay under the R&D Agreement were recognized as research and
development expense on a straight-line basis from June 2009 through August
2010, the period in which development services were performed under the R&D
Agreement. As of December 31, 2010, the Company had an accrued liability of
$500,000 which will become payable upon the achievement of the final milestone
under the R&D Agreement, which the Company believes is probable.

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In
October 2010, the Company entered into a Strategic Alliance Agreement (the
Pipeline Agreement) with Pipeline Biomedical Holdings, LLC (Pipeline) to
develop and supply potential future advanced implant technologies for use with the
Companys RIO system, including the development of a MAKO-branded RESTORIS
family of hip implant systems for use with the hip MAKOplasty application. Upon
execution of the Pipeline Agreement on October 1, 2010, the Company issued and
delivered to Pipeline 203,417 unregistered restricted shares of its common
stock (the Pipeline Shares) as consideration for the rights granted to MAKO
under the Pipeline Agreement. The restricted shares vest upon achievement of
certain performance conditions within six months of the effective date of the Pipeline
Agreement. If the performance conditions are not achieved, the Company may
terminate the Pipeline Agreement at its option subject to a breakup fee not to
exceed $800,000 (the Breakup Fee). The value of the Pipeline Shares will be
recognized as a component of research and development expense on a straight
line basis over 33 months from the effective date of the Pipeline Agreement
through June 30, 2013  the period over which Pipeline is expected to perform
development services under the Pipeline Agreement. In accordance with ASC
505-50-30-30; however, no research and development expense associated with the
services under the Pipeline Agreement will be recognized for the Pipeline
Shares until achievement of the performance conditions. Although the Company
believes the performance conditions will be met by Pipeline, as of December 31,
2010, the Company accrued $400,000 in expense for its obligation under the
Breakup Fee. Upon achievement of the performance conditions, the Company will
record an adjustment for the difference between the amount accrued to date for
the Breakup Fee obligation and the ratable portion of the expense to be
recognized for the Pipeline Shares from the effective date of the Pipeline
Agreement to the achievement of the performance conditions. The total amount of
expense to be recognized for the Pipeline Shares will be determined on the date
the performance conditions are achieved. The Company has no further obligation
beyond the previously issued Pipeline Shares to fund Pipelines research of
implant technologies under the Pipeline Agreement. The Pipeline Agreement
contains provisions under which Pipeline will supply the Company implants
developed under the Pipeline Agreement. Subsequent to December 31, 2010, the
performance conditions were achieved and the Pipeline Shares vested.

Contingencies

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

8. Stockholders Equity

Preferred
Stock

As
of December 31, 2010 and 2009, the Company was authorized to issue
27,000,000 shares of $0.001 par value preferred stock. As of December
31, 2010 and 2009, there were no shares of preferred stock issued or
outstanding. All shares of Series A, B and C redeemable convertible preferred
stock that were issued and outstanding as of December 31, 2007 converted into
10,945,080 shares of common stock upon closing of the Companys IPO in February
2008.

Common
Stock

As
of December 31, 2010 and 2009, the Company was authorized to issue 135,000,000
shares of $0.001 par value common stock. Common stockholders are entitled to
dividends as and if declared by the Board of Directors, subject to the rights
of holders of all classes of stock outstanding having priority rights as to
dividends. There have been no dividends declared to date on the common stock.
The holder of each share of common stock is entitled to one vote.

In December
2004, the Company issued 189,768 shares of restricted common stock to
certain consultants (the Consultant Restricted Stock). The Consultant
Restricted Stock vested in tranches upon the Companys achievement of certain
business milestones and any unvested restricted stock vested immediately upon
completion of an initial public offering of common stock. Upon vesting, the
Company recorded a consulting expense equal to the estimated fair value of the
Companys common stock on the date of vesting. As of January 1,

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2008,
94,884 shares of the Consultant Restricted Stock were unvested. Upon
closing of the IPO in February 2008, the vesting of the remaining 94,884 shares
of Consultant Restricted Stock was accelerated and the Company recognized
$949,000 of compensation expense associated with the accelerated vesting of the
Consultant Restricted Stock during the year ended December 31, 2008 based on
the IPO price of $10.00 per share.

Comprehensive
Loss

Comprehensive
loss is defined as the change in equity from transactions and other events and
circumstances other than those resulting from investments by owners and
distributions to owners. For the years ended December 31, 2010, 2009 and
2008, the Company recorded comprehensive losses of approximately $38.8 million,
$34.1 million and $37.0 million, respectively. The difference between
comprehensive loss and net loss for the years ended December 31, 2010,
2009 and 2008 is due to changes in unrealized gains and losses on the Companys
available-for-sale securities.

401K
Plan

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

Employee
Stock Purchase Plan

In
January 2008, the Companys Board of Directors and stockholders approved the
MAKO Surgical Corp. 2008 Employee Stock Purchase Plan (the 2008 Employee Stock
Purchase Plan). The 2008 Employee Stock Purchase Plan became effective upon
closing of the IPO. The 2008 Employee Stock Purchase Plan authorizes the
issuance of 625,000 shares of the Companys common stock for purchase by
eligible employees of the Company or any of its participating affiliates. The
shares of common stock issuable under the 2008 Employee Stock Purchase Plan may
be authorized but unissued shares, treasury shares or shares purchased on the
open market. The purchase price for a purchase period may not be less than 85%
of the fair market value of the Companys common stock on the first trading day
of the applicable purchase period or the last trading day of such purchase
period, whichever is lower. During the year ended December 31, 2010, the
Company issued approximately 86,000 shares under the 2008 Employee Stock
Purchase Plan. As of December 31, 2010, there were approximately 467,000 shares
reserved for future grant under the 2008 Employee Stock Purchase Plan.

Stock
Option Plans and Stock-Based Compensation

The
Company recognizes compensation expense for its stock-based awards in
accordance with ASC 718, Compensation-Stock Compensation. ASC 718
requires the recognition of compensation expense, using a fair value based
method, for costs related to all stock-based payments including stock options.
ASC 718 requires companies to estimate the fair value of stock-based payment
awards on the date of grant using an option-pricing model.

During
the years ended December 31, 2010, 2009 and 2008, stock-based compensation
expense was $6.4 million, $4.0 million and $3.3 million respectively. Included
within stock-based compensation expense for the year ended December 31, 2010
were $4.8 million related to stock option grants, $1.3 million related to the partial
vesting of shares of restricted stock granted to the Companys CEO at various
dates from 2006 through 2010, and $256,000 related to employee stock purchases
under the 2008 Employee Stock Purchase Plan.

In
December 2004, the Companys stockholders approved the Companys 2004 Stock
Incentive Plan (the 2004 Plan). Under the 2004 Plan, the Board of Directors
was authorized to grant restricted common stock and options to purchase shares
of common stock to employees, directors and consultants. No further awards will
be made under the 2004 Plan. In January 2008, the Companys Board of Directors
and stockholders approved the

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MAKO Surgical Corp. 2008 Omnibus Incentive Plan
(the 2008 Plan, and together with the 2004 Plan, the Plans). The 2008 Plan
became effective upon the closing of the IPO and will expire January 9,
2018 unless earlier terminated by the Board of Directors. Awards under the 2008
Plan may be made in the form of: stock options, which may be either incentive
stock options or non-qualified stock options; stock appreciation rights;
restricted stock; restricted stock units; dividend equivalent rights;
performance shares; performance units; cash-based awards; other stock-based
awards, including unrestricted shares; and any combination of the foregoing.

Generally,
the Companys outstanding stock options vest over four years. Stock options
granted to certain non-employee directors prior to 2010 generally vest over
three years; however, stock options granted to non-employee directors after
January 1, 2010 generally vest over one year. Continued vesting typically
terminates when the employment or consulting relationship ends. Vesting
generally begins on the date of grant.

The
2008 Plan contains an evergreen provision whereby the authorized shares
increase on January 1st of each year in an amount equal to the least of (1)
four percent (4%) of the total number of shares of the Companys common stock
outstanding on December 31st of the preceding year, (2) 2.5 million shares and
(3) a number of shares determined by the Companys Board of Directors that is
lesser than (1) and (2). The number of additional shares authorized under the
2008 Plan on January 1, 2010 and 2011 was approximately 1,330,000 and
1,618,000, respectively.

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

As
of December 31, 2010, the Company had reserved shares of common stock for the
issuance of common stock under the 2008 Employee Stock Purchase Plan, the
exercise of warrants and the issuance of options granted under the 2008 Plan as
follows:

|                                   |  |  |       | 
|---------------------------------- |  |  | ----- | 
|(in thousands)                     |  |  |       | 
|2008 Employee Stock
 Purchase Plan |  |  | 625   | 
|Warrants to purchase
 common stock |  |  | 2,076 | 
|2008 Plan                          |  |  | 3,413 | 
|                                   |  |  | 6,114 | 

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

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Activity
under the Plans is summarized as follows:

|                                      |  |                                      |        |                    |                     |                                    |   |   |       | 
|------------------------------------- |  | ------------------------------------ | ------ | ------------------ | ------------------- | ---------------------------------- | - | - | ----- | 
|(in thousands, except per share data) |  |                                      |        |                    | Outstanding Options |                                   
|                                      |  | Shares/Options
 Available
 For Grant |        | Number of
 Options |                     | Weighted
 Average
 Exercise
 Price |  
|Balance at December 31, 2009          |  |                                      | 174    |                    |                     | 3,478                              |   |   | 6.71  | 
|Shares reserved                       |  |                                      | 1,330  |                    |                     | ―                                  |   |   | ―     | 
|Restricted stock issued               |  |                                      | (175   | )                  |                     | ―                                  |   |   | ―     | 
|Shares swapped under the 2008 Plan    |  |                                      | 2      |                    |                     | ―                                  |   |   | ―     | 
|Options granted                       |  |                                      | (1,183 | )                  |                     | 1,183                              |   |   | 12.41 | 
|Options exercised                     |  |                                      | ―      |                    |                     | (180                               | ) |   | 3.48  | 
|Options forfeited under the 2004 Plan |  |                                      | ―      |                    |                     | (20                                | ) |   | 6.96  | 
|Options forfeited under the 2008 Plan |  |                                      | 56     |                    |                     | (56                                | ) |   | 8.75  | 
|Balance at December 31, 2010          |  |                                      | 204    |                    |                     | 4,405                              |   | $ | 8.35  | 

The
options outstanding and exercisable, by exercise price, at December 31,
2010 were as follows:

|                                        |  |                      |       |                                                   |  |                                |  |                                |       |                   |   |                                                   |  |                                |       |                                |  |      |  |   |       |  |   |        | 
|--------------------------------------- |  | -------------------- | ----- | ------------------------------------------------- |  | ------------------------------ |  | ------------------------------ | ----- | ----------------- | - | ------------------------------------------------- |  | ------------------------------ | ----- | ------------------------------ |  | ---- |  | - | ----- |  | - | ------ | 
|                                        |  | Options
 Outstanding |       | Options
 Exercisable                              | 
|(in thousands, except per 
 share data) |  | Number
 OfOptions    |       | Weighted
 AverageRemainingContractualLife (Years) |  | Weighted
 AverageExercisePrice |  | Aggregate
 Intrinsic Value (1) |       | Number
 OfOptions |   | Weighted
 AverageRemainingContractualLife (Years) |  | Weighted
 AverageExercisePrice |       | Aggregate
 Intrinsic Value (1) | 
|Range of
 Exercise Prices:              |  |                      |       |                                                   |  |                                |  |                                |       |                   |   |                                                   |  |                                |       |                                |  |      |  |   |       |  |   |        | 
|$0.67                                   |  |                      | 233   |                                                   |  |                                |  | $                              | 0.67  |                   |   |                                                   |  |                                | 233   |                                |  |      |  | $ | 0.67  |  |   |        | 
|$1.27  $2.48                           |  |                      | 664   |                                                   |  |                                |  | $                              | 1.75  |                   |   |                                                   |  |                                | 647   |                                |  |      |  | $ | 1.73  |  |   |        | 
|$6.90  $8.06                           |  |                      | 1,410 |                                                   |  |                                |  | $                              | 7.94  |                   |   |                                                   |  |                                | 616   |                                |  |      |  | $ | 7.96  |  |   |        | 
|$8.27  11.41                           |  |                      | 949   |                                                   |  |                                |  | $                              | 10.50 |                   |   |                                                   |  |                                | 604   |                                |  |      |  | $ | 10.52 |  |   |        | 
|$11.95  15.12                          |  |                      | 1,149 |                                                   |  |                                |  | $                              | 12.44 |                   |   |                                                   |  |                                | 211   |                                |  |      |  | $ | 12.39 |  |   |        | 
|                                        |  |                      | 4,405 |                                                   |  | 7.54                           |  | $                              | 8.35  |                   | $ | 30,272                                            |  |                                | 2,311 |                                |  | 6.72 |  | $ | 6.56  |  | $ | 20,023 | 

| |     |                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The
 aggregate intrinsic value represents the total pre-tax intrinsic value, based
 on the Companys closing stock price of $15.22 on December 31, 2010, which
 would have been received by the option holders had all option holders
 exercised their options as of that date.

As
of December 31, 2010, approximately 4,308,000 options were vested and expected
to vest at a weighted average exercise price of $8.31 per share, a weighted
average contractual life of 7.5 years and aggregate intrinsic value of $29.8
million.

The
weighted average fair values of options granted were $6.48, $4.43 and $5.08 for
the years ended December 31, 2010, 2009 and 2008, respectively. The total fair
value of shares vested was approximately $4.6 million, $2.8 million and $1.3
million during the years ended December 31, 2010, 2009 and 2008,
respectively. The total intrinsic value of options exercised was $1.6 million,
$1.0 million and $491,000 for the years ended December 31, 2010, 2009 and 2008.

The
Company records stock-based compensation expense on a straight-line basis over
the vesting period. As of December 31, 2010, there was total unrecognized
compensation cost of approximately $10.5 million, net of estimated forfeitures,
related to non-vested stock option grants to the Companys employees and
non-employee directors. The unrecognized compensation cost will be adjusted for
future changes in estimated forfeitures, and is expected to be recognized over
a remaining weighted average period of 2.5 years as of December 31, 2010.

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On
February 4, 2010, the Company issued 100,000 shares of restricted stock to its
CEO at a fair value of $1.2 million, or $11.95 per share, on the date of
issuance. The restricted stock will vest over a four-year period. On April 13,
2010, the Company issued 75,000 shares of restricted stock to its CEO at a fair
value of approximately $476,000 on the date of issuance. The April 13, 2010
grant is subject to performance conditions based on the achievement of certain
performance metrics. Upon satisfaction of the performance conditions, 50% of
the shares will vest on March 13, 2013 and 50% of the shares will vest on March
13, 2014. For the year ended December 31, 2010, 28,307 shares of common stock were
surrendered by the CEO to the Company to cover payroll taxes associated with
the taxable income from the vesting of restricted stock previously granted to
the Companys CEO. As of December 31, 2010, 879,723 shares of restricted stock
granted to the Companys CEO were issued and outstanding.

Restricted
stock activity for the year ended December 31, 2010 is as follows:

|                                      |  |        |  |                               |   |       | 
|------------------------------------- |  | ------ |  | ----------------------------- | - | ----- | 
|(in thousands, except per share data) |  | Shares |  | Weighted Average 
 Fair Value |  
|Unvested shares at December 31, 2009  |  | 222    |  |                               | $ | 8.86  | 
|Unvested shares at December 31, 2010  |  | 300    |  |                               | $ | 7.64  | 
|Shares granted in 2010                |  | 175    |  |                               |   | 9.55  | 
|Shares vested in 2010                 |  | 97     |  |                               |   | 10.30 | 

As
of December 31, 2010, the remaining stock-based compensation expense for
the restricted stock awards was approximately $2.3 million, which will be
recognized on a straight line basis over a remaining weighted average period of
2.38 years.

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

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

|                         |  |                          |                 |      |  |                 |  |  |                 | 
|------------------------ |  | ------------------------ | --------------- | ---- |  | --------------- |  |  | --------------- | 
|Stock Option
 Plans      |  | Years Ended December 31, |                
|                         |  | 2010                     |                 | 2009 |  | 2008            | 
|Risk-free
 interest rate |  |                          | 2.04% - 3.36%   |      |  | 1.99% - 3.53%   |  |  | 1.59% - 3.62%   | 
|Expected
 life           |  |                          | 6.25 years      |      |  | 6.25 years      |  |  | 6.25 years      | 
|Expected
 dividends      |  |                          | ―               |      |  | ―               |  |  | ―               | 
|Expected
 volatility     |  |                          | 50.15% - 50.74% |      |  | 54.43% - 57.71% |  |  | 56.36% - 58.31% | 

The
Company estimates the fair value of each share of stock which will be issued
under the 2008 Employee Stock Purchase Plan based upon its stock prices at the
beginning of each offering period using a Black-Scholes-Merton pricing model
and amortizes that value to expense over the plan purchase period. The fair
values determined for the years ended December 31, 2010, 2009 and 2008, as
well as the assumptions used in calculating those values are as follows:

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|                                  |  |                          |                 |                          |   |                          |  |   |                 | 
|--------------------------------- |  | ------------------------ | --------------- | ------------------------ | - | ------------------------ |  | - | --------------- | 
|2008 Employee Stock Purchase Plan |  | Year Ended
 December 31, |                 | Year Ended
 December 31, |   | Year Ended
 December 31, | 
|                                  |  | 2010                     |                 | 2009                     |   | 2008                     | 
|Fair Value                        |  | $                        | 2.21 - $3.68    |                          | $ | 1.82 - $2.54             |  | $ | 1.82 - $1.89    | 
|Assumptions                       |  |                          |                 |                          |   |                          |  |   |                 | 
|Risk-free interest rate           |  |                          | 0.12% - 0.60%   |                          |   | 0.60% - 3.20%            |  |   | 1.87% - 3.29%   | 
|Expected life                     |  |                          | 0.25 years      |                          |   | 0.25 years               |  |   | 0.25 years      | 
|Expected dividends                |  |                          | ―               |                          |   | ―                        |  |   | ―               | 
|Expected volatility               |  |                          | 34.50% - 52.08% |                          |   | 34.50% - 60.68%          |  |   | 57.05% - 60.68% | 

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

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

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

Volatility.
Since the Company was a private entity until February 2008 with no historical
data regarding the volatility of its common stock, the expected volatility used
for the years ended December 31, 2010, 2009 and 2008, is based on
volatility of similar entities, referred to as guideline companies. In
evaluating similarity, the Company considered factors such as industry, stage
of life cycle and size.

Forfeitures.
ASC 718 requires the Company to estimate forfeitures at the time of grant, and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. The Company uses historical data to estimate pre-vesting
option forfeitures and records stock-based compensation expense only for those
awards that are expected to vest. All stock-based payment awards are amortized
on a straight-line basis over the requisite service periods of the awards,
which are generally the vesting periods. If the Companys actual forfeiture
rate is materially different from its estimate, the stock-based compensation
expense could be significantly different from what the Company has recorded in
the accompanying periods.

Warrants

In
December 2004, the Company issued at the purchase price of $0.03 per share
warrants to purchase 462,716 shares of common stock. The warrants are
immediately exercisable at an exercise price of $3.00 per share, with the
exercise period expiring in December 2014. As of December 31, 2010 and
2009, 425,915 and 451,916 warrants were outstanding and exercisable,
respectively.

In
October 2008, the Company issued warrants to purchase 1,290,323 shares of
common stock at a purchase price of $0.125 per warrant and an exercise price of
$7.44 per share. The warrants became exercisable on April 29, 2009 and have a
seven-year term. As of December 31, 2010, all the warrants were
outstanding and exercisable.

In
October 2008, the Company issued warrants to purchase 322,581 shares of common
stock at a purchase price of $0.125 per warrant and an exercise price of $6.20
per share. These warrants became exercisable on December 31, 2009 and have a
seven-year term. As of December 31, 2010, all the warrants were
outstanding and exercisable.

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9. Income
Taxes

The
provision for income taxes is as follows:

|                              |  |                    |         |                    |   |                    |   |   |         |  
|----------------------------- |  | ------------------ | ------- | ------------------ | - | ------------------ | - | - | ------- | -
|(in thousands)                |  | Years Ended        |        
|                              |  | December 31,
 2010 |         | December 31,
 2009 |   | December 31,
 2008 |  
|Current income taxes:         |  |                    |         |                    |   |                    |   |   |         |  
|Federal                       |  | $                  | ―       |                    | $ | ―                  |   | $ | ―       |  
|State                         |  |                    | 68      |                    |   | 56                 |   |   | ―       |  
|Total current income taxes    |  |                    | 68      |                    |   | 56                 |   |   | ―       |  
|Deferred income taxes         |  |                    | (14,184 | )                  |   | (12,593            | ) |   | (13,031 | )
|Change in valuation allowance |  |                    | 14,184  |                    |   | 12,593             |   |   | 13,031  |  
|Provision for income taxes    |  | $                  | 68      |                    | $ | 56                 |   | $ | ―       |  

The
Company accounts for income taxes under ASC 740, Income Taxes. Deferred
income taxes are determined based upon differences between financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted income tax rates and laws that will be in effect when the differences
are expected to reverse. The Company recognizes any interest and penalties
related to unrecognized tax benefits as a component of income tax expense.

No
current or deferred income taxes were recorded for the years ended
December 31, 2010, 2009 and 2008, as the Companys income tax benefits
were fully offset by a corresponding increase to the valuation allowance
against its net deferred income tax assets.

At
December 31, 2010, 2009 and 2008, the Company had federal and state net
operating loss carryforwards of approximately $129.6 million, $100.2 million
and $60 million, respectively, available to offset future taxable income. These
net operating loss carryforwards will expire in varying amounts from 2024
through 2030.

The
Tax Reform Act of 1986 limits the annual utilization of net operating loss and
tax credit carryforwards, following an ownership change of the Company. Note
that as a result of the Companys equity financings in recent years, the
Company underwent changes in ownership for purposes of the Tax Reform Act.

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

|                                                  |  |              |         |      |   |         |  
|------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | -
|(in thousands)                                    |  | December 31, |        
|                                                  |  | 2010         |         | 2009 |  
|Current deferred income tax assets:               |  |              |         |      |   |         |  
|Deferred revenue                                  |  | $            | 1,256   |      | $ | 212     |  
|Reserves                                          |  |              | 619     |      |   | ―       |  
|Accrued expenses                                  |  |              | 502     |      |   | ―       |  
|Total current deferred income tax assets          |  |              | 2,377   |      |   | 212     |  
|                                                  |  |              |         |      |   |         |  
|Noncurrent deferred income tax assets:            |  |              |         |      |   |        
|Net operating loss carryforwards                  |  |              | 51,163  |      |   | 38,650  |  
|Amortization                                      |  |              | 591     |      |   | 404     |  
|Other                                             |  |              | 10      |      |   | 481     |  
|Total noncurrent deferred income tax assets       |  |              | 51,764  |      |   | 39,535  |  
|                                                  |  |              |         |      |   |         |  
|Current deferred income tax liabilities:          |  |              |         |      |   |         |  
|Other deferred income tax liabilities             |  |              | ―       |      |   | (2      | )
|Total current deferred income tax
 liabilities    |  |              | ―       |      |   | (2      | )
|                                                  |  |              |         |      |   |         |  
|Noncurrent deferred income tax liabilities:       |  |              |         |      |   |         |  
|Other deferred income tax liabilities             |  |              | (213    | )    |   | ―       |  
|Total noncurrent deferred income tax
 liabilities |  |              | (213    | )    |   | ―       |  
|                                                  |  |              |         |      |   |         |  
|Less valuation allowance                          |  |              | (53,928 | )    |   | (39,745 | )
|Total deferred income tax assets, net             |  | $            | ―       |      | $ | ―       |  

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

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

|                                    |  |                    |        |                    |  |                    |    |  |        |   
|----------------------------------- |  | ------------------ | ------ | ------------------ |  | ------------------ | -- |  | ------ | --
|                                    |  | Years Ended        |       
|                                    |  | December 31,
 2010 |        | December 31,
 2009 |  | December 31,
 2008 |   
|Tax at U.S.
 statutory rate         |  |                    | (35.00 | )%                 |  | (35.00             | )% |  | (35.00 | )%
|State taxes,
 net of federal impact |  |                    | (4.49  | )%                 |  | (3.28              | )% |  | (3.26  | )%
|Non-deductible
 items               |  |                    | 5.46   | %                  |  | 2.92               | %  |  | 3.13   | % 
|Return to
 provision differences    |  |                    | (2.44  | )%                 |  | ―                  |    |  | ―      |   
|Change in
 valuation allowance      |  |                    | 36.66  | %                  |  | 35.13              | %  |  | 35.14  | % 
|Other, net                          |  |                    | (0.19  | )%                 |  | 0.23               | %  |  | (0.01  | )%
|Effective
 income tax rate          |  |                    | 0.00   | %                  |  | 0.00               | %  |  | 0.00   | % 

In
accordance with ASC 740, the Company has decided to classify any interest and
penalties as a component of income tax expense. To date, there have been no
interest or penalties charged to the Company in relation to the underpayment of
income taxes. The Companys primary tax jurisdictions are in the United States
and in multiple state jurisdictions. The tax years from 2005 through 2010
remain open and are subject to examination by the appropriate governmental
agencies.

10. Selected Quarterly Data (Unaudited)

|                                                                            |  |      |         |    |   |        |   |         |        |   |   |        |  
|--------------------------------------------------------------------------- |  | ---- | ------- | -- | - | ------ | - | ------- | ------ | - | - | ------ | -
|(in thousands, except per share data)                                       |  | 2010 |        
|                                                                            |  | Q1   |         | Q2 |   | Q3     |   | Q4
 (1) |       
|Revenue                                                                     |  | $    | 7,249   |    | $ | 10,251 |   | $       | 12,014 |   | $ | 14,782 |  
|Gross profit                                                                |  |      | 3,253   |    |   | 6,580  |   |         | 7,455  |   |   | 8,835  |  
|Loss from operations                                                        |  |      | (11,470 | )  |   | (8,587 | ) |         | (9,006 | ) |   | (9,873 | )
|Net loss attributable to common stockholders                                |  |      | (11,408 | )  |   | (8,524 | ) |         | (8,938 | ) |   | (9,817 | )
|Net loss per share  basic and diluted attributable to common
 stockholders |  |      | (0.34   | )  |   | (0.26  | ) |         | (0.27  | ) |   | (0.26  | )

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | During the
 fourth quarter of 2010, the Company determined that it had incorrectly
 recognized revenue and expenses associated with the initial warranty
 obligation and maintenance services included in all previous RIO system
 sales. Accordingly, in the fourth quarter of 2010, the Company recorded an
 adjustment to decrease revenue by $1.2 million, to reverse the accrual for
 its warranty and maintenance obligation by $552,000 and to increase net loss
 by $644,000, or $(0.02) per basic and diluted share. The adjustment arose
 over the quarters throughout 2009 and
 2010 and did not materially
 affect the Companys trend in earnings. As the adjustment was related
 to the correction of an error, the Company performed the analysis required by
 Staff Accounting Bulletin 99, Materiality,
 and Staff Accounting Bulletin 108, Considering
 the Effects of Prior Year Misstatements When Quantifying Misstatements in
 Current Year Financial Statements. Based on this analysis, the
 Company concluded that the effect of the error was not material to the quarters and years in the two year period
 ended December 31, 2010 from both a quantitative and qualitative
 perspective.

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|                                                                            |  |         |        |         |   |        |   |    |        |   |   |        |  
|--------------------------------------------------------------------------- |  | ------- | ------ | ------- | - | ------ | - | -- | ------ | - | - | ------ | -
|(in thousands, except per share data)                                       |  | 2009    |       
|                                                                            |  | Q1
 (2) |        | Q2
 (2) |   | Q3     |   | Q4 |       
|Revenue                                                                     |  | $       | 3,727  |         | $ | 14,904 |   | $  | 6,726  |   | $ | 8,851  |  
|Gross profit                                                                |  |         | 697    |         |   | 4,685  |   |    | 2,830  |   |   | 4,542  |  
|Loss from operations                                                        |  |         | (9,102 | )       |   | (6,491 | ) |    | (9,447 | ) |   | (9,356 | )
|Net loss attributable to common stockholders                                |  |         | (8,885 | )       |   | (6,424 | ) |    | (9,439 | ) |   | (9,275 | )
|Net loss per share  basic and diluted attributable to common
 stockholders |  |         | (0.36  | )       |   | (0.26  | ) |    | (0.33  | ) |   | (0.28  | )

| |     |                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Revenue for
 the first and second quarters of 2009 includes approximately $2.5 million and
 $8.8 million, respectively, of revenue from previously deferred unit sales of
 our TGS. In accordance with our revenue recognition policy, recognition of
 revenue on unit sales of our TGS was deferred until delivery of the RIO
 system, which we commercially released in the first quarter of 2009.

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

None.

|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, or the
Exchange Act, our management evaluated, with the participation of our chief
executive officer and chief financial officer, or the Certifying Officers, the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December
31, 2010. Based upon their evaluation of these disclosure controls and
procedures, our Certifying Officers concluded that the disclosure controls and
procedures were effective as of December 31, 2010 to provide reasonable
assurance that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC rules and forms, and to
provide reasonable assurance that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding
required disclosure.

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

Managements Report on Internal Control Over
Financial Reporting

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

Under
the supervision and with the participation of our management, including the
certifying officers, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation
under the criteria established in Internal Control  Integrated Framework, our
management concluded that our internal control over financial reporting was effective
as of December 31, 2010. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

The
effectiveness of our internal control over financial reporting as of December
31, 2010 has been audited by our independent registered public account firm, as
stated in their report, which is included herein.

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

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

None

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PART III.

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

The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2011 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

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

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

The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2011 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

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

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

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2011
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

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

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

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

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2011
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

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

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

The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2011
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:

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

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PART IV

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

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

|             |  |                                                                                                                                   | 
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 No. |  | Description                                                                                                                       | 
|             |  |                                                                                                                                  
|3.1          |  | Third Amended and Restated
 Certificate of Incorporation of the Registrant, dated February 20, 2008 (2)                          
|             |  |                                                                                                                                  
|3.2          |  | Fourth Amended and
 Restated Bylaws of the Registrant effective October 31, 2008 (6)                                             
|             |  |                                                                                                                                  
|4.1          |  | Securities Purchase
 Agreement by and among the Registrant and Investors named therein, dated as
 of October 28, 2008 (6)        
|             |  |                                                                                                                                  
|4.2          |  | Form of Warrant (6)                                                                                                              
|             |  |                                                                                                                                  
|4.3          |  | Form of Call Warrant (6)                                                                                                         
|             |  |                                                                                                                                  
|10.1         |  | Form of Indemnity
 Agreement for Directors and Executive Officers (3)                                                            
|             |  |                                                                                                                                  
|10.2+        |  | 2004 Stock Incentive Plan
 and forms of agreements related thereto (3)                                                           
|             |  |                                                                                                                                  
|10.3+        |  | 2008 Omnibus Incentive
 Plan (3)                                                                                                 
|             |  |                                                                                                                                  
|10.4+        |  | 2008 Employee Stock
 Purchase Plan (3)                                                                                           
|             |  |                                                                                                                                  
|10.5+        |  | Amended Employment
 Agreement, dated as of November 12, 2007, by and between Registrant and
 Maurice R. Ferré, M.D (3)           
|             |  |                                                                                                                                  
|10.6         |  | Lease, by and between
 Registrant and Westport Business Park Associates LLP, dated September 8, 2010
 (1)                        
|             |  |                                                                                                                                  
|10.7+        |  | Form of Incentive Stock
 Option Agreement related to the 2008 Omnibus Incentive Plan (4)                                         
|             |  |                                                                                                                                  
|10.8+        |  | Employment Agreement
 between Registrant and Duncan Moffat, effective as of April 28, 2008 (5)                                   
|             |  |                                                                                                                                  
|10.9+        |  | Form of Non-Qualified
 Stock Option Agreement related to the 2008 Omnibus Incentive Plan (5)                                     
|             |  |                                                                                                                                  
|10.10+       |  | Form of Restricted Stock
 Unit Agreement related to the 2008 Omnibus Incentive Plan (5)                                          
|             |  |                                                                                                                                  
|10.11+       |  | Form of Subscription
 Agreement related to the 2008 Employee Stock Purchase Plan (12)                                            
|             |  |                                                                                                                                  
|10.12+       |  | Amendment to Amended
 Employment Agreement by and between Registrant and Maurice R. Ferré,
 M.D., effective February 13, 2009 (7)

117

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Table of Contents

|       |  |                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------
|10.13+ |  | Amended and Restated
 Employment Agreement by and between Registrant and Fritz L. LaPorte,
 effective February 13, 2009 (7)             
|       |  |                                                                                                                                         
|10.14+ |  | Amended and Restated
 Employment Agreement by and between Registrant and Menashe R. Frank,
 effective February 13, 2009 (7)             
|       |  |                                                                                                                                         
|10.15+ |  | Amended and Restated
 Employment Agreement by and between Registrant and Steven J. Nunes, effective
 February 13, 2009 (7)              
|       |  |                                                                                                                                         
|10.16+ |  | Employment Agreement by
 and between Registrant and Ivan Delevic, effective April 27, 2009 (8)                                          
|       |  |                                                                                                                                         
|10.17+ |  | 2010 Leadership Cash Bonus
 Plan (9)                                                                                                    
|       |  |                                                                                                                                         
|10.18+ |  | 2010 Performance Bonus
 Plan for S. Nunes  SVP of Sales & Marketing (9)                                                                
|       |  |                                                                                                                                         
|10.19+ |  | Second Amendment to
 Amended Employment Agreement by and between Registrant and Maurice R. Ferré,
 M.D., effective February 17, 2010 (9)
|       |  |                                                                                                                                         
|10.20+ |  | Employment Agreement
 between Registrant and James E. Keller, effective as of March 22, 2010 (10)                                       
|       |  |                                                                                                                                         
|10.21+ |  | Employment Agreement
 between Registrant and Richard Leparmentier, effective as of March 29, 2010
 (11)                                 
|       |  |                                                                                                                                         
|10.22+ |  | First Amendment to
 Employment Agreement between Registrant and Ivan Delevic, effective as of
 April 13, 2010 (12)                      
|       |  |                                                                                                                                         
|10.23+ |  | Restricted Stock Agreement
 dated April 13, 2010 issued to Maurice R. Ferré (13)                                                        
|       |  |                                                                                                                                         
|10.24+ |  | 2011 Leadership Cash Bonus
 Plan (14)                                                                                                   
|       |  |                                                                                                                                         
|10.25+ |  | Restricted Stock Agreement
 dated February 3, 2011 issued to Maurice R. Ferré (14)                                                      
|       |  |                                                                                                                                         
|23     |  | Consent of 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 to 18 U.S.C. §1350 (1)                                                               
|       |  |                                                                                                                                         
|32.2   |  | Certification of Chief
 Financial Officer pursuant to 18 U.S.C. §1350 (1)                                                               
|       |  |                                                                                                                                         
|99.1   |  | Registration Rights
 Agreement by and between Registrant and Z-Kat, Inc. dated February 25, 2010
 (15)                                  

|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Filed herewith                                                                                                                                                    
|    |                                                                                                                                                                   
|(2) | Incorporated by reference
 to Registrants Annual Report on Form 10-K for the period ended December 31,
 2007 filed with the SEC on March 31, 2008                
|    |                                                                                                                                                                   
|(3) | Incorporated by reference
 to Registrants Registration Statement on Form S-1, as amended, filed with
 the SEC on September 19, 2007 (Registration No. 333-146162)
|    |                                                                                                                                                                   
|(4) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on February 26,
 2008                                                    
|    |                                                                                                                                                                   
|(5) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on April 29,
 2008                                                       
|    |                                                                                                                                                                   
|(6) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on October 30,
 2008                                                     

118

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Table of Contents

|     |                                                                                                                                                   
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(7)  | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on February 20,
 2009                                    
|     |                                                                                                                                                   
|(8)  | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on April 28,
 2009                                       
|     |                                                                                                                                                   
|(9)  | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on February 23,
 2010                                    
|     |                                                                                                                                                   
|(10) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on March 24,
 2010                                       
|     |                                                                                                                                                   
|(11) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on March 29,
 2010                                       
|     |                                                                                                                                                   
|(12) | Incorporated by reference
 to Registrants Quarterly Report on Form 10-Q for the quarter ended March 31,
 2010 filed with the SEC on May 7, 2010  
|     |                                                                                                                                                   
|(13) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on April 15,
 2010                                       
|     |                                                                                                                                                   
|(14) | Incorporated by reference
 to Registrants Current Report on Form 8-K filed with the SEC on February 4,
 2011                                     
|     |                                                                                                                                                   
|(15) | Incorporated by reference
 to Registrants Annual Report on Form 10-K for the period ended December 31,
 2009 filed with the SEC on March 10, 2010
|     |                                                                                                                                                   
|+    | Indicates management
 contract or compensatory plan.                                                                                              

119

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Table of Contents

SIGNATURES

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

|                                                                                                                                                                                                                 |     |                                     | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ----------------------------------- | 
|                                                                                                                                                                                                                 | By: | /s/ Maurice R. Ferré, M.D.          | 
|                                                                                                                                                                                                                 |     | President, Chief Executive
 Officer | 
|                                                                                                                                                                                                                 |     | and Chairman of the Board           | 
|                                                                                                                                                                                                                 |     | (Principal Executive
 Officer)      | 
|Dated: March 10, 2011                                                                                                                                                                                            |     |                                     | 
|                                                                                                                                                                                                                
|Pursuant
 to the requirements of the Securities Exchange Act of 1934, this report has
 been signed below by the following persons on behalf of the Registrant and in
 the capacities and on the dates indicated.

|                                |  |                                                                                                                                           |  |                
|------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------
|Signature                       |  | Title                                                                                                                                     |  | Date           
|                                |  |                                                                                                                                           |  |                
|/s/ Maurice R. Ferré, M.D.      |  | President, Chief Executive
 Officer and Chairman of the Board (Principal Executive Officer)                                               |  | March
 10, 2011
|Maurice R. Ferré, M.D.          |  |                                                                                                                                           | 
|                                |  |                                                                                                                                           |  |                
|/s/
 Fritz L. LaPorte           |  | Senior Vice President of
 Finance and Administration, Chief Financial Officer and Treasurer (Principal
 Accounting and Financial Officer) |  | March
 10, 2011
|Fritz
 L. LaPorte               |  |                                                                                                                                           | 
|                                |  |                                                                                                                                           | 
|                                |  |                                                                                                                                           |  |                
|/s/ S. Morry Blumenfeld,
 Ph.D. |  | Director                                                                                                                                  |  | March
 10, 2011
|S. Morry Blumenfeld, Ph.D.      |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ Christopher C. Dewey        |  | Director                                                                                                                                  |  | March
 10, 2011
|Christopher C. Dewey            |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ Charles W. Federico         |  | Director                                                                                                                                  |  | March
 10, 2011
|Charles W. Federico             |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ John G. Freund, M.D.        |  | Director                                                                                                                                  |  | March
 10, 2011
|John G. Freund, M.D.            |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ Frederic H. Moll, M.D.      |  | Director                                                                                                                                  |  | March
 10, 2011
|Frederic H. Moll, M.D.          |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/
 Richard R. Pettingill      |  | Director                                                                                                                                  |  | March
 10, 2011
|Richard
 R. Pettingill          |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ William D. Pruitt           |  | Director                                                                                                                                  |  | March
 10, 2011
|William D. Pruitt               |  |                                                                                                                                           |  |                
|                                |  |                                                                                                                                           |  |                
|/s/ John J. Savarese, M.D.      |  | Director                                                                                                                                  |  | March
 10, 2011
|John J.
 Savarese, M.D.         |  |                                                                                                                                           |  |                

120

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Table of Contents

EXHIBIT
INDEX

|           |  |                                                                                                       | 
|---------- |  | ----------------------------------------------------------------------------------------------------- | 
|ExhibitNo. |  | Description                                                                                           | 
|10.6       |  | Lease, by
 and between Registrant and Westport Business Park Associates LLP, dated
 September 8, 2010
|           |  |                                                                                                      
|23         |  | Consent of
 Independent Registered Public Accounting Firm                                            
|           |  |                                                                                                       | 
|31.1       |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act             
|           |  |                                                                                                       | 
|31.2       |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act             
|           |  |                                                                                                       | 
|32.1       |  | Certification
 of Chief Executive Officer pursuant to 18 U.S.C. §1350                                
|           |  |                                                                                                       | 
|32.2       |  | Certification
 of Chief Financial Officer pursuant to 18 U.S.C. §1350                                

121

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