UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549


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Form 10-K

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þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission file number: 001-33966

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MAKO SURGICAL CORP.(Exact
Name of Registrant as Specified in Its Charter)

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

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


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

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

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

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, 2009 was approximately $134,589,080 (based on a
closing price of $9.02 per share on The NASDAQ Global Market as of such date).

As
of March 1, 2010, the registrant had outstanding 33,632,696 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Companys definitive proxy statement for the 2010 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                                                                                                  |  | 34 
|Item
 1B                    |  | Unresolved
 Staff Comments                                                                                     |  | 58 
|Item
 2                     |  | Properties                                                                                                     |  | 58 
|Item
 3                     |  | Legal
 Proceedings                                                                                             |  | 58 
|Item
 4                     |  | Reserved                                                                                                       |  | 58 
|                            |  |                                                                                                                |  |    
|                            |  | Part II                                                                                                        |  |    
|                            |  |                                                                                                                |  |    
|Item
 5                     |  | Market
 for Registrants Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |  | 59 
|Item
 6                     |  | Selected
 Financial Data                                                                                       |  | 62 
|Item
 7                     |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                         |  | 63 
|Item
 7A                    |  | Quantitative
 and Qualitative Disclosures about Market Risk                                                    |  | 74 
|Item
 8                     |  | Financial
 Statements and Supplementary Data                                                                   |  | 75 
|Item
 9                     |  | Changes
 in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 106
|Item
 9A(T)                 |  | Controls
 and Procedures                                                                                       |  | 106
|Item
 9B                    |  | Other
 Information                                                                                             |  | 107
|                            |  |                                                                                                                |  |    
|                            |  | Part III                                                                                                       |  |    
|                            |  |                                                                                                                |  |    
|Item
 10                    |  | Directors,
 Executive Officers and Corporate Governance                                                        |  | 108
|Item
 11                    |  | Executive
 Compensation                                                                                        |  | 108
|Item
 12                    |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters               |  | 108
|Item
 13                    |  | Certain
 Relationships, Related Transactions and Director Independence                                         |  | 108
|Item
 14                    |  | Principal
 Accountant Fees and Services                                                                        |  | 109
|                            |  |                                                                                                                |  |    
|                            |  | Part IV                                                                                                        |  |    
|                            |  |                                                                                                                |  |    
|Item
 15                    |  | Exhibits,
 Financial Statements and Financial Statement Schedules                                              |  | 110
|Signatures                  |  | 113                                                                                                           
|Exhibit
 Index              |  | 115                                                                                                           

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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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 goals for sales and
 earnings growth;                                                                                                                                     
| |   |                                                                                                                                                                               
| |  | our ability to sustain
 sales and earnings growth;                                                                                                                            
| |   |                                                                                                                                                                               
| |  | our success in achieving
 timely approval or clearance of products with domestic and foreign regulatory
 entities;                                                            
| |   |                                                                                                                                                                               
| |  | the stability of certain
 domestic and foreign economic markets;                                                                                                              
| |   |                                                                                                                                                                               
| |  | the impact of anticipated
 changes in the 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

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report will prove to be
accurate. The inclusion of a forward-looking statement in this report should
not be regarded as a representation by us that our objectives will be achieved.

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

| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a 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 interest rates;                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in the
 availability of capital and financing sources, for our company and our
 customers;                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in competitive
 conditions and prices in our markets;                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in the
 relationship between supply of and demand for our products;                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | fluctuations in costs of
 raw materials and labor;                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                   
| |  | changes in other
 significant operating expenses;                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to 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;                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 associated with any healthcare reform legislation that may be enacted;                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                   
| |  | 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 products;                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                   
| |  | developments adversely
 affecting our potential sales activities outside the United States;                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | increases in cost
 containment efforts by group purchasing organizations;                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                   
| |  | loss of key management and
 other personnel or inability to attract such management and other personnel;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                   
| |  | increases in costs of
 retaining a direct sales force and building a distributor network;                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated issues
 related to, or unanticipated changes in or difficulties associated with, the
 recruitment of agents and distributors of our products;                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated expenditures
 related to any future litigation; and                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                   
| |  | unanticipated intellectual
 property expenditures required to develop, market and defend our products.                                                                                                                                                                                            

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

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PART I

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

Overview

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

We
were incorporated in Delaware in November 2004. 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, or IPO.

MAKOplasty
is performed using our proprietary RIO® Robotic Arm Interactive Orthopedic
system, or RIO, and proprietary RESTORIS® unicompartmental and RESTORIS® MCK
multicompartmental knee implant systems. The RIO is a technology platform that
we believe has potential future application for other orthopedic procedures
beyond the knee. The RIO utilizes tactile guided robotic arm technology and
patient specific visualization to prepare the knee joint for the insertion and
alignment of our resurfacing implants through a small incision in a minimally
invasive, bone preserving and tissue sparing procedure. Our RESTORIS family of
knee implants is designed to enable minimally invasive restoration of one or
two of the diseased compartments of the knee joint. We believe MAKOplasty will
empower physicians to address the needs of the large and growing, yet
underserved population of patients with early to mid-stage osteoarthritic knee
disease who desire a restoration of quality of life and reduction of pain, but
for whom current surgical treatments are not appropriate or desirable due to
the highly invasive nature of such procedures, the slow recovery and the
substantial costs of rehabilitation, medication and hospitalization.

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

In
May 2005, we obtained 510(k) marketing clearance from the U.S. Food and
Drug Administration, or FDA, for a haptic imageless surgical guidance system.
In November 2005, we obtained 510(k) marketing clearance from the FDA for
version 1.0 of our Tactical Guidance System, or TGS, a CT based patient
specific visualization system with a robotic arm, which was the predecessor
device to our RIO system and enabled MAKOplasty for a single compartment of the
knee joint using a standard unicompartmental implant. In January 2008, we
received 510(k) marketing clearance from the FDA for version 1.2 of our TGS,
which allowed for MAKOplasty using an alternative standard unicompartmental
knee implant and incorporated several software upgrades developed and
introduced since the commercial introduction of version 1.0. We commercially
launched

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version 1.2 in the first
quarter of 2008. In the third quarter of 2008, we commercially launched version
1.3 of our TGS (the modifications to which did not require 510(k) marketing
clearance).

In
the fourth quarter of 2008, we received 510(k) marketing clearance from the FDA
for our RIO system, which is version 2.0 of our TGS, which we commercially
launched in the first quarter of 2009. In the third quarter of 2009, we
commercially launched version 2.1 of our RIO system (the modifications to which
did not require 510(k) marketing clearance), which reflected further refinement
of the RIO platform and knee application. In the fourth quarter of 2009, we
commercially launched version 2.2 of our RIO system (the modifications to which
did not require 510(k) marketing clearance), which enabled surgeons to treat
lateral compartment knee arthritis.

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 for our
combined inlay and onlay system, branded as RESTORIS. In the second quarter of
2008, we received 510(k) marketing clearance for our novel unicompartmental
knee implant and 510(k) marketing clearance for our patellofemoral knee
implant, predecessor components of our proprietary multicompartmental knee
implant system. In the fourth quarter of 2008, we received 510(k) marketing
clearance from the FDA for our multicompartmental knee implant system, branded as
RESTORIS MCK. We commercially launched the RESTORIS MCK multicompartmental knee
implant system in the second quarter of 2009.

As
part of the original TGS sales contracts, TGS customers were entitled to
receive an upgrade of their TGS unit to a RIO system at no additional charge,
with the exception of one customer who had the right to receive it at a
discounted price. During the first half of 2009, we upgraded all seventeen TGS
units to RIO systems. In 2009, we commercially installed nineteen new RIO
systems, bringing the total number of commercial MAKOplasty sites to 36 as of
December 31, 2009. A total of 1,602 MAKOplasty procedures were performed in
2009 and as of December 31, 2009, 2,384 MAKOplasty procedures had been
performed since commercial introduction in June 2006. As of March 1, 2010, we
have 39 post-market studies of MAKOplasty, either recently completed
or in progress, which are aimed at demonstrating the accuracy of the placement
and alignment of our knee implants and the clinical value of the MAKOplasty
procedure. To date, the results of these studies have been presented as
peer-reviewed presentations at conferences in the United States and abroad. As
of March 1, 2010, 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 extended warranty service contracts.

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. The NIH projects that by 2030, 20% of Americans, or
approximately 72 million people, will be 65 years or older and will
be at high risk of developing osteoarthritis. According to 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. The Orthopaedic Industry Annual Report for the year
ended June 15, 2009 reports that being overweight

6

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

For
the most severe cases of osteoarthritis, in which patients suffer from extreme
pain, reconstructive joint surgery may be required. Reconstructive joint
surgery involves the removal of the bone area surrounding the affected joint
and the insertion of one or more manufactured implants as a replacement for the
affected bone. According to The Orthopaedic Industry Annual Report,
global sales of joint replacement products in 2008, including knees, hips,
elbows, wrists, digits and shoulders, were $12.7 billion, an increase in sales
of nearly 9% over 2007, of which sales in the United States represented
$6.7 billion. According to Frost & Sullivan, the joint implant market
is expected to grow to approximately $9.7 billion by 2013, with knee and
hip implant systems representing the two largest sectors.

Market for Osteoarthritis of the Knee

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

(GRAPHIC)

According
to the Centers for Disease Control, there are currently more than
15 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. As a result of this substantial clinical need, the market for
orthopedic knee procedures in the U.S. has experienced tremendous growth
over the past decade. According to data compiled by Orthopedic Network News,
the U.S. knee implant market was greater than $3.7 billion in 2008,
which represents growth of 9.2% from 2007 to 2008. In addition to the
substantial costs of the procedure itself, total knee replacement and
resurfacing procedures represent significant incremental costs to the
healthcare system. These include costs associated with rehabilitation,
medication, hospitalization and, over the long-term, costs incurred as a result
of replacements or revisions that may be required due to wear and tear or
improper placement.

Current Orthopedic Knee Arthroplasty
Approaches

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

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

7

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

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

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

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

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

Unicompartmental
and Bicompartmental Knee Resurfacing. Unicompartmental and bicompartmental knee resurfacing is a less
invasive arthroplasty procedure in which only the arthritic region of the knee
is removed and a small implant is inserted to resurface the diseased
compartment of the knee. Unicompartmental and bicompartmental knee resurfacing
procedures are ideal for patients with early to mid-stage osteoarthritis and
are aimed at sparing the healthy bone, cartilage and other soft tissues
typically removed in a conventional total knee replacement procedure. Today,
these procedures are generally performed manually and require a level of
training, expertise and precision that significantly exceeds what is required
for the typical total knee replacement surgery. Orthopedic Network News has
estimated that 49,400 unicompartmental knee resurfacing procedures were
performed in 2008 in the United States, which represents a 6.9% increase from
the estimated 46,200 such procedures performed in 2007 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.                                                                                                

8

---



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

Introduction of Minimally Invasive Surgery

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

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

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

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

Introduction of Robotics into Other
Surgical Fields

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

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

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

9

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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.

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

The MAKO Solution

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

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

10

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | MAKOplasty in a relatively
 short period of time and also will increase the number of physicians who are
 willing and able to perform unicompartmental and bicompartmental resurfacing
 procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Proprietary Implants.We believe that our proprietary knee
 resurfacing implants allow surgeons to customize a knee resurfacing solution
 for individual patients facing early to mid-stage osteoarthritis in one or
 two compartments of the knee joint. Our original RESTORIS unicompartmental
 implant system allows for a choice of tibial implant based on patient bone
 quality. Our RESTORIS MCK implant system provides for this same choice for
 medial 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.
 Because all implants are sized and planned for based on patient-specific
 anatomical indications, the potential for favorable clinical outcomes is
 enhanced.                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Ease of Use. We believe that our 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 of the knee joint. We believe
 that the RIOs ease of use makes resurfacing procedures accessible to
 orthopedic surgeons with a broad range of training and skills and has the
 potential to lead to greater adoption of knee resurfacing solutions for early
 to mid-stage osteoarthritis of the knee. We also believe that the ease of use
 provided by the RIO can enable physicians to shorten operating room time and
 potentially increase the number of procedures performed.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Improved Restorative Post-Operative Outcomes. Due to the minimally invasive nature of
 the procedure, we believe that patients who undergo knee MAKOplasty are
 likely to experience less tissue loss, less visible scarring and a faster
 recovery, thereby reducing the cost of rehabilitation, physical therapy,
 medication and hospitalization. In addition, because more of the patients
 natural anatomy is preserved and less trauma is inflicted on the knee,
 patients who undergo MAKOplasty have the potential to experience better
 mobility, comfort, range of motion and more natural knee movements to achieve
 an improved post-operative quality of life.                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Reduced Costs for Patients and Hospitals. The minimally invasive nature of the knee
 MAKOplasty solution aids hospitals and patients in reducing costs by
 shortening hospital stays and recovery periods and reducing the amount of
 rehabilitation and medication.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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

The
figure below illustrates a MAKOplasty knee resurfacing procedure.

(GRAPHIC)

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
early to mid-stage, unicompartmental and multicompartmental degeneration of the
knee. We believe that we can achieve this objective by working with hospitals
to demonstrate key benefits of MAKOplasty, such as consistently reproducible
surgical precision, improved post-operative outcomes and reduced healthcare
costs. Our strategy includes the following key elements:

11

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on key physicians and thought leaders to encourage
 adoption of our MAKOplasty solution. We plan to continue to focus our marketing efforts on key
 orthopedic surgeons who currently perform the majority of unicompartmental
 and bicompartmental knee procedures or who are actively involved in the
 development of minimally invasive orthopedic approaches. We also plan to
 continue to focus our 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 early to mid-stage
 osteoarthritis of the knee.                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Drive volume sales of our RESTORIS family of knee 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 knee
 MAKOplasty. Our goal is to increase usage per RIO system to drive higher
 volume sales of our RESTORIS family of knee implant systems and disposable
 products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Expand the market for multicompartmental knee resurfacing. We plan to expand the market for
 multicompartmental knee resurfacing procedures by encouraging use of the
 MAKOplasty procedure for patients who, given only conventional surgical
 alternatives, would have opted for total knee replacement surgery or no
 surgery at all. Our current FDA cleared application of MAKOplasty is for
 unicompartmental and bicompartmental knee resurfacing procedures using the
 RESTORIS family of knee implant systems, allowing us the potential of
 accommodating varied patient profiles and surgeon preferences. We believe
 that the potential benefits of our MAKOplasty solution and the combination of
 these product offerings will facilitate our efforts to expand and capture the
 market for multicompartmental knee resurfacing.                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Demonstrate the clinical and financial value proposition
 of MAKOplasty. We
 intend to continue to collaborate with leading surgeons and early adopting
 hospitals through such programs as 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 maintain and provide us with certain clinical and financial data
 that we use to support the business case for the MAKOplasty solution. Our
 goal is to obtain clinical data further supporting the value of MAKOplasty
 knee resurfacing procedures, as well as the accuracy and longevity of such
 implant placements, while demonstrating to hospitals the top and bottom line
 financial benefits of our MAKOplasty solution. Furthermore, if we are able to
 commercialize additional applications to our RIO system, we believe that we
 would be able to further demonstrate the financial value proposition of
 MAKOplasty to hospitals.

Our Products

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

12

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The
figures below identify 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 apply
 the bone cutting instrument beyond the intended area of the knee joint.                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Controller  The controller is the electronic hardware and firmware
 component of our computing system which interfaces with our proprietary
 surgical planning and execution software to allow the surgeon to safely guide
 the tactile robotic arm. The controller governs the basic, low-level
 functions of the tactile robotic arm, such as the tactile constraints and the
 safety circuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Stereo Tracking System Camera and Instruments  During a MAKOplasty procedure, the
 location of the tactile safety zone is updated continuously based on bone
 tracking data supplied to the computer system by an infrared stereo tracking
 system, which consists of a special camera that is directed toward a series
 of spheres and arrays attached to the patients anatomy by bone pins. The
 tracking system assists the robotic arm system in locating and physically
 tracking the patients anatomy and coordinating its real time position with
 the cutting instrument of the robotic arm. It has a sufficient refresh rate
 to provide the robotic arm system with an adequate flow of information
 regarding movements by both the patient and the robotic arm to ensure optimal
 cutting and placement. Using the system, the surgeon can freely move the
 robotic arm within the defined space, but encounters tactile resistance as
 the boundaries of such space are reached.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | End Effector  The end effector is the mechanical component by which the
 bone cutting instrument is attached to the tactile robotic arm. It is
 designed to ensure the secure placement of the bone cutting instrument, while
 providing the flexibility necessary for the surgeon to manipulate the
 instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Bone Cutting Instrument with Disposable Cutting Tip  The bone cutting instrument is
 integrated into the tactile robotic arm at the end effector. This instrument
 is composed of a high speed motor and a component that houses a variety of
 single use bone cutting tips. The design of the bone cutting instrument
 allows the surgeon to grip it in a manner similar to holding a pen-like
 cutting tool, making it easy to manipulate the instrument in the patients
 anatomy. The cutting tip is the disposable end tip of the bone cutting
 instrument that makes contact with the knee joint and actually removes the
 bone for placement of the implant in accordance with the pre-operative plan.
 In combination with our tactile robotic arm, the bone cutting instrument
 enables the smooth precision and accuracy necessary for resurfacing
 procedures.                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Portable Base Console  The base component of our tactile
 robotic arm is a mobile unit that enables the portability of the tactile
 robotic arm from one operating room to another. The base 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)

13

---



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

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

Early Versions of the Tactile Guidance
System

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

In
January 2008, we obtained 510(k) marketing clearance from the FDA for version
1.2 of our TGS, which became commercially available in the first quarter of
2008. Version 1.2 reflected further refinement of the basic
instrumentation set and featured a customized bone cutting instrument and new
surgical planning software applications necessary to support unicompartmental
resurfacing procedures using a tibial onlay knee implant system. In the third
quarter of 2008, we launched version 1.3 of our TGS, which enabled integration
of components of both our tibial inlay and tibial onlay knee implant systems
into a single MAKO-branded

14

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RESTORIS unicompartmental
knee implant system, for use with the TGS. These modifications did not require
the submission of a new 510(k) application.

The RIO System

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

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improved dexterity and
 range of motion in the robotic arm to allow additional degrees of freedom in
 the movement of the robotic arm;                           
| |   |                                                                                                                                                                  
| |  | more efficient physical
 configuration of the patient specific visualization system, robotic arm,
 customized bone cutting instruments and electronic components;
| |   |                                                                                                                                                                  
| |  | support for the RESTORIS
 MCK knee implant system to enable bicompartmental knee procedures;                                                                     
| |   |                                                                                                                                                                  
| |  | intelligent implant
 planning features 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 application. In the
fourth quarter of 2009, we launched version 2.2 of our RIO system, which
enabled surgeons to treat lateral compartment knee arthritis. The modifications
present in versions 2.1 and 2.2 did not require the submission of new 510(k)
applications. The RIO System was approved for CE Marking in December 2009.

The RESTORIS Family of Knee Implant Systems

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

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

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The RESTORIS Unicompartmental Knee Implant System

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

Patients
with relatively good tibial bone quality, including a sufficiently thick and
appropriately located bed of hardened sclerotic tibial bone, are generally
candidates for our RESTORIS inlay implant system. The RESTORIS onlay implant
system is designed to accommodate patients who lack tibia sclerotic bone beds
of sufficient quality. The metal support is placed horizontally on a planar
surface prepared on the tibia using the 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 system, branded as RESTORIS. Our classic RESTORIS
onlay unicompartmental knee implant system was approved for CE marking in
January 2010.

|               |  |               
|-------------- |  | --------------
|(GRAPHIC)      |  | (GRAPHIC)     
|Inlay Implant  |  | Onlay Implant 
|               |  |               
|(GRAPHIC)      |  | (GRAPHIC)     
|Post-operative |  | Post-operative
|Inlay Implant  |  | Onlay Implant 
|Placement      |  | Placement     

The RESTORIS MCK Multicompartmental Knee Implant System

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

The
RESTORIS MCK system enables surgeons to treat patients suffering from
osteoarthritis in 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
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. The CE marking certification process for the RESTORIS MCK
onlay unicompartmental knee implant system is currently ongoing, with approval
anticipated in 2010.

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

|                                                         |                                                       |                                              
|-------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------
|(GRAPHIC)RESTORIS MCK UnicondylarOnlay Implant Placement | (GRAPHIC)RESTORIS MCK PatellofemoralImplant Placement | (GRAPHIC)RESTORIS MCKLateralImplant Placement

|                                            |                                                      
|------------------------------------------- | -----------------------------------------------------
|(GRAPHIC)RESTORIS MCKBicompartmentalImplant | (GRAPHIC)RESTORIS MCKBicompartmentalImplant Placement

Disposable Products

The
RIO system utilizes disposable products such as bone pins and the spheres on
the arrays used in our tracking system, irrigation clips and tubes that cool
the cutting instruments, drapes to cover the robotic arm and other items that
require disposal after each use. Disposables are not only a potential source of
recurring revenue, but also an opportunity to differentiate our product
platform from those of less comprehensive solutions offered by competitors.

Potential Future Applications

Hip MAKOplasty

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.

Market for Osteoarthritis of the Hip.
Similar to the knee joint, osteoarthritis of the hip typically begins with
degeneration of the hip joint caused by a local tear in the soft tissue
surrounding the acetabulum (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. According to iData Data Research, Inc., the
total hip replacement market in the U.S. in 2010 is estimated to be greater
than 360,000 procedures.

Current Treatment Options for Osteoarthritis of the
Hip. The current treatments available for osteoarthritis in the hip
joint consist of early intervention, 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 6 to 12 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

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

The
current methodologies for measuring a patients leg length can result in a
discrepancy in the length of a patients legs. Clinical studies show that leg
length discrepancies 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 ten millimeters or less. 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.

The MAKOplasty Solution. In February 2010,
we received 510(k) marketing clearance from the FDA for an application that
assists a surgeon in performing all components of a total hip arthroplasty
using the RIO system. We believe a hip MAKOplasty application has the potential
to provide a surgeon with the same consistently reproducible precision,
accuracy, and dexterity as our knee MAKOplasty solution. The hip application
would allow the surgeon to preoperatively plan the placement of the hip
implants on a three dimensional image CT scan. The RIO systems robotic arm
would then assist the surgeon in preparing the bone accurately to the surgical
plan as well as in the positioning of the hip implant, as opposed to the
current method of implant placement which involves the use of mechanical jigs
and visual alignment by the surgeon, which we believe may potentially decrease
the likelihood and severity of leg length discrepancy.

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 metal
cup. During the insertion of the final implant, the robotic arm will help the
surgeon position the cup at the orientation that was planned by the surgeon on
the preoperative CT scan. A study at Massachusetts General Hospital, which was
presented at the 39th Annual Course, Advances in Arthoplasty in
October 2009, found that sixty percent of the acetabular 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 a
hip MAKOplasty application would provide 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 would allow
the surgeon to seat the implants to a final placement following the plan at a
level of accuracy that we believe is extremely difficult to accomplish
manually, resulting in placement of the implants in the best position to resist
dislocation.

We
are currently researching our hip MAKOplasty application and we anticipate that
our pre-commercialization research and development efforts will continue
through at least 2010.

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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, such as the shoulder and spine, and we are currently
conducting initial research and development to test the viability of MAKOplasty
outside of the knee and hip. 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
comprised of a direct sales force to sell RIO systems and to commercialize and
market MAKOplasty in the U.S. and independent orthopedic product agents and
distributors, who primarily generate RIO system sales leads for us. As of
March 1, 2010, our sales and marketing group had a total of
79 employees, including 49 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 knee MAKOplasty by leading surgeons and
hospitals and build demand for the procedure among patients through the
following sales and marketing strategy:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Target High Volume Orthopedic Facilities.
 Our sales representatives actively target hospitals with strong orthopedic
 reputations and significant knee replacement and resurfacing practices. We
 believe that adoption by such leading hospitals helps us to seed the market
 for MAKOplasty and provides the validation and visibility necessary for more
 widespread adoption.                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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.                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Establish and Promote MAKOplasty Centers of Excellence.
 The MAKOplasty Center of Excellence is a joint marketing program that we
 promote in collaboration with participating hospitals to educate surgeons and
 patients regarding the benefits of MAKOplasty and to coordinate our public
 relations strategy. As part of the program, hospitals agree to maintain and
 provide us with certain clinical and financial data that we use in support of
 our business case for the MAKOplasty solution. As of December 31, 2009, we
 entered into 32 co-marketing agreements with hospitals to establish
 MAKOplasty Centers of Excellence.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Drive Patient Demand for MAKOplasty. During
 2009, 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                                                                                                                                                                                                                                                                                                                            

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| |  |                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | of new
 procedures such as MAKOplasty. Currently, our representatives primarily
 support hospitals participating in the MAKOplasty Center of Excellence
 program in their efforts to publicize the benefits of MAKOplasty and educate
 patients.

The
generation of recurring revenue through sales of our implants, disposable
products and service contracts is an important part of the MAKOplasty business
model. We anticipate that recurring revenue will constitute an increasing percentage
of our total revenue as we leverage each new installation of the RIO system to
generate recurring sales of implants and disposable products. We have designed
our products so that our 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 supplemental
service contract that provides enhanced levels of 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.

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. As of
March 1, 2010, our research and development team, which is based at our
headquarters in Fort Lauderdale, Florida, consisted of 63
employees. We have assembled an experienced team with recognized expertise in
advanced robotics, software, instrumentation and orthopedic implants. Although
we do not currently have plans to increase the size of our research and
development team significantly, we may do so in the future, depending on the
progress of our ongoing research and development efforts.

Our
research and development efforts are currently focused on improvements to our
current knee MAKOplasty solution, including customized bone cutting
instruments, alternative registration and tracking systems, and enhanced
application workflow, improvements to the RIO system based on customer
feedback, and our hip MAKOplasty application. 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
June 2009, we entered into a Research and Development License and Supply
Agreement, or the R&D Agreement, associated with the potential future
product 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 we are
obligated to pay under the R&D Agreement are $1.6 million assuming the
achievement of all development milestones. Through December 31, 2009, we had
paid the $450,000 up-front payment and we had paid $550,000 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 we are
required to pay under the R&D Agreement will be recognized as research and
development expense on a straight-line basis over the period development
services are performed based on our current expectation that all development
milestones will be achieved.

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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 $13.1
million in 2009, $12.5 million in 2008, and $8.3 million in 2007.

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.

Other
than our proprietary software, single source suppliers currently provide us
with many of the major components of the RIO system, including the bone cutting
instrument and stereo tracking camera. Our RESTORIS family of knee 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 risk. In addition, we intend
to achieve improvements in our manufacturing operations and in our cost of
revenue by continuing to improve our procurement and third-party manufacturing
processes. We have also 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. 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. In
November 2008, BSi, an independent global certification body, conducted an
annual assessment of our quality management system, which concluded that our
quality management system complied with the requirements of ISO13485:2003 in
all material respects. In December 2009, we received a major nonconformance in
our annual assessment by BSi. We implemented corrective actions

21

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and in March 2010 the finding
was officially closed by BSi. We expect that BSi will continue to conduct
annual audits to assess our compliance with BSi certification standards.

Intellectual Property

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

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

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

Wholly Owned 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 could
not use the CAS intellectual property on a stand alone basis; we could 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 connection with the acquisition, we also entered
into a new license agreement with Z-Kat pursuant to which we obtained an
exclusive worldwide, fully transferable, perpetual, royalty-free and fully
paid-up sublicense to certain intellectual property for

22

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technologies
in CAS licensed by Z-Kat. This new license agreement expands our rights in this
intellectual property from the field of orthopedics to the medical field generally.
Certain of our rights under the asset purchase agreement and new license
agreement remain subject to any prior license granted by Z-Kat, including the
license from Z-Kat to Biomet Manufacturing Corp.

As
of March 1, 2010, we held 6 wholly owned granted U.S. patents and 38 wholly
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 pending patent applications was filed in March 2003
and should expire in March 2023, exclusive of any statutory extensions or
reductions. As of March 1, 2010, we also held 13 wholly owned granted foreign
patents and 80 wholly 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 March 1, 2010, we had licensed rights to 114 U.S. and 40 foreign
third-party granted patents, and we had licensed rights to 9 U.S. and 10
foreign third-party pending patent applications. The majority of these patents
and applications are either used in our current products or relate to core
technologies used in our products, such as CAS, robotics, haptics and implants.
We also have rights to additional third-party patents and intellectual property
that relate to our core technologies, but are not currently used in our
products. Five of the licensed U.S. patents will expire by the end of 2010. One
of these patents is considered material to our intellectual property portfolio
because it deals with a core technology and potentially enables us to exclude others
from practicing the claimed technology. The last licensed patent will expire in
2024.

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 $600,000 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 $1.3
million annually.

As
noted above, in February 2010, we entered into a new license agreement with
Z-Kat pursuant to which we obtained an exclusive worldwide, fully transferable,
perpetual, royalty-free and fully paid-up sublicense to intellectual property
for technologies in CAS in the medical field. This new license agreement
expands our rights

23

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in this
intellectual property from the field of orthopedics to the medical field
generally but remains subject to any prior license, including the license to
Biomet Manufacturing Corp., an affiliate of Biomet, Inc.

Competition

Our
success depends on convincing hospitals, surgeons and patients to utilize our
robotic arm technology to perform unicompartmental and bicompartmental
resurfacing of the knee. We face competition from large, well-known companies,
principally Biomet, Inc., DePuy Orthopedics, Inc., a Johnson & Johnson
company, Stryker Corporation, and Zimmer Holdings, Inc., that dominate the
market for orthopedic products. Each of these companies, as well as other
companies like Smith & Nephew, Inc., which introduced the non-modular
Journey Deuce Bi-Compartmental Knee System in July 2007, offers conventional
instruments and implants for use in conventional total and partial knee replacement
surgeries as well as unicompartmental resurfacings procedures, which may
compete with our MAKOplasty solution and negatively impact sales of our 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 Z-Kat and 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 minimally
invasive arthroplasty of the knee. Even if these companies currently do not
have an established presence in the field of minimally invasive surgery for the
knee, they may attempt to apply their robotics technology to the field of knee
replacement and resurfacing procedures to compete directly with us.

Even
if our RIO system is commercially successful and becomes a market leader in the
field of orthopedics with robotic arm technology, our implant products may face
substantial competition from implants offered by the well-known companies
currently in the market for orthopedic products. We have designed our products
so that our 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, 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 minimally invasive orthopedic knee procedures;
| |   |                                                                                                                                              
| |  | the strength
 of acceptance and adoption by orthopedic surgeons and hospitals;                                                               

24

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

Many
of our competitors have significantly greater financial, human and other
resources than we do, and have established relationships with healthcare
professionals, customers and third-party payors. In addition, many of our
competitors have established sales networks, greater resources for product
development, additional lines of products and the ability to offer financial
incentives such as rebates, bundled products or discounts on other product
lines that we cannot provide. Our products could also be rendered obsolete or
uneconomical by technological advances developed by one or more of our
competitors. These competitive factors may negatively affect our ability to
convince individuals to utilize our 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;                                                                                                                                                 
| |   |                                                                                                                                                                             
| |  | 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

25

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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.

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.

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. We
originally submitted a Special 510(k) application in September 2007, which the
FDA subsequently indicated was converted to a Traditional 510(k) application.
On November 1, 2007, the FDA provided us with a letter requesting
additional information in which the FDA, among other things, asked us to
justify our proposed use of the terms haptic and robot in the labeling of
version 1.2 of our TGS. Through subsequent correspondence and communications,
the FDA indicated that we needed to use the term tactile in lieu of haptic
and the term robotic arm in lieu of robotic, as appropriate, when these
terms are used to market our products and in order to obtain timely clearance
of our 510(k) submission. The FDA granted 510(k) 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 and 2.2 of the RIO System did not require
submission of a 510(k) application.

26

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In
June 2009, we received 510(k) marketing clearance from the FDA for an
application that assists a surgeon in acetabular reaming during total hip
arthroplasty using the TGS platform. In September 2009, we received 510(k)
marketing clearance for the same application using the RIO system. In February
2010, we received 510(k) marketing clearance for an application that 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, 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 March 1, 2010, we have 39 studies either recently

27

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completed or
in progress. The studies, many of which are being conducted pursuant to IRB
approval, range from cadaveric biomechanics studies to retrospective chart and
radiographic reviews to prospective functional comparison studies to basic
science histology studies. The results of these studies have been presented
internationally as peer-reviewed presentations at conferences in the United
States and abroad. One MAKOplasty surgical technique book chapter and 15 peer-reviewed
manuscripts on the technology and early clinical results have been published as
of March 1, 2010.

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

We
must also register with the FDA as a medical device manufacturer and must
obtain all necessary state permits or licenses to operate our business. As a
manufacturer, we are subject to announced and unannounced inspections by the
FDA to determine our compliance with FDAs QSR and other regulations. We were
audited by the FDA in January 2009 and 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;                         

28

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| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | 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 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. The RIO System
and our classic RESTORIS onlay unicompartmental knee implant system were
approved for CE marking in December 2009 and January 2010, respectively. The CE
marking certification process for the RESTORIS MCK onlay unicompartmental knee
implant system is currently ongoing, with approval anticipated in 2010.

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

29

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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. While we
cannot predict whether such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
our business, financial condition and profitability.

Medicare and
Medicaid

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

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

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

We
believe that there are existing reimbursement codes that can be used for
MAKOplasty procedures performed in the hospital inpatient setting. Procedures
for hospital inpatient billing are referenced by international classifications
of diseases, clinical modification, or ICD-9-CM, volume 3 procedure codes. Knee
arthroplasty is billed under ICD-9-CM code 81.54 (Total Knee Replacement),
which is assigned to MS-DRG 469 (Major

30

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Joint
Replacement or Reattachment of Lower Extremity with Complication or
Comorbidity) and MS-DRG 470 (Major Joint Replacement or Reattachment of Lower
Extremity without Major Complication or Comorbidity). We anticipate that
Medicare will continue to reimburse hospitals under MS-DRGs 469 and 470 for
MAKOplasty procedures, but CMS can revise MS-DRG assignments from year to year.

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

Commercial Insurers

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

Fraud and Abuse Laws

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

Anti-Kickback Statutes and Federal False
Claims Act

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

The
Anti-Kickback Statute is broad and prohibits many arrangements and practices
that are lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, Congress authorized the Office of
Inspector

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

As
part of our internal compliance program, we review our sales and marketing
materials, contracts and programs with counsel, and require employees and
marketing representatives to participate in regular training. We also have
adopted and train our personnel on the Code of Ethics for Interactions with
Health Care Professionals

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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.

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.
While the government intended this legislation to reduce administrative
expenses and burdens for the healthcare industry, our compliance with certain
provisions of these standards entails significant costs for us.

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

Employees

As
of March 1, 2010, we had 240 employees, 73 of whom were engaged in sales
and marketing, 63 in research and development, 53 in assembly, manufacturing
and service, 27 in regulatory, clinical affairs and quality activities and 24
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.

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Available Information

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

| |   |                                                                                                                                                                                                                                                                            |   |                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -----------------------------------------------------------------------
| |  | Our annual
 reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
 8-K, including amendments to these reports, and other documents as soon as
 reasonably practicable after we file them with the Securities and Exchange
 Commission, or the SEC;
| |   |                                                                                                                                                                                                                                                                           
| |  | Beneficial
 ownership reports filed by officers, directors and principal security holders
 under Section 16(a) of the Securities Exchange Act of 1934, as amended, or
 the Exchange Act; and                                                                              
| |   |                                                                                                                                                                                                                                                                           
| |  | Corporate
 governance information that includes our                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                            |   |                                                                        
| |   |                                                                                                                                                                                                                                                                            | o | Corporate
 Governance Guidelines                                       
| |   |                                                                                                                                                                                                                                                                            |   |                                                                        
| |   |                                                                                                                                                                                                                                                                            | 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 knee
implant systems. Continuing weak economic conditions, or a reduction in
healthcare technology spending even if economic conditions improve, could
adversely impact our business, operating results and financial condition in a
number of ways, including longer sales cycles, lower prices for our products
and services and reduced unit sales.

Current credit and
financial market conditions could delay or prevent our customers from obtaining
financing to purchase 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 past year and concerns regarding the
availability of credit, particularly in the United States, our customers may be
delayed in obtaining, or may not be able to obtain, necessary financing for
their purchases 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

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order
cancellations of this nature could adversely affect our product sales and
revenues and, therefore, harm our business and results of operations.

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

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

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

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

To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
continue our commercialization of the RIO system and the RESTORIS MCK multicompartmental
knee implant system and continue to develop the corporate infrastructure
required to sell and market our products and operate as a public company. We
also expect to experience increased cash requirements for inventory and
property and equipment in conjunction with the continued commercialization of
our RESTORIS unicompartmental and RESTORIS MCK multicompartmental knee implant
systems and our RIO system. Given the current weak economic conditions, we may
be unable to obtain additional financing. As a result, we may be required to
reduce the scope of, delay or eliminate some or all of our 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 knee systems, we are unable to estimate the exact amounts of capital
outlays and operating expenditures necessary to complete the development of the
products and successfully deliver commercial products to the market. Our future
capital requirements will depend on many factors, including but not limited to
the following:

| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | the revenue
 generated by sales of our current and future products;

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| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the expenses
 we incur in selling and marketing our products;                                                                                                                              
| |   |                                                                                                                                                                                            
| |  | 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, although we currently
 have no understandings, commitments or agreements relating to any material
 transaction of this type; 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, such as The Anspach Effort, Inc., for
our bone cutting instrument, Northern Digital Inc., or NDI, for the stereo
tracking camera used in MAKOplasty and Millstone Medical Outsourcing, LLC, for
sterile packaging of our RESTORIS family of knee implant systems. We currently
do not have long-term contracts with all 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                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 family of knee 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
current 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, and 2.2 of our RIO system, and inlay
and onlay implant systems for use in unicompartmental and bicompartmental knee
resurfacing procedures. The future success of our business depends on our
ability to continue to develop and obtain regulatory clearances or approvals
for innovative and commercially successful products in our field, which we may
be unable to do in a timely manner, or at all. Our success and ability to
generate revenue or be profitable also depends on our ability to establish our
sales and marketing force, generate product sales and control costs, all of
which we may be unable to do. We have a limited history of operations upon
which you can evaluate our business and our operating expenses are increasing.
Our lack of any significant operating history also limits your ability to make
a comparative evaluation of us, our products and our prospects.

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

We
have sustained net losses in every fiscal year since our inception in 2004, including
a net loss attributable to common stockholders of $34.0 million for the year
ended December 31, 2009. As of December 31, 2009, we had total stockholders
equity of $90.8 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 additional operational and regulatory burdens associated with
operating as a public company. 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 knee systems. As of March 1, 2010, we had licensed rights to 114 U.S.
and 40 foreign third-party granted patents, and we had licensed rights to 9
U.S. and 10 foreign third-party pending patent applications. The majority of
these patents and applications are either used in our current products or
relate to core technologies used in our products, such as computer assisted
surgery, or CAS, robotics, haptics and implants. Five of the licensed U.S.
patents will expire by the end of 2010. One of these

37

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patents is
considered material to our intellectual property portfolio because it deals
with a core technology and potentially enables us to exclude others from
practicing the claimed technology. 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.

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

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

On
September 28, 2007, we submitted a Special 510(k) application to the FDA for
version 1.2 of our TGS which the FDA converted to a Traditional 510(k)
application. On November 1, 2007, the FDA provided us with a letter requesting
additional information in which the FDA, among other things, asked us to
justify our proposed use of the terms haptic and robot in the labeling of
version 1.2 of our TGS. Through subsequent correspondence and communications,
the FDA indicated that we needed to use the term tactile in lieu of haptic
and the term robotic arm in lieu of robotic, as appropriate, when these
terms are used to market our products. The FDA granted 510(k) 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 and 2.2) 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.

38

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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.

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,
recurring sales of implants and disposable products required for each knee
MAKOplasty procedure, and service plans that are sold with the RIO system.
Currently, the only line of products that has been commercially introduced 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, and 2.2 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 the
RESTORIS family of knee implant systems. If we are unable to achieve commercial
acceptance of MAKOplasty for unicompartmental and bicompartmental knee
resurfacing procedures or obtain regulatory clearances or approvals for future
products, including products to treat the hip and other joints of the human
body, our revenue would be adversely affected and we would not become
profitable.

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

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

39

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any of these
or other reasons, we will not be able to generate the revenue necessary to
develop a sustainable, profitable business.

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

We
believe that patients, surgeons and hospitals will only accept MAKOplasty or
purchase our products if they believe that MAKOplasty is a safe and effective
procedure with advantages over competing products and conventional 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, 2009,
2,384 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 knee MAKOplasty. The
results of short-term studies, such as our post-market studies, do not
necessarily predict long-term clinical results. As of March 1, 2010, we have
one published MAKOplasty surgical technique book chapter, 15
peer-reviewed manuscripts, 40 peer-reviewed abstracts at conferences, and
11 completed whitepapers. We also have 39 studies either recently
completed or in progress, which range from cadaveric biomechanics studies to
retrospective chart and radiographic reviews to prospective functional
comparison slides to basic science histology studies. If longer-term or more
extensive clinical studies that may be performed by us or others indicate that
MAKOplasty is a less safe or less effective procedure than our current data
suggest, patients may choose not to undergo, and surgeons may choose not to
perform, knee MAKOplasty. Furthermore, unsatisfactory patient outcomes or
patient injury could cause negative publicity for our products, particularly in
the early phases of product introduction. The FDA could also rescind our
marketing clearances if future results and experience indicate that our
products cause unexpected or serious complications or other unforeseen negative
effects. See Risks Related to Regulatory Compliance. Surgeons may be slow to
adopt our products if they perceive liability risks arising from the use of
these new products. As a result, patients, surgeons and hospitals may not
accept knee MAKOplasty or our products and we may fail to become profitable and
may be subject to significant legal liability.

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

We
have limited experience as a company in the sales and marketing of our
products. We may not be successful in marketing and selling our products in the
U.S. through our direct sales force with assistance from independent orthopedic
product agents and distributors. Our sales and marketing organization is
supported by clinical and technical representatives who provide training,
clinical and technical support and other services to our customers before and
during the surgery. As of March 1, 2010, we have 73 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. 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.

40

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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.

MAKOplasty
requires the use of new robotics technology, and we face competition from
large, well known companies, principally Biomet, Inc., DePuy Orthopedics, Inc.,
a Johnson & Johnson company, Stryker Corporation, and Zimmer Holdings,
Inc., that dominate the market for orthopedic products. Each of these companies,
as well as other companies like Smith & Nephew, Inc., which introduced the
Journey Deuce Bi-Compartmental Knee System in July 2007, offers conventional
instruments and implants for use in conventional total and partial knee
replacement surgeries as well as unicompartmental resurfacing procedures, which
may compete with our MAKOplasty solution and negatively impact sales of our
robotic arm technology. A number of these and other companies also offer 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 human anatomy to minimally
invasive arthroplasty of the knee. Even if these other companies currently do
not have an established presence in the field of minimally invasive surgery for
the knee, they may attempt to apply their robotics technology to the field of
knee replacement and resurfacing procedures to compete directly with us.

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

| |   |                                         
| | - | ----------------------------------------
| |  | significantly
 greater name recognition;

41

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| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 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:

| |   |                                                       
| | - | ------------------------------------------------------
| |  | 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        

42

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | 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 knee
MAKOplasty. As of December 31, 2009, we had trained 126
surgeons on the MAKOplasty system. We rely on surgeons and hospital staff to
devote adequate time to learn to use our products. Convincing surgeons and
hospital staff to dedicate the time and energy necessary for adequate training
in the use of our system is challenging, and we cannot assure you we will be
successful in these efforts. If surgeons or hospital staff are not properly
trained, they may misuse or ineffectively use our products. If nurses or other
members of the hospital staff are not adequately trained to assist in using our
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 subject to a customer acceptance period,
during which the customer may return the RIO system to us subject to a penalty.
Although we believe that training can be accomplished in a relatively short
period of time, there may be situations where training of physicians and staff
may last an additional month or more after installation. In addition, the
introduction of new products could adversely impact our sales cycle as
customers take additional time to assess the capital products. Because of the
lengthy sales cycle, the unit price of the RIO system and the relatively small
number of systems installed each quarter, each installation of a RIO system can
represent a significant component of our revenue for a particular quarter,
particularly in the near term and during any other periods in which our sales
volume is relatively low.

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

| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | timing and
 level of expenditures associated with new product development activities;                                          
| |   |                                                                                                                                
| |  | delays in
 shipment due, for example, to cancellations by customers, natural disasters
 or labor disturbances;                 
| |   |                                                                                                                                
| |  | delays or
 unexpected difficulties in the manufacturing processes of our suppliers or in
 our assembly process;                
| |   |                                                                                                                                
| |  | timing of
 the announcement, introduction and delivery of new products or product
 upgrades by us and by our competitors;      
| |   |                                                                                                                                
| |  | timing and
 level of expenditures associated with expansion of sales and marketing
 activities and our overall operations;     
| |   |                                                                                                                                
| |  | disruptions
 in the supply or changes in the costs of raw materials, labor, product
 components or transportation services; and

43

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

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

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

Our
business exposes us to potential liability risks, product actions and other
field or regulatory actions that are inherent in the manufacturing, marketing
and sale of medical device products. We may be held liable if our 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. During the year
ended December 31, 2009, we initiated one voluntary product actions, which was a
product recall reportable to the FDA pursuant to the correction / removal
guidelines. We are required to submit an MDR report to the FDA for any incident
in which our product may have caused or contributed to a death or serious
injury or in which our product malfunctioned and, if the malfunction were to
recur, would likely cause or contribute to death or serious injury.

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

44

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and
potentially terminate their relationships with us. Regulatory investigations or
product actions could also result in our incurring substantial costs, losing
revenue, and implementing a change in the design, manufacturing process or the
indications for which our products may be used, each of which would harm our
business.

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

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

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

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

Medicare
pays acute care hospitals a prospectively determined amount for inpatient
operating costs under the Medicare hospital inpatient prospective payment
system, or PPS. Under the Medicare hospital inpatient PPS, the prospective
payment for a patients stay in an acute care hospital is determined by the
patients condition and other patient data and procedures performed during the
inpatient stay using a classification system known as diagnosis related groups,
or DRGs. As of October 1, 2007, CMS, implemented a revised version of the DRG

45

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system that
uses 745 Medicare Severity DRGs, or MS-DRGs, instead of the approximately 540
DRGs Medicare previously used. The MS-DRGs are intended to account more
accurately for the patients severity of illness when assigning each patients
stay to a payment classification. Medicare pays a fixed amount to the hospital
based on the MS-DRG into which the patients stay is assigned, regardless of
the actual cost to the hospital of furnishing the procedures, items and
services provided. Accordingly, acute care hospitals generally do not receive
direct Medicare reimbursement under PPS for the specific costs incurred in
purchasing medical devices. Rather, 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 connection with procedures using our technology. Our customers also have
available Ambulatory Payment Classifications, or APC, code 0451 and CPT codes
27446 and 73700 (CT lower extremity without contrast) for out-patient
procedures and procedures performed in an ambulatory surgery center. If
unicompartmental and bicompartmental knee resurfacing procedures gain market
acceptance and the number of such procedures increases, CMS and other payors
may establish billing codes for unicompartmental and bicompartmental knee
resurfacing procedures that provide for a smaller reimbursement amount than
knee arthroplasty, which could adversely affect our financial results and
business.

46

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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 may affect demand for our systems and products.

The
U. S. government, state and local governments, and a number of foreign
governments, are currently considering or may in the future consider healthcare
policies and proposals intended to curb rising healthcare costs, including
those that could significantly affect both coverage and reimbursement for
healthcare services. Future significant changes in the healthcare systems in
the United States or elsewhere, and current uncertainty about whether and how
changes may be implemented, could have a negative impact on the demand for our
products and services and our business. These changes may include basing
coverage and reimbursement policies and rates on clinical outcomes, the
comparative effectiveness and costs of different treatment technologies and
modalities; imposing price controls on medical products and services providers;
reducing reimbursement rates; imposing an excise tax on the medical device
industry; and other measures. It is unclear which, if any, of the various U.S.
healthcare reforms currently being discussed and/or proposed might be enacted
by the U.S. Congress and signed into law by the President of the United States.
We are unable to predict what healthcare reform legislation or regulations, if
any, will be enacted in the United States or elsewhere; whether other
healthcare legislation or regulations affecting our business may be proposed or
enacted in the future; what effect any legislation or regulation would have on
our business; or the effect ongoing uncertainty about these matters will have
on the purchasing decisions of our customers.

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

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

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

We
are highly dependent on members of our senior management, in particular Maurice
R. Ferré, M.D., our President, Chief Executive Officer and Chairman of the
Board. Our future success will depend in part on our ability to retain these
key employees and to identify, hire and retain additional qualified personnel
with expertise

47

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in research
and development and sales and marketing. Competition for qualified personnel in
the medical device industry is intense, and finding and retaining qualified
personnel with experience in our industry is very difficult. We believe that
there are only a limited number of individuals with the requisite skills to
serve in many of our key positions, and we compete for key personnel with other
medical equipment and software manufacturers and technology companies, as well
as universities and research institutions. It is often difficult to hire and
retain these persons, and we may be unable to replace key persons if they leave
or fill new positions requiring key persons with appropriate experience. A
significant portion of our compensation to our key employees is in the form of
stock option grants. A prolonged depression in our stock price could make it
difficult for us to retain our employees and recruit additional qualified
personnel.

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

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

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

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

48

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| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | pricing
 pressures that we may experience internationally;                                              
| |   |                                                                                                         
| |  | compliance
 with existing and changing foreign regulatory laws and requirements;                        
| |   |                                                                                                         
| |  | foreign laws
 and business practices favoring local companies;                                          
| |   |                                                                                                         
| |  | longer
 payment cycles;                                                                                 
| |   |                                                                                                         
| |  | shipping
 delays;                                                                                       
| |   |                                                                                                         
| |  | difficulties
 in enforcing agreements and collecting receivables through certain foreign
 legal systems;
| |   |                                                                                                         
| |  | political
 and economic instability;                                                                    
| |   |                                                                                                         
| |  | potentially
 adverse tax consequences, tariffs and other trade barriers;                                
| |   |                                                                                                         
| |  | international
 terrorism and anti-American sentiment;                                                   
| |   |                                                                                                         
| |  | difficulties
 and costs of staffing and managing foreign operations; and                                
| |   |                                                                                                         
| |  | difficulties
 in enforcing intellectual property rights.                                                

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

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

We
currently conduct all of our management activities, most of our research and
development activities and assemble all of our products at a single location in
Fort Lauderdale, Florida. We have taken various precautions to safeguard our
facilities, such as obtaining insurance, 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 could cause substantial delays in our operations, delay or prevent
assembly of our RIO systems and shipment of our implants, damage or destroy our
equipment and inventory, and cause us to incur substantial expenses. Our
insurance does not cover losses caused by certain events such as floods or
other activities and may not be adequate to cover our losses in any particular
case. Any damage, loss or delay could seriously harm our business and have an
adverse affect on our financial results.

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

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 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 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.

Risks Related to Our Intellectual Property

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

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

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

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

50

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engineer
certain aspects of our products that we consider proprietary. As a result,
third parties may be able to use our proprietary technology or information, and
our ability to compete in the market would be harmed.

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

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

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

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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 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. We cannot predict whether the
FDA will modify its 510(k) marketing clearance process in the future. Any such
modification could have a material adverse effect on our ability to
commercialize our products.

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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 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 Europe. In addition, we will be subject to annual regulatory audits in
order to maintain those CE mark permissions. In November 2008, BSi, an
independent global certification body, conducted an annual assessment of our
quality management system, which concluded that our quality management system
complied with the requirements of ISO13485:2003 in all material respects. We
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. 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 Europe, 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.

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

We
and some of our third-party manufacturers and suppliers are required to comply
with the FDAs Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our products. We
and our manufacturers and suppliers are also subject to the regulations of
foreign jurisdictions regarding the manufacturing process if we market our
products overseas. The FDA enforces the QSR through periodic and unannounced
inspections of manufacturing facilities. In January 2009, the FDA conducted its
first audit of our facility, during which we received certain inspectional
observations. We have addressed the observations and submitted a response to
the FDA on a voluntary basis. We received a copy of the establishment
inspection report

53

---



(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, 2009, we initiated one product action, which was
reportable to the FDA pursuant to the correction / removal guidelines. 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 are awaiting closure
notification from the FDA. During the year ended December 31, 2009, we also
closed a reportable recall which was initiated in 2008. This reportable recall
was associated with two tracking array instruments for the patient specific
visualization of the TGS and was communicated to the FDA in May 2008. We
internally closed the action in January 2009 and received a closure
notification from the FDA on August 6, 2009.

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

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

54

---



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

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

55

---



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 state could consider the activities of our MAKOplasty
Specialists to constitute the practice of medicine and 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.

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-                                                                                                                                                                                                                                                     

56

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 implementation of the infrastructure
to comply with these bills could be costly.

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, 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 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, 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.

57

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|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS

Not
applicable.

|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

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

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

None

|        |         
|------- | --------
|ITEM 4. | RESERVED

58

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PART II

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

Market Information

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

The
following table sets forth the range of the high and low intraday prices for
the period of April 1, 2008 through December 31, 2009 as reported by The NASDAQ
Global Market.

|                |  |      |       |      |   |      |  |     |      |  |   |      | 
|--------------- |  | ---- | ----- | ---- | - | ---- |  | --- | ---- |  | - | ---- | 
|                |  | 2009 |       | 2008 |  
|                |  | High |       | Low  |   | High |  | Low |     
|First
 Quarter  |  | $    | 9.18  |      | $ | 6.18 |  |     | N/A  |  |   | N/A  | 
|Second
 Quarter |  | $    | 9.74  |      | $ | 6.59 |  | $   | 9.49 |  | $ | 7.00 | 
|Third
 Quarter  |  | $    | 10.00 |      | $ | 6.86 |  | $   | 8.45 |  | $ | 6.29 | 
|Fourth
 Quarter |  | $    | 11.65 |      | $ | 8.47 |  | $   | 9.75 |  | $ | 5.23 | 

Our
stock transfer records indicated that as of March 1, 2010, there were
approximately 48 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,
2009.

|                                                                |  |                                                                                                   |     |                                                                  |          |                                                                                                                                                                    |  |         |     | 
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------- | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------- | --- | 
|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     |  | 3,478,000                                                                                         | (1) |                                                                  | $   6.71 |                                                                                                                                                                    |  | 727,000 | (2) | 
|Equity compensation plans not approved by
 our security holders |  | None                                                                                              |     |                                                                  | None     |                                                                                                                                                                    |  | None    |     | 
|TOTAL                                                           |  | 3,478,000                                                                                         | (1) |                                                                  | $   6.71 |                                                                                                                                                                    |  | 727,000 | (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 553,000 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

59

---



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).

Unregistered Sales of Equity Securities

On
January 8, 2010, we entered into an asset purchase agreement with Z-Kat to
acquire certain intellectual property assets from Z-Kat in consideration for
$3,053,569, payable in shares of our common stock. We closed this transaction
and issued 230,458 shares of our common stock to Z-Kat in a private placement
on February 25, 2010. These shares were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

In
connection with the closing, we entered into a registration rights agreement,
dated as of February 25, 2010, with respect to the registration of the shares
issued to Z-Kat at the closing. The registration rights agreement provides
Z-Kat with piggyback registration rights for one year following the closing
of the transaction and one demand registration right, which is exercisable
beginning after the one year anniversary date of the closing but only to the
extent that Z-Kat is not otherwise eligible to sell the shares pursuant to Rule
144 under the Securities Act of 1933, as amended.

Uses of Proceeds from Sale of Registered
Securities

Not
applicable.

Issuer Purchases of Equity Securities

The
following table summarizes the surrenders of the Companys common stock during
the three month period ended December 31, 2009:

|                       |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |   |   | 
|---------------------- |  | ----------------------------------------- |  | ---------------------------------- | ---- | -------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------ | - | - | 
|                       |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |  
|                       |  | Total
 
 Number of 
 Shares
 Purchased(1) |  | Average
 Price Paid 
 per Share(1) |      | Total
 Number 
 of Shares 
 Purchased as 
 Part of Publicly
 Announced 
 Plans or 
 Programs |   | Maximum
 
 Dollar Value of
 Shares that May 
 Yet be 
 Purchased 
 Under the Plans 
 or Programs |  
|Period                 |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |   |   | 
|                       |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |   |   | 
|October 1 to 31, 2009  |  |                                          |  | $                                  |     |                                                                                              |  |                                                                                                  | $ |  | 
|                       |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |   |   | 
|November 1 to 30, 2009 |  | 15,834                                    |  |                                    | 8.97 |                                                                                              |  |                                                                                                  |   |  | 
|                       |  |                                           |  |                                    |      |                                                                                              |   |                                                                                                  |   |   | 
|December 1 to 31, 2009 |  |                                          |  |                                    |     |                                                                                              |  |                                                                                                  |   |  | 
|                       |  | 15,834                                    |  | $                                  | 8.97 |                                                                                              |  |                                                                                                  | $ |  | 

|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the surrender of
 shares of common stock of the Company to satisfy the tax withholding
 obligations associated with the vesting of restricted stock.

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.

|
|
|
|

|  |                                                                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.

60

---



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

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

COMPARISON OF 22-MONTH CUMULATIVE TOTAL
RETURN
Among
MAKO Surgical Corp.
The NASDAQ Composite Index
andThe 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    | 

61

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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, |         
|                                                                              
|                                                                               |  | 2009                     |          | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|Statements of Operations Data                                                  |  |                          |          |      |   |         |   |      |         |      |   |         |   |   |        |  
|Revenue                                                                        |  | $                        | 34,208   |      | $ | 2,944   |   | $    | 771     |      | $ | 63      |   | $ | ―      |  
|Cost of revenue                                                                |  |                          | 21,704   |      |   | 3,446   |   |      | 583     |      |   | 77      |   |   | ―      |  
|Gross profit (loss)                                                            |  |                          | 12,504   |      |   | (502    | ) |      | 188     |      |   | (14     | ) |   | ―      |  
|Operating costs and expenses:                                                  |  |                          |          |      |   |         |   |      |         |      |   |         |   |   |        |  
|Selling, general and administrative                                            |  |                          | 31,878   |      |   | 23,158  |   |      | 12,042  |      |   | 5,023   |   |   | 2,736  |  
|Research and development                                                       |  |                          | 13,127   |      |   | 12,472  |   |      | 8,269   |      |   | 5,192   |   |   | 2,582  |  
|Depreciation and amortization                                                  |  |                          | 1,951    |      |   | 1,828   |   |      | 1,297   |      |   | 644     |   |   | 98     |  
|Total operating costs and expenses                                             |  |                          | 46,956   |      |   | 37,458  |   |      | 21,608  |      |   | 10,859  |   |   | 5,416  |  
|Loss from operations                                                           |  |                          | (34,452  | )    |   | (37,960 | ) |      | (21,420 | )    |   | (10,873 | ) |   | (5,416 | )
|Interest and other income                                                      |  |                          | 432      |      |   | 988     |   |      | 1,073   |      |   | 476     |   |   | 269    |  
|Interest and other expenses                                                    |  |                          | (3       | )    |   | (110    | ) |      | (311    | )    |   | (220    | ) |   | ―      |  
|Net loss                                                                       |  | $                        | (34,023  | )    | $ | (37,082 | ) | $    | (20,658 | )    | $ | (10,617 | ) | $ | (5,147 | )
|Net loss attributable to common stockholders                                   |  | $                        | (34,023  | )    | $ | (37,647 | ) | $    | (24,318 | )    | $ | (12,493 | ) | $ | (6,288 | )
|Net loss per share: Basic and diluted attributable to common
 stockholders (1) |  | $                        | (1.22    | )    | $ | (2.20   | ) | $    | (14.75  | )    | $ | (8.03   | ) | $ | (4.18  | )
|Weighted average common shares outstanding: Basic and diluted (2)              |  |                          | 27,806   |      |   | 17,096  |   |      | 1,649   |      |   | 1,555   |   |   | 1,503  |  
|                                                                               |  |                          |          |      |   |         |   |      |         |      |   |         |   |   |        |  
|(in thousands)                                                                 |  | As of December 31,       |         
|                                                                              
|                                                                               |  | 2009                     |          | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|Balance Sheet Data:                                                            |  |                          |          |      |   |         |   |      |         |      |   |         |   |   |        |  
|Cash and cash equivalents                                                      |  | $                        | 17,159   |      | $ | 62,547  |   | $    | 9,615   |      | $ | 2,108   |   | $ | 6,145  |  
|Short-term investments                                                         |  |                          | 44,686   |      |   | 1,077   |   |      | 3,084   |      |   | 1,400   |   |   | 10,097 |  
|Long-term investments                                                          |  |                          | 9,368    |      |   | ―       |   |      | ―       |      |   | ―       |   |   | ―      |  
|Total assets                                                                   |  |                          | 99,103   |      |   | 86,533  |   |      | 29,190  |      |   | 12,754  |   |   | 17,435 |  
|Long-term debt, net of current portion                                         |  |                          | ―        |      |   | ―       |   |      | ―       |      |   | ―       |   |   | ―      |  
|Redeemable convertible preferred stock                                         |  |                          | ―        |      |   | ―       |   |      | 59,487  |      |   | 25,911  |   |   | 24,034 |  
|Accumulated deficit                                                            |  |                          | (114,195 | )    |   | (80,172 | ) |      | (42,843 | )    |   | (19,366 | ) |   | (6,820 | )
|Total stockholders equity (deficit)                                           |  |                          | 90,794   |      |   | 66,514  |   |      | (42,837 | )    |   | (19,437 | ) |   | (6,888 | )

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 minimally invasive orthopedic knee
procedures. We offer MAKOplasty, an innovative, restorative surgical solution
that enables orthopedic surgeons to consistently, reproducibly and precisely
treat patient specific, early to mid-stage osteoarthritic knee disease. In
February 2008, our common stock began trading on The NASDAQ Global Market under
the ticker symbol MAKO in connection with the closing of our initial public
offering, or IPO.

Through
December 31, 2008, our recognized revenue was primarily generated from the sale
of our implants and disposable products utilized in knee MAKOplasty procedures.
In accordance with our revenue recognition policy, upon the sale of our first
generation Tactile Guidance System, or TGS, we deferred recognition of the
related revenue and direct cost of revenue until delivery of the RIO system,
which is version 2.0 of the TGS. We commercially released the RIO system in the
first quarter of 2009. 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. We have incurred net losses in each year
since our inception and, as of December 31, 2009, we had an accumulated deficit
of $114.2 million. We expect to continue to incur significant operating losses
as we increase our sales and marketing activities and otherwise continue to
invest capital in the development and expansion of our products and our
business generally. We also expect that our general and administrative expenses
will increase due to additional operational and regulatory costs and burdens
associated with the rapid expansion of our operations and operating as a public
company.

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
We commercially released our RIO system in the first quarter of 2009. 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. In addition, we recognized the revenue and the direct cost of revenue
from nineteen new unit sales of our RIO system during the year ended December
31, 2009, bringing the total number of commercial RIO systems to 36 as of
December 31, 2009.                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 
In the second quarter of 2009, we commercially released our RESTORIS MCK
multicompartmental knee implant system, or RESTORIS MCK, which enables
surgeons to perform bicompartmental knee MAKOplasty procedures. As of
December 31, 2009, 133 RESTORIS MCK bicompartmental knee MAKOplasty procedures
were performed since the release of RESTORIS MCK.                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 
During the year ended December 31, 2009, a total of 1,602 knee MAKOplasty
procedures were performed, including unicompartmental and bicompartmental
procedures, representing a 167% increase over the year ended December 31,
2008.                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 
In September 2009, we received 510(k) marketing clearance from the FDA for an
application that assists a surgeon in acetabular reaming during total hip
arthroplasty using the RIO system platform. In February 2010, we received
510(k) marketing clearance from the FDA for an application that assists a
surgeon in performing all components of a total hip arthroplasty using the
RIO system. We believe these represent achievement of necessary milestones
towards what we anticipate will be our continuing development and future
commercialization of a RIO-enabled hip application.

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

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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 unit sales of our RIO systems, including installation
services, training and upgrades and enhancements, from sales of implants and
disposable products and sales of extended warranty service contracts. Through
December 31, 2008, our recognized revenue was primarily generated from the sale
of implants and disposable products utilized in knee MAKOplasty procedures. For
the year ended December 31, 2009, we also recognized revenue from sales of our
RIO systems in our statement of operations as described in the Critical
Accounting Policies and Significant Judgments and Estimates section below.

Future
revenue from sales of our products is difficult to predict and we expect that
it will only modestly reduce our continuing and increasing losses resulting
from selling, general and administrative expenses, research and development
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 knee implants, disposable
products and extended 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.

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 or deferred 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, the cost
associated with establishing at the time of installation an accrual for the RIO
system standard one-year warranty liability, royalties related to the sale of
products covered by licensing arrangements and write-offs of obsolete or
impaired inventory.

The
direct cost of revenue associated with the sale of TGS units was deferred until
the recognition of the related revenue. The revenue and the direct cost of
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.

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, an increased number of employees
necessary to support our continued growth in operations, and the additional
operational and regulatory burdens and costs associated with operating as a
publicly traded company. In addition, we are currently in the process of
securing European Union CE marking for the RESTORIS MCK onlay unicompartmental
knee implant system, which is a legal requirement for medical

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devices
intended for sale in Europe, which may also increase our selling, general and
administrative expenses, and we expect to incur additional costs associated
with securing and protecting our intellectual property rights as necessary to
support our future product offerings.

Research and
Development Expenses

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

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 from unit sales of our RIO systems, including installation
services, training and upgrades and enhancements, from sales of implants and
disposable products and sales of extended warranty service contracts. Through
December 31, 2008, our recognized revenue was primarily generated from the sale
of implants and disposable products utilized in knee MAKOplasty procedures. For
the year ended December 31, 2009, we also recognized revenue from sales of our
RIO systems in our statement of operations as discussed below.

Since
December 31, 2008, we no longer manufacture TGS units, 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, we anticipate
that revenues related to RIO system sales will not be deferred and will be
recognized upon installation of the system, delivery of associated
instrumentation and training of at least one surgeon.

For
sales of TGS units through December 31, 2008, the sales arrangements required
us to provide upgrades and enhancements to the TGS unit through and including
delivery of the RIO system. 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.
Upon satisfaction of the final deliverable of the RIO system, the revenue and
direct cost of revenue associated with the sale of TGS units are recognized in
our statement of operations. 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. Our deferred revenue balance as of
December 31, 2009 consists primarily of deferred service revenue for extended
warranty services on the RIO system hardware.

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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.

Procedure
revenue from the sale of implants and disposable products utilized in knee
MAKOplasty procedures is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectability is reasonably assured. The implants and
disposable products are a separate unit of accounting from the RIO systems as
(1) they have value to the customer on a standalone basis, (2) objective and
reliable evidence of the fair value of the item exists and (3) no right of
return exists once the implants and disposable products are implanted or
consumed. Accordingly, as our implants and disposable products are sold on a
procedural basis, the revenue and costs associated with the sale of implants
and disposable products are recognized at the time of sale (i.e., at the time
of the related surgical procedure).

Service
revenue consists of extended warranty services on the RIO system hardware, and
is deferred and recognized ratably over the service period until no further
obligation exists. Costs associated with providing extended warranty services
are expensed as incurred.

Allowance for Doubtful Accounts

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

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.

Beginning
with the fourth quarter of 2008, manufacturing overhead costs have been
capitalized and included in inventory. Previously, such overhead costs were
fully expensed as selling, general and administrative expense as capitalizable
amounts were not significant.

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 income tax assets.

Impairment of
Long-Lived Assets

We
evaluate our long-lived assets for indicators of impairment by comparison of
the carrying amounts to future net undiscounted cash flows expected to be
generated by such assets when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Should an impairment exist,
the impairment loss

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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, 2009, we recognized $4.0 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 $9.9 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 2.7 years as of December 31, 2009.

Results of Operations

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 nineteen unit sales of our RIO system and the
recognition of approximately $11.3 million of revenue from seventeen 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. We expect our revenue to continue
to increase as unit sales of our RIO system increase in future periods and the
number of knee MAKOplasty procedures performed increases in future periods.

Cost of Revenue. Cost of revenue was $21.7
million for the year ended December 31, 2009, compared to $3.4 million for the
year ended December 31, 2008. The increase in cost of revenue of $18.3 million
was primarily due to the cost of revenue from nineteen unit sales of our RIO
system, the recognition of the direct cost of revenue from seventeen 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. 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 knee
MAKOplasty procedures performed increases in future periods.

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Selling, General and Administrative. Selling,
general and administrative expense was $31.9 million for the year ended
December 31, 2009, compared to $23.2 million for the year ended December 31,
2008. The increase of $8.7 million, or 38%, 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 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. 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, continued growth in operations and the costs associated with
operating as a public company.

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. 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.

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 income taxes were
recognized for the year ended December 31, 2009 and 2008, due to net operating
losses in each period. 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.

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

Revenue. Revenue was $2.9 million for the
year ended December 31, 2008, compared to $771,000 for the year ended December
31, 2007, and was primarily generated from the sale of implants and disposable
products utilized in knee MAKOplasty procedures. The increase in revenue of
$2.2 million was primarily due to an increase in MAKOplasty procedures
performed during the year ended December 31, 2008 as compared with the year
ended December 31, 2007. There were 601 procedures performed during the year
ended December 31, 2008 compared to 168 procedures performed during the year
ended December 31, 2007. Total revenue was also positively impacted by a
$434,000 increase in other revenue, which consists primarily of service revenue
on extended warranty services and net royalty revenues.

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Cost of Revenue. Cost of revenue was $3.4
million for the year ended December 31, 2008, compared to $583,000 for the year
ended December 31, 2007. The increase in cost of revenue of $2.9 million was
primarily due to an increase in knee MAKOplasty procedures performed, a
$730,000 write-off of obsolete and discontinued inventory in 2008 primarily due
to the launch of our RESTORIS implant system in 2008 and the anticipated launch
of our RIO system in the first half 2009, the establishment of warranty
accruals on sales of twelve TGS units and royalties incurred on sales of twelve
TGS units during the year ended December 31, 2008.

Selling, General and Administrative.
Selling, general and administrative expense was $23.2 million for the year
ended December 31, 2008, compared to $12.0 million for the year ended December
31, 2007. The increase of $11.1 million, or 92%, was primarily due to an
increase in sales, marketing and operations costs associated with the
production and commercialization of our products, an increase in general and
administrative costs to support growth and costs associated with operating as a
public company. Selling, general and administrative expense for the year ended
December 31, 2008 also included $1.9 million of stock-based compensation
expense compared with $1.0 million for the year ended December 31, 2007. The
increase in stock-based compensation expense was primarily due to additional
option and restricted stock grants made in 2008 and 2007.

Research and Development. Research and
development expense was $12.5 million for the year ended December 31, 2008,
compared to $8.3 million for the year ended December 31, 2007. The increase of
$4.2 million, or 51%, was primarily due to an increase in research and
development activities associated with on-going development of our RIO system
and the RESTORIS and RESTORIS MCK implant systems. Research and development
expense for the year ended December 31, 2008 also included $1.4 million of
stock-based compensation expense compared with $184,000 for the year ended
December 31, 2007. The increase in stock-based compensation expense is due
primarily to a nonrecurring charge of $949,000 associated with the vesting in
full, upon completion of our IPO in February 2008, of restricted common stock
issued pursuant to business consultation agreements entered into in December
2004.

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

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

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

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

69

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Liquidity and Capital Resources

(in thousands)

|                                                     |  |      |         |        |   |         |   |        |         |      |   |         |   |   |         |  
|---------------------------------------------------- |  | ---- | ------- | ------ | - | ------- | - | ------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                     |  | 2009 |         | Change |   | 2008    |   | Change |         | 2007 |  
|Cash and cash equivalents                            |  | $    | 17,159  |        | $ | (45,388 | ) |        | 62,547  |      | $ | 52,932  |   | $ | 9,615   |  
|Short-term investments                               |  |      | 44,686  |        |   | 43,609  |   |        | 1,077   |      |   | (2,007  | ) |   | 3,084   |  
|Long-term investments                                |  |      | 9,368   |        |   | 9,368   |   |        | ―       |      |   | ―       |   |   | ―       |  
|Total cash, cash
equivalents, and investments        |  | $    | 71,213  |        | $ | 7,589   |   | $      | 63,624  |      | $ | 50,925  |   | $ | 12,699  |  
|Cash used in operating
activities                    |  | $    | (45,572 | )      | $ | (15,752 | ) | $      | (29,820 | )    | $ | (13,745 | ) | $ | (16,075 | )
|Cash used in investing
activities                    |  |      | (54,180 | )      |   | (50,631 | ) |        | (3,549  | )    |   | (333    | ) |   | (3,216  | )
|Cash provided by financing
activities                |  |      | 54,364  |        |   | (31,937 | ) |        | 86,301  |      |   | 59,503  |   |   | 26,798  |  
|Net increase (decrease) in
cash and cash equivalents |  | $    | (45,388 | )      | $ | (98,320 | ) | $      | 52,932  |      | $ | 45,425  |   | $ | 7,507   |  

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, 2009, we
had an accumulated deficit of $114.2 million and have financed our operations
principally through the sale of Series A, B and C redeemable convertible
preferred stock, the sale of common stock in our IPO in February 2008, our
equity financing in October 2008 and our sale of common stock in August 2009.
In February 2008, we completed our IPO of common stock, issuing a total of 5.1
million shares at an offering price to the public of $10.00 per share,
resulting in net proceeds to us, after underwriting discounts and commission
and expenses, of approximately $43.8 million. In conjunction with the closing
of the IPO in February 2008, all of our outstanding Series A, Series B and
Series C redeemable convertible preferred stock was converted into 10,945,080
shares of common stock, as adjusted for a one-for-3.03 reverse stock split,
which has been retroactively reflected in the accompanying financial
statements.

In
October 2008, we entered into a Securities Purchase Agreement for an equity
financing of up to approximately $60 million, with initial gross proceeds of
approximately $40.2 million, which we closed on October 31, 2008, and
conditional access to an additional $20 million. The financing resulted in net
proceeds of approximately $39.7 million, after expenses of approximately
$525,000. In connection with the financing, we issued and sold to the
participating investors 6,451,613 shares of our common stock at a purchase
price of $6.20 per share and issued 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 satisfaction of certain business related milestones before December 31,
2009, we had the right, which we refer to as 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. We did not exercise our 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 our 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.

In
August 2009, we completed a public offering of our common stock, issuing
8,050,000 shares at an offering price to the public of $7.25 per share,
resulting in net proceeds of approximately $54.3 million, after underwriting
discounts and commissions and expenses.

As
of December 31, 2009, we had approximately $71.2 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 and inventory write-downs. Net cash used in

70

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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, 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 seventeen 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
forth quarter of 2009 as compared to the forth quarter of 2008. Included in
changes in operating assets for the year ended December 31, 2008 are
approximately $8.2 million of increases to the deferred revenue balance, which
was partially offset by approximately $2.7 million of increases to the deferred
cost of revenue balance. The increases to the deferred revenue and deferred
cost of revenue balances are primarily related to twelve unit sales of our TGS
during the year ended December 31, 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, 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
used in investing activities for the year ended December 31, 2008 was primarily
attributable to the payment of the $4.0 million deferred license fee due upon
completion of our IPO, purchases of $1.6 million of property and equipment as
we invested in the infrastructure to support the growth of our company and $2.0
million for the purchase of investments, which was partially offset by proceeds
of $4.0 million from sales and maturities of investments.

Net Cash Provided by
Financing Activities

Net
cash provided by our financing activities for the year ended December 31, 2009
was primarily attributable to net proceeds received in connection with our
equity financing in August 2009. Net cash provided by our financing activities
for the year ended December 31, 2008 was primarily attributable to net proceeds
received in connection with our IPO in February 2008 and to net proceeds
received in connection with our equity financing in October 2008.

Operating Capital and
Capital Expenditure Requirements

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

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 after that period, 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

71

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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 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
acquisition of businesses, products and technologies, although we currently
have no understandings, commitments or agreements relating to any material
transaction of this type; and
| |   |                                                                                                                                                                                         
| |  | the
continued downturn in general economic conditions and interest rates.                                                                                                               

Contractual
Obligations

The
following table summarizes our outstanding contractual obligations as of
December 31, 2009 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:

|                                     |  |                       |        |              |   |             |  |           |       |  |   |       |  |   |       | 
|------------------------------------ |  | --------------------- | ------ | ------------ | - | ----------- |  | --------- | ----- |  | - | ----- |  | - | ----- | 
|(in thousands)                       |  | Payment Due by Period |       
|                                     |  |                       |        | December 31, |   | After
 2014 | 
|                                     |  | Total                 |        | 2010         |   | 2011-2012   |  | 2013-2014 |       | 
|Contractual
Obligations              |  |                       |        |              |   |             |  |           |       |  |   |       |  |   |       | 
|Minimum royalty payments 
licenses  |  | $                     | 11,724 |              | $ | 1,258       |  | $         | 3,358 |  | $ | 3,085 |  | $ | 4,023 | 
|Purchase commitments and
obligations |  |                       | 7,140  |              |   | 7,140       |  |           | ―     |  |   | ―     |  |   | ―     | 
|Development agreement
obligations    |  |                       | 1,000  |              |   | 1,000       |  |           | ―     |  |   | ―     |  |   | ―     | 
|Operating lease  real
estate        |  |                       | 639    |              |   | 400         |  |           | 239   |  |   | ―     |  |   | ―     | 
|Total                                |  | $                     | 20,503 |              | $ | 9,798       |  | $         | 3,597 |  | $ | 3,085 |  | $ | 4,023 | 

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
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 a research and development
agreement 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.

Recent Accounting Pronouncements

Adopted Accounting Pronouncements

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In
June 2008, the Financial Accounting Standards Board, or FASB, issued an
accounting standard update. As codified in Accounting Standards Codification
815-40, or ASC 815-40, Derivatives and
Hedging, this update provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entitys own stock.
The update applies to any freestanding financial instrument or embedded feature
that has all the characteristics of a derivative, for purposes of determining
whether that instrument or embedded feature qualifies for the first part of the
scope exception under ASC 815-10-15. The update also applies to any
freestanding financial instrument that is potentially settled in an entitys
own stock, regardless of whether the instrument has all the characteristics of
a derivative under previous derivative Generally Accepted Accounting
Principals, or GAAP, for purposes of determining whether the instrument is
within the scope of derivative accounting. ASC 815-40 was effective beginning
first quarter of fiscal 2009. The adoption did not have a material impact on
our results of operations and financial position.

Effective
January 1, 2009, we adopted a new accounting standard update regarding business
combinations. As codified under ASC 805, Business
Combinations, this update requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the acquisition
and expensed as incurred; that restructuring costs generally be expensed in
periods subsequent to the acquisition date; and that changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties after
the measurement period be recognized as a component of provision for taxes. In
addition, acquired in-process research and development is capitalized as an
intangible asset and amortized over its estimated useful life. The adoption did
not have a material impact on our results of operations and financial position.

In
December 2007, the FASB issued accounting guidance regarding noncontrolling
interests, as codified in ASC 810-10-65. ASC 810-10-65 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to
the parent and to the noncontrolling interest, changes in a parents ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. ASC 810-10-65 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling
owners. The adoption did not have a material impact on our results of
operations and financial position.

Effective
April 1, 2009, we adopted a new accounting standard, as codified in ASC
820-10-65, which provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. ASC 820-10-65 also includes guidance on identifying circumstances
that indicate a transaction is not orderly. The adoption did not have a material
impact on our results of operations and financial position.

In
April 2009, the FASB issued an accounting standard update, as codified in ASC
320-10-65, to amend the other-than-temporary impairment guidance in debt
securities to be based on intent to sell instead of ability to hold the
security and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This
pronouncement is effective for periods ending after June 15, 2009. The adoption
did not have a material impact on our results of operations and financial
position.

Effective
April 1, 2009, we adopted a new accounting standard for subsequent events, as
codified in ASC 855-10, which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date, but before
the financial statements are issued or available to be issued (subsequent
events). ASC 855-10 is effective for interim or annual periods ending after
June 15, 2009. See Item 8, Financial
Statements and Supplementary Data, Note 11 to the Financial Statements for
discussion of subsequent event.

Effective
July 1, 2009, we adopted The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, or ASC 105. ASC 105 establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the

73

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preparation of
financial statements in conformity with generally accepted accounting
principles. ASC 105 explicitly recognizes rules and interpretive releases of
the SEC under federal securities laws as authoritative GAAP for SEC
registrants. As ASC 105 was not intended to change or alter existing GAAP, it
did not have any impact on our financial statements.

Recent Accounting Pronouncements

In
September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issues Task Force, or ASU 2009-13. ASU 2009-13 updates the
existing multiple-element revenue arrangements guidance currently included
under ASC 605-25. ASU 2009-13 eliminates the need for objective and reliable
evidence of the fair value for the undelivered element in order for a delivered
item to be treated as a separate unit of accounting and eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance
also expands the disclosure requirements for revenue recognition. ASU 2009-13
will be effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised guidance
is retroactively applied to the beginning of the year of adoption. We are
currently evaluating the future impact that ASU 2009-13 will have on our
financial statements.

In
September 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, a
consensus of the FASB Emerging Issues Task Force, or ASU 2009-14.
ASU 2009-14 modifies the scope of ASC 985-605 to exclude from its requirements
(a) non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible
product function together to deliver the tangible products essential
functionality. ASU 2009-14 will be effective for the first annual reporting
period beginning on or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to the beginning of
the year of adoption. We are currently evaluating the future impact that ASU
2009-14 will have on our 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 and
investments. 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. We do not
believe that a variation in market rates of interest would significantly impact
the value of our investment portfolio.

74

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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                                                                                       |  | 76
|Balance Sheets as of December 31, 2009 and 2008                                                                                                |  | 78
|Statements of Operations for the years ended December 31, 2009,
 2008 and 2007                                                                 |  | 79
|Statements of Redeemable Convertible Preferred Stock and
 Stockholders Equity (Deficit) for the years ended December 31, 2009,
 2008 and 2007 |  | 80
|Statements of Cash Flows for the years ended December 31, 2009,
 2008 and 2007                                                                 |  | 82
|Notes to Financial Statements                                                                                                                  |  | 83

75

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
MAKO Surgical Corp.

We have audited the accompanying balance sheets of MAKO Surgical Corp.
as of December 31, 2009 and 2008, 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, 2009.
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, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, 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, 2009, 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, 2010 expressed an unqualified opinion thereon.

|                          |                             
|------------------------- | ----------------------------
|                          | /S/ Ernst & Young LLP       
|                          | Certified Public Accountants
|Fort
 Lauderdale, Florida |                             
|March 10,
 2010           |                             

76

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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, 2009, 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 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, 2009, 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, 2009 and 2008, 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, 2009 of
MAKO Surgical Corp. and our report dated March 10, 2010 expressed an
unqualified opinion thereon.

|                          |                             
|------------------------- | ----------------------------
|                          | /s/ Ernst & Young LLP       
|                          | Certified Public Accountants
|Fort
 Lauderdale, Florida |                             
|March 10,
 2010           |                             

77

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MAKO SURGICAL CORP.

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

|                                                                                                                                                                 |  |              |          |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | ---- | - | ------- | -
|                                                                                                                                                                 |  | December 31, |         
|                                                                                                                                                                 |  | 2009         |          | 2008 |  
|ASSETS                                                                                                                                                           |  |              |          |      |   |         |  
|Current Assets:                                                                                                                                                  |  |              |          |      |   |         |  
|Cash and cash equivalents                                                                                                                                        |  | $            | 17,159   |      | $ | 62,547  |  
|Short-term investments                                                                                                                                           |  |              | 44,686   |      |   | 1,077   |  
|Accounts receivable                                                                                                                                              |  |              | 6,536    |      |   | 2,727   |  
|Inventory                                                                                                                                                        |  |              | 10,190   |      |   | 7,673   |  
|Deferred cost of revenue                                                                                                                                         |  |              | ―        |      |   | 3,608   |  
|Prepaids and other assets                                                                                                                                        |  |              | 532      |      |   | 483     |  
|Total current assets                                                                                                                                             |  |              | 79,103   |      |   | 78,115  |  
|Long-term investments                                                                                                                                            |  |              | 9,368    |      |   | ―       |  
|Property and equipment, net                                                                                                                                      |  |              | 6,205    |      |   | 3,424   |  
|Intangible assets, net                                                                                                                                           |  |              | 4,234    |      |   | 4,817   |  
|Other assets                                                                                                                                                     |  |              | 193      |      |   | 177     |  
|Total assets                                                                                                                                                     |  | $            | 99,103   |      | $ | 86,533  |  
|                                                                                                                                                                 |  |              |          |      |   |         |  
|LIABILITIES AND
 STOCKHOLDERS EQUITY                                                                                                                            |  |              |          |      |   |         |  
|Current Liabilities:                                                                                                                                             |  |              |          |      |   |         |  
|Accounts payable                                                                                                                                                 |  | $            | 1,159    |      | $ | 1,809   |  
|Accrued compensation and employee benefits                                                                                                                       |  |              | 3,709    |      |   | 2,338   |  
|Other accrued liabilities                                                                                                                                        |  |              | 2,872    |      |   | 4,283   |  
|Deferred revenue                                                                                                                                                 |  |              | 548      |      |   | 11,518  |  
|Total current liabilities                                                                                                                                        |  |              | 8,288    |      |   | 19,948  |  
|                                                                                                                                                                 |  |              |          |      |   |         |  
|Deferred revenue                                                                                                                                                 |  |              | 21       |      |   | 71      |  
|Total liabilities                                                                                                                                                |  |              | 8,309    |      |   | 20,019  |  
|                                                                                                                                                                 |  |              |          |      |   |         |  
|Stockholders equity:                                                                                                                                            |  |              |          |      |   |         |  
|Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares
 issued and outstanding as of December 31, 2009 and 2008                                      |  |              | ―        |      |   | ―       |  
|Common stock, $0.001 par value; 135,000,000 authorized; 33,036,378 and
 24,684,786 shares issued and outstanding as of December 31, 2009 and 2008,
 respectively |  |              | 33       |      |   | 25      |  
|Additional paid-in capital                                                                                                                                       |  |              | 204,977  |      |   | 146,607 |  
|Accumulated deficit                                                                                                                                              |  |              | (114,195 | )    |   | (80,172 | )
|Accumulated other comprehensive income (loss)                                                                                                                    |  |              | (21      | )    |   | 54      |  
|Total stockholders equity                                                                                                                                       |  |              | 90,794   |      |   | 66,514  |  
|Total liabilities and stockholders equity                                                                                                                       |  | $            | 99,103   |      | $ | 86,533  |  

See accompanying notes.

78

---



MAKO SURGICAL CORP.

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

|                                                                            |  |                          |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                            |  | Years Ended December 31, |        
|                                                                            |  | 2009                     |         | 2008 |   | 2007    |  
|Revenue:                                                                    |  |                          |         |      |   |         |   |   |         |  
|Procedures                                                                  |  | $                        | 7,550   |      | $ | 2,457   |   | $ | 718     |  
|Systems  RIO                                                               |  |                          | 14,715  |      |   | ―       |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                          | 11,297  |      |   | ―       |   |   | ―       |  
|Service and other                                                           |  |                          | 646     |      |   | 487     |   |   | 53      |  
|Total
 revenue                                                              |  |                          | 34,208  |      |   | 2,944   |   |   | 771     |  
|Cost of
 revenue:                                                           |  |                          |         |      |   |         |   |   |         |  
|Procedures                                                                  |  |                          | 3,337   |      |   | 1,521   |   |   | 197     |  
|Systems  RIO                                                               |  |                          | 9,032   |      |   | 1,692   |   |   | 361     |  
|Systems  RIO upgrades                                                      |  |                          | 5,183   |      |   | ―       |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                          | 3,606   |      |   | ―       |   |   | ―       |  
|Service and other                                                           |  |                          | 546     |      |   | 233     |   |   | 25      |  
|Total cost
 of revenue                                                      |  |                          | 21,704  |      |   | 3,446   |   |   | 583     |  
|Gross profit
 (loss)                                                        |  |                          | 12,504  |      |   | (502    | ) |   | 188     |  
|Operating
 costs and expenses:                                              |  |                          |         |      |   |         |   |   |         |  
|Selling, general and administrative                                         |  |                          | 31,878  |      |   | 23,158  |   |   | 12,042  |  
|Research and development                                                    |  |                          | 13,127  |      |   | 12,472  |   |   | 8,269   |  
|Depreciation and amortization                                               |  |                          | 1,951   |      |   | 1,828   |   |   | 1,297   |  
|Total
 operating costs and expenses                                         |  |                          | 46,956  |      |   | 37,458  |   |   | 21,608  |  
|Loss from
 operations                                                       |  |                          | (34,452 | )    |   | (37,960 | ) |   | (21,420 | )
|Interest and
 other income                                                  |  |                          | 432     |      |   | 988     |   |   | 1,073   |  
|Interest and
 other expenses                                                |  |                          | (3      | )    |   | (110    | ) |   | (311    | )
|Net loss                                                                    |  |                          | (34,023 | )    |   | (37,082 | ) |   | (20,658 | )
|Accretion of
 preferred stock                                               |  |                          | ―       |      |   | (44     | ) |   | (301    | )
|Dividends on
 preferred stock                                               |  |                          | ―       |      |   | (521    | ) |   | (3,359  | )
|Net loss
 attributable to common stockholders                               |  | $                        | (34,023 | )    | $ | (37,647 | ) | $ | (24,318 | )
|Net loss per
 share  Basic and diluted attributable to common stockholders |  | $                        | (1.22   | )    | $ | (2.20   | ) | $ | (14.75  | )
|Weighted
 average common shares outstanding  Basic and diluted             |  |                          | 27,806  |      |   | 17,096  |   |   | 1,649   |  

See accompanying notes.

79

---



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 |   | Note
 Receivable
 from
 Stockholder |  | Accumulated
 Deficit |         | Other
 Comprehensive
 Income (Loss) |   | Total
 Stockholders
 Equity (Deficit) |  
|                                                                                                               |  | Shares                              |   | Amount         |         |               |        |                              |   |                                     |  |                     
|                                                                                                               |  |                                     |   |                |         |               |        |                              |   |                                     |  |                      |         |                                     |   |                                        |   |   |         |   |   |    |   |   |         |  
|Balance at December 31, 2006                                                                                   |  | 19,650                              |   | $              | 25,911  |               | 1,556  |                              | $ | 2                                   |  | $                    |        |                                     | $ | (71                                    | ) | $ | (19,366 | ) | $ | (2 | ) | $ | (19,437 | )
|Issuance of Series C redeemable convertible preferred stock, net
 of issuance costs of $84,000                 |  | 13,514                              |   |                | 29,916  |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   |        |   |   |   |   |   |        |  
|Issuance of common stock upon exercise of options                                                              |  |                                    |   |                |        |               | 1      |                              |   |                                    |  |                      | 2       |                                     |   |                                       |   |   |        |   |   |   |   |   | 2       |  
|Employee share-based compensation expense                                                                      |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      | 531     |                                     |   |                                       |   |   |        |   |   |   |   |   | 531     |  
|Interest on note receivable from stockholder                                                                   |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      | 4       |                                     |   | (4                                     | ) |   |        |   |   |   |   |   |        |  
|Modification of restricted stock                                                                               |  |                                    |   |                |        |               | 300    |                              |   |                                    |  |                      | 394     |                                     |   | 75                                     |   |   |        |   |   |   |   |   | 469     |  
|Return of 35,244 shares due to modification of restricted stock                                                |  |                                    |   |                |        |               | (35    | )                            |   |                                    |  |                      | (392    | )                                   |   |                                       |   |   |        |   |   |   |   |   | (392    | )
|Restricted common stock compensation expense                                                                   |  |                                    |   |                |        |               | 49     |                              |   |                                    |  |                      | 302     |                                     |   |                                       |   |   |        |   |   |   |   |   | 302     |  
|Accretion to redemption value of Series A, B and C redeemable
 convertible preferred stock                     |  |                                    |   |                | 301     |               |       |                              |   |                                    |  |                      | (301    | )                                   |   |                                       |   |   |        |   |   |   |   |   | (301    | )
|Accrued dividends on Series A, B and C redeemable convertible
 preferred stock                                 |  |                                    |   |                | 3,359   |               |       |                              |   |                                    |  |                      | (540    | )                                   |   |                                       |   |   | (2,819  | ) |   |   |   |   | (3,359  | )
|Change in unrealized gain on available-for-sale securities                                                     |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   |        |   |   | 6  |   |   | 6       |  
|Net loss                                                                                                       |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   | (20,658 | ) |   |   |   |   | (20,658 | )
|                                                                                                               |  |                                     |   |                |         |               |        |                              |   |                                     |  |                      |         |                                     |   |                                        |   |   |         |   |   |    |   |   |         |  
|Total comprehensive loss                                                                                       |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   |        |   |   |   |   |   | (20,652 | )
|Balance at December 31, 2007                                                                                   |  | 33,164                              |   |                | 59,487  |               | 1,871  |                              |   | 2                                   |  |                      |        |                                     |   |                                       |   |   | (42,843 | ) |   | 4  |   |   | (42,837 | )
|Issuance of common stock in initial public offering                                                            |  |                                    |   |                |        |               | 5,100  |                              |   | 5                                   |  |                      | 43,789  |                                     |   |                                       |   |   |        |   |   |   |   |   | 43,794  |  
|Issuance of common stock in equity financing                                                                   |  |                                    |   |                |        |               | 6,451  |                              |   | 7                                   |  |                      | 39,726  |                                     |   |                                       |   |   |        |   |   |   |   |   | 39,733  |  
|Issuance of common stock upon exercise of options                                                              |  |                                    |   |                |        |               | 62     |                              |   |                                    |  |                      | 46      |                                     |   |                                       |   |   |        |   |   |   |   |   | 46      |  
|Employee share-based compensation expense                                                                      |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      | 1,467   |                                     |   |                                       |   |   |        |   |   |   |   |   | 1,467   |  
|Restricted common stock compensation expense                                                                   |  |                                    |   |                |        |               | 256    |                              |   |                                    |  |                      | 1,856   |                                     |   |                                       |   |   |        |   |   |   |   |   | 1,856   |  
|Accretion to redemption value of Series A, B and C redeemable
 convertible preferred stock                     |  |                                    |   |                | 44      |               |       |                              |   |                                    |  |                      | (44     | )                                   |   |                                       |   |   |        |   |   |   |   |   | (44     | )
|Accrued dividends on Series A, B and C redeemable convertible
 preferred stock                                 |  |                                    |   |                | 521     |               |       |                              |   |                                    |  |                      | (274    | )                                   |   |                                       |   |   | (247    | ) |   |   |   |   | (521    | )
|Conversion of Series A, B and C redeemable convertible preferred
 shares into common shares                    |  | (33,164                             | ) |                | (53,667 | )             | 10,945 |                              |   | 11                                  |  |                      | 53,656  |                                     |   |                                       |   |   |        |   |   |   |   |   | 53,667  |  
|Reclassification of accrued dividends on redeemable convertible preferred
 stock to additional paid-in capital |  |                                    |   |                | (6,385  | )             |       |                              |   |                                    |  |                      | 6,385   |                                     |   |                                       |   |   |        |   |   |   |   |   | 6,385   |  
|Change in unrealized gain on available-for-sale securities                                                     |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   |        |   |   | 50 |   |   | 50      |  
|Net loss                                                                                                       |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   | (37,082 | ) |   |   |   |   | (37,082 | )
|Total comprehensive loss                                                                                       |  |                                    |   |                |        |               |       |                              |   |                                    |  |                      |        |                                     |   |                                       |   |   |        |   |   |   |   |   | (37,032 | )
|Balance at December 31, 2008                                                                                   |  |                                    |   | $              |        |               | 24,685 |                              | $ | 25                                  |  | $                    | 146,607 |                                     | $ |                                       |   | $ | (80,172 | ) | $ | 54 |   | $ | 66,514  |  

(continued)

80

---



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 |   | Note
 Receivable
 from
 Stockholder |  | 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     |  
|Employee share-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    | )
|Deferred 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  |  

See accompanying notes.

81

---



MAKO SURGICAL CORP.

Statements of
Cash Flows(in thousands)

|                                                                                                                                                                     |  |                           |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                                                                     |  | Years
 Ended December 31, |        
|                                                                                                                                                                     |  | 2009                      |         | 2008 |   | 2007    |  
|Operating activities:                                                                                                                                                |  |                           |         |      |   |         |   |   |         |  
|Net loss                                                                                                                                                             |  | $                         | (34,023 | )    | $ | (37,082 | ) | $ | (20,658 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                                                                                         |  |                           |         |      |   |         |   |   |         |  
|Depreciation                                                                                                                                                         |  |                           | 1,769   |      |   | 1,502   |   |   | 678     |  
|Amortization of intangible assets                                                                                                                                    |  |                           | 682     |      |   | 660     |   |   | 645     |  
|Stock-based compensation                                                                                                                                             |  |                           | 4,014   |      |   | 3,323   |   |   | 1,227   |  
|Inventory write-down                                                                                                                                                 |  |                           | 1,081   |      |   | 730     |   |   | 8       |  
|Amortization of premium on investment securities                                                                                                                     |  |                           | 188     |      |   | ―       |   |   | ―       |  
|Loss on asset impairment                                                                                                                                             |  |                           | 51      |      |   | ―       |   |   | 14      |  
|Accrued interest expense on deferred license fee                                                                                                                     |  |                           | ―       |      |   | 45      |   |   | 305     |  
|Changes in operating assets and liabilities:                                                                                                                         |  |                           |         |      |   |         |   |   |         |  
|Accounts receivable                                                                                                                                                  |  |                           | (3,809  | )    |   | (514    | ) |   | (1,634  | )
|Inventory                                                                                                                                                            |  |                           | (7,358  | )    |   | (7,056  | ) |   | (2,123  | )
|Prepaid and other assets                                                                                                                                             |  |                           | (49     | )    |   | (173    | ) |   | 97      |  
|Other assets                                                                                                                                                         |  |                           | (16     | )    |   | (7      | ) |   | 156     |  
|Accounts payable                                                                                                                                                     |  |                           | (650    | )    |   | 298     |   |   | 1,078   |  
|Accrued compensation and employee benefits                                                                                                                           |  |                           | 1,371   |      |   | 1,305   |   |   | 523     |  
|Other accrued liabilities                                                                                                                                            |  |                           | (1,411  | )    |   | 1,603   |   |   | 1,664   |  
|Deferred cost of revenue                                                                                                                                             |  |                           | 3,608   |      |   | (2,682  | ) |   | (716    | )
|Deferred revenue                                                                                                                                                     |  |                           | (11,020 | )    |   | 8,228   |   |   | 2,661   |  
|Net cash used in operating activities                                                                                                                                |  |                           | (45,572 | )    |   | (29,820 | ) |   | (16,075 | )
|Investing activities:                                                                                                                                                |  |                           |         |      |   |         |   |   |         |  
|Purchase of investments                                                                                                                                              |  |                           | (59,961 | )    |   | (1,990  | ) |   | (15,159 | )
|Proceeds from sales and maturities of investments                                                                                                                    |  |                           | 6,721   |      |   | 4,047   |   |   | 13,480  |  
|Acquisition of property and equipment                                                                                                                                |  |                           | (790    | )    |   | (1,606  | ) |   | (1,087  | )
|Acquisition of intangible assets                                                                                                                                     |  |                           | (150    | )    |   | ―       |   |   | (450    | )
|Payment of deferred license fee                                                                                                                                      |  |                           | ―       |      |   | (4,000  | ) |   | ―       |  
|Net cash used in investing activities                                                                                                                                |  |                           | (54,180 | )    |   | (3,549  | ) |   | (3,216  | )
|Financing activities:                                                                                                                                                |  |                           |         |      |   |         |   |   |         |  
|Proceeds from issuance of common stock in equity financing, net of
 underwriting fees of $3,502 and $0 for the years ended December 31, 2009 and
 2008, respectively |  |                           | 54,861  |      |   | 40,202  |   |   | ―       |  
|Deferred equity financing costs                                                                                                                                      |  |                           | (609    | )    |   | (469    | ) |   | ―       |  
|Proceeds from initial public offering of common stock, net of
 underwriting fees of $3,570                                                                           |  |                           | ―       |      |   | 47,430  |   |   | ―       |  
|Deferred initial public offering costs                                                                                                                               |  |                           | ―       |      |   | (908    | ) |   | (2,728  | )
|Proceeds from issuance of Series C redeemable convertible preferred
 stock, net of stock issuance costs                                                              |  |                           | ―       |      |   | ―       |   |   | 29,916  |  
|Proceeds from employee stock purchase plan                                                                                                                           |  |                           | 455     |      |   | ―       |   |   | ―       |  
|Exercise of common stock options for cash                                                                                                                            |  |                           | 149     |      |   | 46      |   |   | 2       |  
|Payment of payroll taxes relating to vesting of restricted stock                                                                                                     |  |                           | (492    | )    |   | ―       |   |   | ―       |  
|Payment of CEO payroll taxes relating to restricted stock modification                                                                                               |  |                           | ―       |      |   | ―       |   |   | (392    | )
|Net cash provided by financing activities                                                                                                                            |  |                           | 54,364  |      |   | 86,301  |   |   | 26,798  |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                 |  |                           | (45,388 | )    |   | 52,932  |   |   | 7,507   |  
|Cash and cash equivalents at beginning of year                                                                                                                       |  |                           | 62,547  |      |   | 9,615   |   |   | 2,108   |  
|                                                                                                                                                                     |  |                           |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                                                                                             |  | $                         | 17,159  |      | $ | 62,547  |   | $ | 9,615   |  
|Non-cash investing and financing activities:                                                                                                                         |  |                           |         |      |   |         |   |   |         |  
|Receipt of 56,045 and 35,244 shares of common stock delivered in
 payment of payroll taxes for the years ended December 31, 2009 and 2007,
 respectively             |  | $                         | 492     |      | $ | ―       |   | $ | 392     |  
|Transfers of inventory to property and equipment                                                                                                                     |  |                           | 3,760   |      |   | 999     |   |   | 695     |  
|Accretion of redeemable convertible preferred stock                                                                                                                  |  |                           | ―       |      |   | 44      |   |   | 301     |  
|Accrued dividends on redeemable convertible preferred stock                                                                                                          |  |                           | ―       |      |   | 521     |   |   | 3,359   |  
|Conversion of redeemable convertible preferred stock into 10,945,080
 common shares                                                                                  |  |                           | ―       |      |   | 53,667  |   |   | ―       |  
|Reclassification of accrued dividends on redeemable convertible
 preferred stock to additional paid-in capital                                                       |  |                           | ―       |      |   | 6,385   |   |   | ―       |  
|Reclassification of deferred initial public offering costs to
 additional paid-in capital                                                                            |  |                           | ―       |      |   | 3,636   |   |   | ―       |  
|Licensing of intellectual property                                                                                                                                   |  |                           | ―       |      |   | ―       |   |   | 30      |  
|Deferred license fee payable                                                                                                                                         |  |                           | ―       |      |   | ―       |   |   | 30      |  
|Interest on note receivable for common stock                                                                                                                         |  |                           | ―       |      |   | ―       |   |   | 4       |  

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
minimally invasive orthopedic knee procedures. The Company was incorporated in
the State of Delaware on November 12, 2004 and is headquartered in
Fort Lauderdale, Florida.

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

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

In
October 2008, the Company entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) for an equity financing of up to 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 (which conditional access expired on December 31, 2009). The
financing resulted in net proceeds to the Company of approximately $39.7
million, after expenses of approximately $525,000. See Note 5 for further
discussion of the Securities Purchase Agreement.

In
August 2009, the Company completed a public offering of its common stock,
issuing 8,050,000 shares at an offering price to the public of $7.25 per share,
resulting in net proceeds to the Company, after underwriting discounts and
commissions and expenses, of approximately $54.3 million.

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 after that period, the Company will need to seek additional
sources of funds, including selling additional equity, debt or other securities
or entering into a credit

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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 its 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 and investments.
The Companys cash and cash equivalents are held in demand and money market
accounts at three 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.

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s current versions of its RIO® Robotic Arm Interactive
Orthopedic system (RIO), which is the version 2.0 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.

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.

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, 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

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total revenue
for the year ended December 31, 2009. The following table presents information
about the Companys revenue by significant customer for the years ended
December 31, 2008 and 2007:

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

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

Accrual for Warranty Costs

Upon
installation of a RIO system, the Company establishes an accrual for the
estimated costs associated with providing a standard one-year warranty for
defects in materials and workmanship.

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, 2009 and 2008,
capitalized manufacturing overhead included in inventory was approximately $1.1
million and $282,000, respectively. Previously, such overhead costs were fully
expensed as selling, general and administrative expense as capitalizable
amounts were not significant.

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Property and Equipment

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

Intangible Assets

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

Impairment of Long-Lived Assets

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

Revenue Recognition

Revenue
is generated from unit sales of the Companys RIO system, including
installation services, training, upgrades and enhancements, from sales of
implants and disposable products, and by providing extended warranty services.
The Companys RIO system, as well as upgrades and enhancements to its RIO
system, include software that is essential to the functionality of the product
and, accordingly, the Company accounts for the sale of the RIO system pursuant
to ASC 985-605, Software  Revenue Recognition (ASC 985-605).

The
Company recognizes system revenue for sales of the RIO system when there is
persuasive evidence of a sales arrangement, the fee is fixed or determinable,
collection of the fee is probable and delivery has occurred as prescribed by
ASC 985-605. For all sales, the Company uses either a signed agreement or a
binding purchase order as evidence of an arrangement.

For
arrangements with multiple elements, the Company allocates arrangement
consideration to the RIO systems, upgrades, enhancements and services based
upon vendor specific objective evidence (VSOE) of fair value of the
respective elements. Revenue and direct cost of revenue associated with the
sale of the RIO systems are recognized upon the earlier of (1) delivery of all
elements or (2) establishment of VSOE of fair value for all undelivered
elements.

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 will be recognized
upon installation of the system, delivery of associated instrumentation 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), 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

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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, 2009, the deferred revenue balance
consists primarily of deferred service revenue as discussed below.

A
portion of the Companys customers acquire the RIO system through a
leasing arrangement with a third-party leasing company. In these instances, the
Company typically sells the RIO system to the leasing company, and the customer
enters into an independent leasing arrangement with the leasing company. The
Company treats these leasing transactions the same as sales transactions for
purposes of recognizing revenue for the sale. The Company sells implants and
disposable products utilized in knee MAKOplasty procedures directly to the
customers.

Procedure
revenue from the sale of implants and disposable products utilized in knee
MAKOplasty procedures is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectability is reasonably assured. The implants and
disposable products are a separate unit of accounting from the RIO systems as
(1) they have value to the customer on a standalone basis, (2) objective and
reliable evidence of the fair value of the item exists and (3) no right of
return exists once the implants and disposable products are implanted or consumed.
Accordingly, as the Companys implants and disposable products are sold on a
procedural basis, the revenue and costs associated with the sale of implants
and disposable products are recognized at the time of sale (i.e., at the time
of the related surgical procedure).

Costs
associated with establishing an accrual for the RIO system standard one-year
warranty liability and 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.

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

Deferred Revenue and Deferred Cost of Revenue

Deferred
revenue consists of deferred system revenue and deferred service revenue.
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 service revenue also results
from the advance payment for services to be delivered over a period of time,
usually in one-year increments. Service revenue is recognized ratably over the
service period. Deferred cost of revenue consists of the direct costs
associated with the manufacture of RIO systems for which the revenue has been
deferred in accordance with the Companys revenue recognition policy. Deferred
revenue and associated deferred cost of revenue expected to be realized within
one year are classified as current liabilities and current assets,
respectively. The deferred revenue balance as of December 31, 2009 consists
primarily of deferred service revenue for extended warranty services on the RIO
system hardware.

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.

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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 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.

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

Advertising Costs

Advertising
costs are expensed as incurred. Advertising costs were approximately $1.3
million, $1.4 million and $431,000 for the years ended December 31, 2009, 2008
and 2007, 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. Valuation allowances are established when necessary to
reduce deferred income tax assets to the amounts expected to be realized. The
Company recognizes any interest and penalties related to unrecognized tax
benefits as a component of income tax expense.

Operating Leases

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

Net Loss Per Share

The
Company calculated net loss per share in accordance with ASC 260, Earnings per
Share. Basic earnings per share (EPS) is calculated by dividing
the net income or loss available to common stockholders adjusted for redeemable
convertible preferred stock accretion and dividends by the weighted average
number of common

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shares
outstanding for the period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or loss available to common
stockholders by the weighted average number of common shares outstanding for
the period and the weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury stock method. The
following table sets forth 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, |      
|                                        |  | 2009         |       | 2008 |  | 2007  | 
|Stock
 options outstanding              |  |              | 3,478 |      |  | 2,193 |  |  | 1,917  | 
|Warrants to
 purchase common stock      |  |              | 2,065 |      |  | 2,076 |  |  | 463    | 
|Unvested
 restricted stock              |  |              | 222   |      |  | 267   |  |  | 428    | 
|Redeemable
 convertible preferred stock |  |              | ―     |      |  | ―     |  |  | 33,164 | 

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, 2009, 2008 and
2007, the Company recorded comprehensive losses of approximately $34.1 million,
$37.0 million and $20.7 million, respectively. The difference between
comprehensive loss and net loss for the years ended December 31, 2009, 2008
and 2007 is due to changes in unrealized gains and losses on the Companys
available-for-sale securities.

Recent Accounting Pronouncements

Adopted Accounting Pronouncements

In
June 2008, the Financial Accounting Standards Board (FASB) issued an
accounting standard update. As codified in ASC 815-40,Derivatives and Hedging, this update
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entitys own stock. The update applies
to any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative, for purposes of determining whether that
instrument or embedded feature qualifies for the first part of the scope
exception under ASC 815-10-15. The update also applies to any freestanding
financial instrument that is potentially settled in an entitys own stock,
regardless of whether the instrument has all the characteristics of a
derivative under previous derivative Generally Accepted Accounting Principals
(GAAP), for purposes of determining whether the instrument is within the
scope of derivative accounting. ASC 815-40 was effective beginning with the
first quarter of fiscal 2009. The adoption did not have a material impact on
the Companys results of operations and financial position.

Effective
January 1, 2009, the Company adopted a new accounting standard update regarding
business combinations. As codified under ASC 805,Business Combinations, this update requires an entity to recognize
the assets acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period be recognized as a component of
provision for taxes. In addition, acquired in-process research and development
is capitalized as an intangible asset and amortized over its estimated useful
life.

Effective
April 1, 2009, the Company adopted a new accounting standard, as codified in
ASC 820-10-65, which provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability have
significantly decreased. ASC 820-10-65 also includes guidance on identifying
circumstances that

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indicate a
transaction is not orderly. The adoption did not have a material impact on the
Companys results of operations and financial position.

In
April 2009, the FASB issued an accounting standard update, as codified in ASC
320-10-65, to amend the other-than-temporary impairment guidance in debt
securities to be based on intent to sell instead of ability to hold the
security and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This
pronouncement is effective for periods ending after June 15, 2009. The adoption
did not have a material impact on the Companys results of operations and
financial position.

Effective
April 1, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10, which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet
date, but before the financial statements are issued or available to be issued
(subsequent events). ASC 855-10 is effective for interim or annual periods
ending after June 15, 2009.  See Note 11 for discussion of subsequent event.

Effective
July 1, 2009, the Company adoptedThe FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (ASC 105). ASC 105 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial
statements in conformity with generally accepted accounting principles. ASC 105
explicitly recognizes rules and interpretive releases of the SEC under federal
securities laws as authoritative GAAP for SEC registrants. As ASC 105 was not
intended to change or alter existing GAAP, it did not have any impact on the
Companys financial statements.

New Accounting Pronouncements

In
September 2009, the FASB issued Update No. 2009-13,Multiple-Deliverable Revenue Arrangements,a consensus of the FASB Emerging Issues Task Force
(ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue
arrangements guidance currently included under ASC 605-25. ASU 2009-13
eliminates the need for objective and reliable evidence of the fair value for
the undelivered element in order for a delivered item to be treated as a separate
unit of accounting and eliminates the residual method to allocate the
arrangement consideration. In addition, the guidance also expands the
disclosure requirements for revenue recognition. ASU 2009-13 will be effective
for the first annual reporting period beginning on or after June 15, 2010, with
early adoption permitted provided that the revised guidance is retroactively
applied to the beginning of the year of adoption. The Company is currently
evaluating the future impact that ASU 2009-13 will have on its financial
statements.

In
September 2009, the FASB issued Update No. 2009-14,Certain Revenue Arrangements That Include Software Elements, a
consensus of the FASB Emerging Issues Task Force (ASU 2009-14).
ASU 2009-14 modifies the scope of ASC 985-605 to exclude from its requirements
(a) non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible
product function together to deliver the tangible products essential
functionality. ASU 2009-14 will be effective for the first annual reporting
period beginning on or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to the beginning of
the year of adoption. The Company is currently evaluating the future impact
that ASU 2009-14 will have on its financial statements.

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Reclassifications

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

3. Investments

The
Companys investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
included in other comprehensive income within stockholders equity (deficit).
Realized gains and losses and declines in value determined to be
other-than-temporary on available-for-sale securities are included in interest
and other expenses. During the years ended December 31, 2009, 2008 and 2007,
realized gains or losses recognized on the sale of investments were not
significant. Interest and dividends on securities classified as
available-for-sale are included in interest and other income. The cost of
securities sold is based on the specific identification method.

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

As of December 31, 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, 2008          |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|                                 |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|(in thousands)                   |  | Amortized
 Cost |        | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |    
|Short-term investments:          |  |                 |        |                          |   |                           |  |             |     |   |   |        | 
|Certificates of deposit          |  | $               | 61     |                          | $ | ―                         |  | $           | ―   |   | $ | 61     | 
|Variable auction rate securities |  |                 | 962    |                          |   | 54                        |  |             | ―   |   |   | 1,016  | 
|Total short-term investments     |  | $               | 1,023  |                          | $ | 54                        |  | $           | ―   |   | $ | 1,077  | 

As of December
31, 2009 and December 31, 2008, all short-term investments had maturity dates
or interest reset dates of less than one year. As of December 31, 2009, all
long-term investments had maturity dates between one and two years.

91

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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,
 2009 |        | 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 |  | $                  | 32,867 |                                                                           | $ | 32,867                                                |  | $                                               | ― |  | $ | ― | 
|Certificates of deposit  |  |                    | 10,273 |                                                                           |   | 10,273                                                |  |                                                 | ― |  |   | ― | 
|U.S. corporate debt      |  |                    | 1,546  |                                                                           |   | 1,546                                                 |  |                                                 | ― |  |   | ― | 
|Long-term
 investments:  |  |                    |        |                                                                           |   |                                                       |  |                                                 |   |  |   |   | 
|U.S. government agencies |  |                    | 5,400  |                                                                           |   | 5,400                                                 |  |                                                 | ― |  |   | ― | 
|Certificates of deposit  |  |                    | 2,452  |                                                                           |   | 2,452                                                 |  |                                                 | ― |  |   | ― | 
|U.S. corporate debt      |  |                    | 1,516  |                                                                           |   | 1,516                                                 |  |                                                 | ― |  |   | ― | 
|Total
 investments       |  | $                  | 54,054 |                                                                           | $ | 54,054                                                |  | $                                               | ― |  | $ | ― | 

The table
below provides a reconciliation of auction rate securities assets measured at
fair value on a recurring basis which use Level 3 or significant unobservable
inputs for the year ended December 31, 2009.

|                                                                                                                                                                                       |  |                                                               |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ------ | -
|(in thousands)                                                                                                                                                                         |  | Fair Value Measurements Using Significant Unobservable Inputs |       
|                                                                                                                                                                                       |  | Year Ended 
 December 31, 2009                                |       
|Balance at beginning of year                                                                                                                                                           |  | $                                                             | 1,016  |  
|Transfers into Level 3                                                                                                                                                                 |  |                                                               | ―      |  
|Total gains realized included in earnings                                                                                                                                              |  |                                                               | 63     |  
|Total change in other comprehensive income                                                                                                                                             |  |                                                               | (54    | )
|Sales/Redemptions                                                                                                                                                                      |  |                                                               | (1,025 | )
|Balance at December 31, 2009                                                                                                                                                           |  | $                                                             | ―      |  
|                                                                                                                                                                                       |  |                                                               |        |  
|The total amount of gains or losses for the
 period included in earnings attributable to the change in unrealized gains or
 losses relating to assets still held at the reporting date |  | $                                                             | ―      |  

In
February 2008, the FASB issued an accounting standard update, as codified in
ASC 820-10, that delayed the effective date of fair value measurements
accounting for certain nonfinancial assets and certain nonfinancial
liabilities, until the beginning of the first quarter of fiscal 2009. The
Company adopted this accounting standard update effective January 1, 2009.
The adoption of this update did not have a material impact on the Companys
financial position or its results of operations.

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4. Selected Balance Sheet Components

The
following table provides details of selected balance sheet items:

|                 |  |              |        |      |   |       | 
|---------------- |  | ------------ | ------ | ---- | - | ----- | 
|(in thousands)   |  | December 31, |       
|                 |  | 2009         |        | 2008 |  
|Inventory:       |  |              |        |      |   |       | 
|Raw
 materials   |  | $            | 2,770  |      | $ | 3,809 | 
|Work-in-process  |  |              | 932    |      |   | 748   | 
|Finished
 goods  |  |              | 6,488  |      |   | 3,116 | 
|Total
 inventory |  | $            | 10,190 |      | $ | 7,673 | 

The Company
incurred write-offs totaling approximately $1.1 million and $730,000 during the
years ended December 31, 2009 and 2008, respectively. Write-offs 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. Write-offs in 2008 primarily relate to discontinued portions
of the Companys existing implant lines in connection with the launch of
RESTORIS and to the discontinuation of the manufacturing of the Companys TGS
in anticipation of the launch of the RIO system.

|                                                |  |              |        |                        |   |        |   |  |                                      | 
|----------------------------------------------- |  | ------------ | ------ | ---------------------- | - | ------ | - |  | ------------------------------------ | 
|(in thousands)                                  |  | December 31, |        | Estimated
 Useful Life |  
|                                                |  | 2009         |        | 2008                   |   |       
|Property and equipment:                         |  |              |        |                        |   |        |   |  |                                      | 
|Consigned
 RIO systems and instruments          |  | $            | 2,551  |                        | $ | 705    |   |  | 2-5 years                            | 
|Service and
 demo RIO systems and instruments   |  |              | 2,354  |                        |   | 549    |   |  | 2-5 years                            | 
|Computer
 equipment and software                |  |              | 2,160  |                        |   | 1,669  |   |  | 3-5 years                            | 
|Manufacturing
 and laboratory equipment         |  |              | 1,654  |                        |   | 1,261  |   |  | 5 years                              | 
|Office
 furniture and equipment                 |  |              | 882    |                        |   | 804    |   |  | 7 years                              | 
|Leasehold
 improvements                         |  |              | 607    |                        |   | 387    |   |  | Lesser of
 useful life or lease term | 
|                                                |  |              | 10,208 |                        |   | 5,375  |   |  |                                      | 
|Less
 accumulated depreciation and amortization |  |              | (4,003 | )                      |   | (1,951 | ) |  |                                      | 
|Total
 property and equipment, net              |  | $            | 6,205  |                        | $ | 3,424  |   |  |                                      | 

|                           |  |              |       |      |   |       | 
|-------------------------- |  | ------------ | ----- | ---- | - | ----- | 
|(in thousands)             |  | December 31, |      
|                           |  | 2009         |       | 2008 |  
|Other accrued liabilities: |  |              |       |      |   |       | 
|Accrued
 royalties         |  | $            | 413   |      | $ | 429   | 
|Accrued
 legal fees        |  |              | 172   |      |   | 586   | 
|Other                      |  |              | 2,287 |      |   | 3,268 | 
|                           |  | $            | 2,872 |      | $ | 4,283 | 

5. Related Parties

Employee Loans

During
2006, the Company issued $225,000 in employee loans to certain officers of the
Company (the Employee Loans). The Employee Loans accrued interest at a rate
of 4.0% per annum, compounded annually. The interest was paid biweekly. The
Employee Loans and accrued interest were due upon the earlier of one year from
the date of the Employee Loan or a liquidation event, as defined. The Employee
Loans were fully repaid in

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April 2007. In
May and June 2007, the Company issued $225,000 in employee loans to certain
officers of the Company under terms that were substantially similar to the
Employee Loans issued in 2006. In August and September 2007, the Company
forgave the $225,000 of outstanding loans, including accrued interest, with a
charge to the statement of operations. No Employee Loans were outstanding as of
December 31, 2009 and 2008.

Restricted Stock and
Note Receivable from Related Party

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

On
September 5, 2007, the Company forgave approximately $1,149,000 of
outstanding loans, including accrued interest of $113,000, to its CEO, which
represents all loans outstanding to the Companys CEO. Of this amount $949,000
was associated with the issuances of the restricted and unrestricted stock and
$200,000 was associated with the employee loans discussed above. In connection
with the forgiveness of the loans, 35,244 shares of common stock were surrendered
by the CEO to the Company to pay for the payroll taxes associated with the
taxable income from the forgiveness of the loans. The forgiveness of the notes
receivable resulted in a modification to the original award. Accordingly, the
Company accounted for the modification by determining the amount of the
incremental compensation charge to be recorded in accordance with ASC
718-20-35. The original award, which was accounted for as a stock option, was
revalued on the date of modification using the Black-Scholes-Merton model with
current inputs for risk-free rate, volatility and market value. This calculated
amount was compared to the fair value of the restricted stock award on the date
of modification resulting in the incremental charge. Due to the forgiveness of
the note, the Company ceased to record the award as a stock option and
commenced the recording of the award as a restricted stock award. Accordingly,
on the date of modification, the Company recognized the incremental charge for
the portion of the vested shares and is recording the additional portion
related to the unvested shares over the remaining term. The forgiveness
resulted in a modification to the original terms of the restricted stock-based
awards with a charge of approximately $395,000 recorded in the financial
statements in September 2007. The remaining unrecognized compensation expense
of approximately $533,000 relating to the unvested restricted stock will be
recorded in the financial statements over the remaining vesting period, along
with the related vested common stock. The compensation expense associated with
the modification of the terms of the restricted stock was determined under the
Black-Scholes-Merton model assuming a risk free interest rate of 0.0% (as the
interest rate on the promissory notes was greater than the risk free interest
rate and the excess was not significant to the Black-Scholes-Merton
valuation  risk free interest rate of 4.29% less the stated interest rate
of 8% implicit in the promissory notes), a volatility factor of 54.07% and

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an estimated
life ranging from 4.10 to 5.80 years. The value of the common stock on the
modification date was determined in an August 2007 valuation by an independent
valuation firm.

See
Note 8 for further discussion of restricted stock.

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.

6. Intangible Assets

The
Companys intangible assets are comprised of a purchased patent application and
licenses to intellectual property rights (the Licenses). The Licenses are
amortized on a straight line basis over their estimated useful lives which
range 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)                  |  | 2009         |        | 2008                                    | 
|                                |  | Amount       |        | Weighted
 Average
 Amortization
 Period |  | Amount |  | Weighted
 Average
 Amortization
 Period |       
|Licenses                        |  | $            | 6,679  |                                         |  | 9.9    |  | $                                       | 6,549  |   |  | 10.0 | 
|Patent                          |  |              | ―      |                                         |  |        |  |                                         | 60     |   |  | 17.8 | 
|                                |  |              | 6,679  |                                         |  | 9.9    |  |                                         | 6,609  |   |  | 10.1 | 
|Less:
 accumulated amortization |  |              | (2,445 | )                                       |  |        |  |                                         | (1,792 | ) |  |      | 
|Intangible
 assets, net         |  | $            | 4,234  |                                         |  |        |  | $                                       | 4,817  |   |  |      | 

Amortization
expense related to intangible assets was approximately $682,000, $660,000 and
$645,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.

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The
estimated future amortization expense of intangible assets for the next five
years as of December 31, 2009 is as follows:

|               |  |   |       | 
|-------------- |  | - | ----- | 
|(in thousands) |  |   |       | 
|2010           |  | $ | 688   | 
|2011           |  |   | 688   | 
|2012           |  |   | 688   | 
|2013           |  |   | 683   | 
|2014           |  |   | 655   | 
|Total          |  | $ | 3,402 | 

7. Commitments and Contingencies

Operating Leases

The
Company leases its facility under an operating lease that expires in July 2011.
The Company has the option to renew its facility lease for two consecutive
three year periods. Rent expense on a straight-line basis was $613,000,
$498,000 and $314,000 for the years ended December 31, 2009, 2008 and
2007, respectively. The rent expense for the years ended December 31,
2009, 2008 and 2007 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, 2009 are approximately as
follows:

|               |  |   |     | 
|-------------- |  | - | --- | 
|(in thousands) |  |   |     | 
|2010           |  |   | 400 | 
|2011           |  |   | 239 | 
|               |  | $ | 639 | 

Purchase Commitments

At
December 31, 2009, the Company was committed to make future purchases for
inventory related items under various purchase arrangements with fixed purchase
provisions aggregating approximately $7.1 million.

License and Royalty
Agreements

In
December 2004, the Company was granted a limited license to Z-Kat, Inc.s
(Z-Kat) computer assisted surgery (CAS) and haptic robotic intellectual
property portfolio for use in the field of orthopedics (the Z-Kat License).
In December 2006, the Company entered into an addendum to the Z-Kat License (the
Addendum). Under the Addendum, the Company 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; and MAKO assumed the
obligation to pay the annual minimum royalty to a third-party CAS licensor due
to the importance of maintaining the licensed rights. The Z-Kat License is
fully paid up as to intellectual property owned by Z-Kat. The Z-Kat License
includes sublicenses to 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
$555,000. By their terms, the Z-Kat License and the component sublicenses generally
continue until all of the licensed patents have expired, which, based on the
licensed granted patents and presently pending patent applications is currently
estimated to be December 2024.

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

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See
Note 11 for further discussion of the Z-Kat License and Addendum.

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 and $305,000 for
the years ended December 31, 2008 and 2007, respectively, in the
accompanying statements of operations. In February 2008, the Company paid the
$4 million Deferred License Fee due 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 minimum
running royalties on sales of the Companys RIO systems. The minimum running
royalties are estimated to be approximately $600,000 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 $1.3
million annually.

The
Company has other license agreements related to current product offerings and
research and development projects. Upfront license fees paid for these
agreements total approximately $1.1 million. Royalty payments related to these
agreements are anticipated to range between 1% and 5% 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 7 and 17 years. The net expense related to the
Companys license and royalty agreements was approximately $1.5 million,
$525,000 and $304,000 for the years ended December 31, 2009, 2008 and
2007, respectively.

As
of December 31, 2009, future annual minimum royalty payments under the
licenses and sublicenses are anticipated to be as follows:

|               |  |   |        | 
|-------------- |  | - | ------ | 
|(in thousands) |  |   |        | 
|2010           |  | $ | 1,258  | 
|2011           |  |   | 1,499  | 
|2012           |  |   | 1,859  | 
|2013           |  |   | 1,689  | 
|2014           |  |   | 1,396  | 
|Thereafter     |  |   | 4,023  | 
|               |  | $ | 11,724 | 

Development
Agreement

In
June 2009, the Company entered into a Research and Development License and
Supply Agreement, or the R&D Agreement, associated with a potential future
product 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,

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2009, the
Company paid the $450,000 up-front payment and the Company paid $550,000 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 will be
recognized as research and development expense on a straight-line basis over
the period development services are performed based on the current expectation
that all development milestones will be achieved.

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. Preferred Stock and Stockholders Equity

Preferred
Stock

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

Common
Stock

As
of December 31, 2009 and 2008, 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, 2008, 94,884 shares of the Consultant Restricted Stock
were unvested. Upon closing of the IPO in February 2008, the vesting of the
remaining 94,884 shares of Consultant Restricted Stock was accelerated and the
Company recognized $949,000 of compensation expense associated with the
accelerated vesting of the Consultant Restricted Stock during the year ended
December 31, 2008 based on the IPO price of $10.00 per share.

401K Plan

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

Employee Stock
Purchase Plan

In
January 2008, the Companys Board of Directors and stockholders approved the
MAKO Surgical Corp. 2008 Employee Stock Purchase Plan (the 2008 Employee Stock
Purchase Plan). The 2008 Employee Stock Purchase Plan became effective upon
closing of the IPO. The 2008 Employee Stock Purchase Plan authorizes the
issuance of 625,000 shares of the Companys common stock for purchase by
eligible employees of the Company or any of its participating affiliates. The
shares of common stock issuable under the 2008 Employee Stock

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Purchase Plan
may be authorized but unissued shares, treasury shares or shares purchased on
the open market. The purchase price for a purchase period may not be less than
85% of the fair market value of the Companys common stock on the first trading
day of the applicable purchase period or the last trading day of such purchase
period, whichever is lower. The initial purchase period of the 2008 Employee
Stock Purchase Plan began on October 1, 2008. During the year ended December
31, 2009, the Company issued approximately 72,000 shares under the 2008
Employee Stock Purchase Plan. As of December 31, 2009, there were approximately
553,000 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 year ended December 31, 2009, 2008 and 2007, stock-based compensation
expense was $4.0 million, $3.3 million and $1.2 million respectively. Included
within stock-based compensation expense for the year ended December 31, 2009
were $2.9 million related to stock option grants, $982,000 related to the
partial vesting of shares of restricted stock granted to the Companys CEO at
various dates from 2005 through 2009, and $164,000 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 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. The aggregate number
of shares of the Companys common stock that may be issued initially pursuant
to stock awards under the 2008 Plan is 1,084,703 shares, which includes
approximately 85,000 shares previously reserved but unallocated under the 2004
Plan. Awards under the 2008 Plan may be made in the form of: stock options,
which may be either incentive stock options or non-qualified stock options; stock
appreciation rights; restricted stock; restricted stock units; dividend
equivalent rights; performance shares; performance units; cash-based awards;
other stock-based awards, including unrestricted shares; and any combination of
the foregoing.

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, 2009 and 2010 was approximately 998,000 and 1,330,000,
respectively.

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

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

99

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As
of December 31, 2009, 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                          |  |  | 2,083 | 
|                                   |  |  | 4,784 | 

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.

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, 2008           |  |                                      | 733    |                     |  | 2,193                              |   |   | 5.56 | 
|Shares
 reserved                       |  |                                      | 998    |                     |  | ―                                  |   |   | ―    | 
|Restricted
 stock issued               |  |                                      | (100   | )                   |  | ―                                  |   |   | ―    | 
|Options
 granted                       |  |                                      | (1,482 | )                   |  | 1,482                              |   |   | 8.03 | 
|Options
 exercised                     |  |                                      | ―      |                     |  | (133                               | ) |   | 1.13 | 
|Options
 forfeited under the 2004 Plan |  |                                      | ―      |                     |  | (39                                | ) |   | 9.25 | 
|Options
 forfeited under the 2008 Plan |  |                                      | 25     |                     |  | (25                                | ) |   | 8.30 | 
|Balance at December 31, 2009           |  |                                      | 174    |                     |  | 3,478                              |   | $ | 6.71 | 

The
options outstanding and exercisable, by exercise price, at December 31,
2009 were as follows:

|                                        |  |                      |  |                                                         |  |                                    |       |                                 |   |                     |  |                                                         |  |                                    |  |                                 |       |  |   |        | 
|--------------------------------------- |  | -------------------- |  | ------------------------------------------------------- |  | ---------------------------------- | ----- | ------------------------------- | - | ------------------- |  | ------------------------------------------------------- |  | ---------------------------------- |  | ------------------------------- | ----- |  | - | ------ | 
|                                        |  | Options
 Outstanding |  | Options
 Exercisable                                    | 
|(in thousands,
 except per
 share data) |  | Number
 Of
 Options  |  | Weighted
 Average
 Remaining
 Contractual
 Life (Years) |  | Weighted
 Average
 Exercise
 Price |       | Aggregate
 Intrinsic
 Value (1) |   | Number
 Of
 Options |  | Weighted
 Average
 Remaining
 Contractual
 Life (Years) |  | Weighted
 Average
 Exercise
 Price |  | Aggregate
 Intrinsic
 Value (1) |      
|Range of Exercise Prices:               |  |                      |  |                                                         |  |                                    |       |                                 |   |                     |  |                                                         |  |                                    |  |                                 |       |  |   |        | 
|$0.67                                   |  | 241                  |  |                                                         |  | $                                  | 0.67  |                                 |   |                     |  | 241                                                     |  |                                    |  | $                               | 0.67  |  |   |        | 
|$1.27  $2.48                           |  | 798                  |  |                                                         |  | $                                  | 1.72  |                                 |   |                     |  | 680                                                     |  |                                    |  | $                               | 1.63  |  |   |        | 
|$6.90  $8.06                           |  | 1,483                |  |                                                         |  | $                                  | 7.94  |                                 |   |                     |  | 282                                                     |  |                                    |  | $                               | 7.98  |  |   |        | 
|$8.27  11.39                           |  | 956                  |  |                                                         |  | $                                  | 10.49 |                                 |   |                     |  | 383                                                     |  |                                    |  | $                               | 10.57 |  |   |        | 
|                                        |  | 3,478                |  | 7.82                                                    |  | $                                  | 6.71  |                                 | $ | 15,271              |  | 1,586                                                   |  | 6.80                               |  | $                               | 4.77  |  | $ | 10,041 | 

100

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|    |                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
 aggregate intrinsic value represents the total pre-tax intrinsic value, based
 on the Companys closing stock price of $11.10 on December 31, 2009, which
 would have been received by the option holders had all option holders
 exercised their options as of that date.

As
of December 31, 2009, approximately 3,390,000 options were vested and expected
to vest at a weighted average exercise price of $6.67 per share, a weighted
average contractual life of 7.8 years and aggregate intrinsic value of $15.0
million.

The
weighted average fair values of options granted were $4.43, $5.08 and $4.54 for
the years ended December 31, 2009, 2008 and 2007, respectively. The total fair
value of shares vested was approximately $2.8 million, $1.3 million and
$260,000 during the years ended December 31, 2009, 2008 and 2007, respectively.
The total intrinsic value of options exercised was $1.0 million and $491,000
for the years ended December 31, 2009 and 2008. The total intrinsic value of
options exercised was not significant for the year ended December 31, 2007.

The
Company records stock-based compensation expense on a straight-line basis over
the vesting period. As of December 31, 2009, there was total unrecognized
compensation cost of approximately $7.9 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 2.8 years as of December 31, 2009.

On
May 22, 2009, the Company issued 100,000 shares of restricted stock to its
CEO at an estimated fair value of $8.70 per share on the date of issuance. The
restricted stock will vest over a four-year period. For the year ended December
31, 2009, 56,045 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, 2009, 755,105 shares of restricted stock granted to the
Companys CEO were issued and outstanding.

Restricted
stock activity for the year ended December 31, 2009 is as follows:

|                                      |  |        |  |                              |      | 
|------------------------------------- |  | ------ |  | ---------------------------- | ---- | 
|(in thousands, except per share data) |  | Shares |  | Weighted Average
 Fair Value |     
|Unvested
 shares at December 31, 2008 |  | 267    |  | $                            | 7.78 | 
|Unvested
 shares at December 31, 2009 |  | 222    |  |                              | 8.86 | 
|Shares
 granted in 2009               |  | 100    |  |                              | 8.70 | 
|Shares
 vested in 2009                |  | 145    |  |                              | 6.77 | 

As
of December 31, 2009, the remaining stock-based compensation expense for
the restricted stock awards was approximately $2.0 million, which will be
recognized on a straight line basis over a remaining weighted average period of
2.30 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.

101

---



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,
|                         |  | 2009                     |  | 2008            |  | 2007           
|Risk-free
 interest rate |  | 1.99% - 3.53%            |  | 1.59% - 3.62%   |  | 4.50% - 5.14%  
|Expected
 life           |  | 6.25 years               |  | 6.25 years      |  | 6.25 years     
|Expected
 dividends      |  | ―                        |  | ―               |  | ―              
|Expected
 volatility     |  | 54.43% - 57.71%          |  | 56.36% - 58.31% |  | 56.24% - 60.00%

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, 2009 and 2008, as well
as the assumptions used in calculating those values are as follows:

|                                  |  |  |  |                        |  |                       
|--------------------------------- |  |  |  | ---------------------- |  | ----------------------
|2008 Employee Stock Purchase Plan |  |  |  | Year EndedDecember 31, |  | Year EndedDecember 31,
|                                  |  |  |  | 2009                   |  | 2008                  
|Fair Value                        |  |  |  | $1.82 - $2.54          |  | $1.82 - $1.89         
|Assumptions                       |  |  |  |                        |  |                       
|Risk-free interest rate           |  |  |  | 0.60% - 3.20%          |  | 1.87% - 3.29%         
|Expected life                     |  |  |  | 0.25 years             |  | 0.25 years            
|Expected dividends                |  |  |  | ―                      |  | ―                     
|Expected volatility               |  |  |  | 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, 2009, 2008 and 2007, 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.

102

---



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, 2009 and
2008, 451,916 and 462,716 warrants were outstanding and exercisable,
respectively.

As
more fully described in Note 5, in October 2008, the Company entered into a
Securities Purchase Agreement for an equity financing of up to $60 million,
with initial gross proceeds of approximately $40.2 million, and conditional
access to an additional $20 million. In connection with the financing, the
Company issued warrants to the participating investors to purchase 1,290,323
shares of common stock at a purchase price of $0.125 per warrant and an
exercise price of $7.44 per share. The warrants became exercisable on April 29,
2009 and have a seven-year term. In addition, as consideration for the Call
Right, 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 to participating investors. These warrants became exercisable on December
31, 2009 and have a seven-year term.

9. Income Taxes

The
provision for income taxes is as follows:

|                              |  |                    |         |                    |   |                    |   |   |        |  
|----------------------------- |  | ------------------ | ------- | ------------------ | - | ------------------ | - | - | ------ | -
|(in thousands)                |  | Years Ended        |        
|                              |  | December 31,
 2009 |         | December 31,
 2008 |   | December 31,
 2007 |  
|Current
 income taxes:        |  |                    |         |                    |   |                    |   |   |        |  
|Federal                       |  | $                  | ―       |                    | $ | ―                  |   | $ | ―      |  
|State                         |  |                    | ―       |                    |   | ―                  |   |   | ―      |  
|Total
 current income taxes   |  |                    | ―       |                    |   | ―                  |   |   | ―      |  
|Deferred
 income taxes        |  |                    | (12,593 | )                  |   | (13,031            | ) |   | (7,835 | )
|Change in valuation allowance |  |                    | 12,593  |                    |   | 13,031             |   |   | 7,835  |  
|Provision
 for 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.

No
current or deferred income taxes were recorded for the years ended
December 31, 2009, 2008 and 2007, 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, 2009, 2008 and 2007, the Company had federal and state net
operating loss carryforwards of approximately $100.2 million, $60 million and
$32.9 million, respectively, available to offset future taxable income. These
net operating loss carryforwards will expire in varying amounts from 2024
through 2029.

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 2008, the Company
underwent a change of ownership for purposes of the Tax Reform Act during the
tax year ended December 31, 2008.

103

---



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, |        
|                                                  |  | 2009         |         | 2008 |  
|Current
 deferred income tax assets:              |  |              |         |      |   |         |  
|Deferred
 revenue                                 |  | $            | 212     |      | $ | 4,443   |  
|Total
 current deferred income tax assets         |  |              | 212     |      |   | 4,443   |  
|                                                  |  |              |         |      |   |         |  
|Noncurrent
 deferred income tax assets:           |  |              |         |      |   |         |  
|Net
 operating loss carryforwards                 |  |              | 38,650  |      |   | 23,144  |  
|Amortization                                      |  |              | 404     |      |   | 322     |  
|Other                                             |  |              | 481     |      |   | 656     |  
|Total
 noncurrent deferred income tax assets      |  |              | 39,535  |      |   | 24,122  |  
|                                                  |  |              |         |      |   |         |  
|Current
 deferred income tax liabilities:         |  |              |         |      |   |         |  
|Other
 deferred income tax liabilities            |  |              | (2      | )    |   | ―       |  
|Deferred
 costs                                   |  |              | ―       |      |   | (1,392  | )
|Total
 current deferred income tax liabilities    |  |              | (2      | )    |   | (1,392  | )
|                                                  |  |              |         |      |   |         |  
|Noncurrent
 deferred income tax liabilities:      |  |              |         |      |   |         |  
|Other
 deferred income tax liabilities            |  |              | ―       |      |   | (21     | )
|Total
 noncurrent deferred income tax liabilities |  |              | ―       |      |   | (21     | )
|                                                  |  |              |         |      |   |         |  
|Less
 valuation allowance                         |  |              | (39,745 | )    |   | (27,152 | )
|                                                  |  |              |         |      |   |         |  
|                                                  |  |              |         |      |   |         |  
|Total
 deferred income tax assets, net            |  | $            | ―       |      | $ | ―       |  

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

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

|                                    |  |                    |    |                    |    |                    |   
|----------------------------------- |  | ------------------ | -- | ------------------ | -- | ------------------ | --
|                                    |  | Years Ended        |   
|                                    |  | December 31,
 2009 |    | December 31,
 2008 |    | December 31,
 2007 |   
|                                    |  |                    |    |                    |    |                    |   
|Tax at U.S.
 statutory rate         |  | (35.00             | )% | (35.00             | )% | (35.00             | )%
|State taxes,
 net of federal impact |  | (3.28              | )% | (3.26              | )% | (3.55              | )%
|Non-deductible
 items               |  | 2.92               | %  | 3.13               | %  | 0.28               | % 
|Change in
 valuation allowance      |  | 35.13              | %  | 35.14              | %  | 37.93              | % 
|Other, net                          |  | 0.23               | %  | (0.01              | )% | 0.34               | % 
|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

104

---



underpayment of income taxes. The Companys primary tax
jurisdictions are the United States, Florida, California, Rhode Island, Ohio,
New York, Georgia, Texas, Illinois, North Carolina, Pennsylvania, Maryland,
Colorado, Oklahoma, Washington, West Virginia, Wisconsin, Michigan, Mississippi
and Tennessee. The tax years from 2005 through 2009 remain open and are subject
to examination by the appropriate governmental agencies.

10. Selected Quarterly Data (Unaudited)

|                                                                            |  |      |        |    |   |        |   |    |        |   |   |        |  
|--------------------------------------------------------------------------- |  | ---- | ------ | -- | - | ------ | - | -- | ------ | - | - | ------ | -
|(in thousands, except per share data)                                       |  | 2009 |       
|                                                                            |  | Q1   |        | Q2 |   | Q3     |   | Q4 |       
|Revenue                                                                     |  | $    | 3,727  |    | $ | 14,904 |   | $  | 6,726  |   | $ | 8,851  |  
|Gross profit (loss)                                                         |  |      | 655    |    |   | 4,622  |   |    | 2,765  |   |   | 4,462  |  
|Loss from operations                                                        |  |      | (9,107 | )  |   | (6,491 | ) |    | (9,498 | ) |   | (9,356 | )
|Net loss                                                                    |  |      | (8,885 | )  |   | (6,424 | ) |    | (9,439 | ) |   | (9,275 | )
|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  | )

Revenue
for the first and second quarter 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.

|                                                                            |  |      |        |    |   |        |   |    |         |   |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------ | -- | - | ------ | - | -- | ------- | - | - | ------- | -
|(in thousands, except per share data)                                       |  | 2008 |       
|                                                                            |  | Q1   |        | Q2 |   | Q3     |   | Q4 |        
|Revenue                                                                     |  | $    | 498    |    | $ | 704    |   | $  | 777     |   | $ | 965     |  
|Gross profit (loss)                                                         |  |      | 128    |    |   | 224    |   |    | (584    | ) |   | (270    | )
|Loss from operations                                                        |  |      | (8,552 | )  |   | (7,805 | ) |    | (10,443 | ) |   | (11,160 | )
|Net loss                                                                    |  |      | (8,501 | )  |   | (7,565 | ) |    | (10,202 | ) |   | (10,814 | )
|Net loss attributable to common stockholders                                |  |      | (9,066 | )  |   | (7,565 | ) |    | (10,202 | ) |   | (10,814 | )
|Net loss per share  basic and diluted
 attributable to common stockholders |  |      | (0.95  | )  |   | (0.42  | ) |    | (0.56   | ) |   | (0.48   | )

11. Subsequent Event

In
February 2010, the Company completed the acquisition of substantially all of
the intellectual property portfolio of 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 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 license agreement with Z-Kat (the License Agreement)
pursuant to which the Company obtained an exclusive worldwide, fully
transferable, perpetual, royalty-free and fully paid-up sublicense to certain
intellectual property for technologies in CAS licensed by Z-Kat. This new
License Agreement expands the Companys rights in this intellectual property
from the field of orthopedics to the medical field generally. Certain of the
Companys rights under the Asset Purchase Agreement and License Agreement remain
subject to any prior license granted by Z-Kat, including the license to Biomet
Manufacturing Corp. In consideration for consummation of the transactions

105

---



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. The Asset Purchase Agreement and License Agreement, the entry into
which was deemed to be a related party transaction as certain directors and
executive officers of the Company have a material interest in Z-Kat by virtue
of their ownership of Z-Kat stock, were approved by the board of directors and
audit committee of the Company.

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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, 2009. 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, 2009 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, 2009. 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

106

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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, 2009 has been audited by our independent registered public account firm, as
stated in their report, which is included herein.

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

107

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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
2010 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
2010 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 2010
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 2010
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              

108

---



|         |                                       
|-------- | --------------------------------------
|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 2010
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

109

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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)                                                                                                 
|             |  |                                                                                                                           
|4.4          |  | Form of Call
 Exercise 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+        |  | Employment
 Agreement, dated as of January 1, 2005, by and between Registrant and
 Rony Abovitz (3)                       
|             |  |                                                                                                                           
|10.7+        |  | Amendment to
 Employment Agreement, dated as of February 5, 2007, by and between
 Registrant and Rony Abovitz (3)         
|             |  |                                                                                                                           
|10.8         |  | Multi-Tenant
 Lease, by and between Registrant and Westport Business Park Associates LLP,
 last dated January 31, 2006 (3)
|             |  |                                                                                                                           
|10.9+        |  | Form of
 Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan (4)                                  
|             |  |                                                                                                                           
|10.10+       |  | Employment
 Agreement between Registrant and Duncan Moffat, effective as of April 28,
 2008 (5)                           
|             |  |                                                                                                                           
|10.11+       |  | Form of
 Non-Qualified Stock Option Agreement related to the 2008 Omnibus                                                 

110

---



|       |  |                                                                                                                                          
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------
|       |  | Incentive
 Plan (5)                                                                                                                      
|       |  |                                                                                                                                          
|10.12+ |  | Form of
 Restricted Stock Unit Agreement related to the 2008 Omnibus Incentive Plan (5)                                                  
|       |  |                                                                                                                                          
|10.13+ |  | Form of
 Subscription Agreement related to the 2008 Employee Stock Purchase Plan (5)                                                     
|       |  |                                                                                                                                          
|10.14+ |  | 2009
 Leadership Cash Bonus Plan (7)                                                                                                     
|       |  |                                                                                                                                          
|10.15+ |  | 2009
 Performance Bonus Plan for S. Nunes  SVP of Sales & Marketing (7)                                                                 
|       |  |                                                                                                                                          
|10.16+ |  | Amendment to
 Amended Employment Agreement by and between Registrant and Maurice R. Ferré,
 M.D., effective February 13, 2009 (8)        
|       |  |                                                                                                                                          
|10.17+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Fritz L. LaPorte,
 effective February 13, 2009 (8)              
|       |  |                                                                                                                                          
|10.18+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Menashe R. Frank,
 effective February 13, 2009 (8)              
|       |  |                                                                                                                                          
|10.19+ |  | Amended and
 Restated Employment Agreement by and between Registrant and Steven J. Nunes,
 effective February 13, 2009 (8)               
|       |  |                                                                                                                                          
|10.20+ |  | Employment
 Agreement by and between Registrant and Ivan Delevic, effective April 27,
 2009 (9)                                          
|       |  |                                                                                                                                          
|10.21+ |  | 2010
 Leadership Cash Bonus Plan (10)                                                                                                    
|       |  |                                                                                                                                          
|10.22+ |  | 2010
 Performance Bonus Plan for S. Nunes  SVP of Sales & Marketing (10)                                                                
|       |  |                                                                                                                                          
|10.23+ |  | Second
 Amendment to Amended Employment Agreement by and between Registrant and
 Maurice R. Ferré, M.D., effective February 17, 2010 (10)
|       |  |                                                                                                                                          
|23     |  | Consent of
 Ernst & Young LLP, Independent Registered Public Accounting Firm (1)                                                         
|       |  |                                                                                                                                          
|31.1   |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
 Act (1)                                            
|       |  |                                                                                                                                          
|31.2   |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
 Act (1)                                            
|       |  |                                                                                                                                          
|32.1   |  | Certification
 of Chief Executive Officer pursuant to18 U.S.C. §1350 (1)                                                                 
|       |  |                                                                                                                                          
|32.2   |  | Certification
 of Chief Financial Officer pursuant to 18 U.S.C. §1350 (1)                                                                
|       |  |                                                                                                                                          
|99.1   |  | Registration
 Rights Agreement by and between Registrant and Z-Kat, Inc. dated February 25,
 2010 (1)                                    

|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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                                                     

111

---



|     |                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------
|(7)  | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 13, 2009
|     |                                                                                                               
|(8)  | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 20, 2009
|     |                                                                                                               
|(9)  | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 April 28, 2009   
|     |                                                                                                               
|(10) | Incorporated
 by reference to Registrants Current Report on Form 8-K filed with the SEC on
 February 23, 2010
|     |                                                                                                               
|+    | Indicates
 management contract or compensatory plan.                                                          

112

---



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, 2010                                                                                                                                                                                           |     |                                     | 
|                                                                                                                                                                                                                 |     |                                     | 
|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, 2010
|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, 2010
|Fritz L. LaPorte                |  |                                                                                                                                          
|                                |  |                                                                                                                                           |  |               
|/s/ S. Morry
 Blumenfeld, Ph.D. |  | Director                                                                                                                                  |  | March 10, 2010
|S. Morry
 Blumenfeld, Ph.D.     |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ Marcelo G. Chao             |  | Director                                                                                                                                  |  | March 10, 2010
|Marcelo G. Chao                 |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/
 Christopher C. Dewey       |  | Director                                                                                                                                  |  | March 10, 2010
|Christopher
 C. Dewey           |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ Charles
 W. Federico        |  | Director                                                                                                                                  |  | March 10, 2010
|Charles W.
 Federico            |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ John G.
 Freund, M.D.       |  | Director                                                                                                                                  |  | March 10, 2010
|John G.
 Freund, M.D.           |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ Frederic
 H. Moll, M.D.     |  | Director                                                                                                                                  |  | March 10, 2010
|Frederic H.
 Moll, M.D.         |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ William
 D. Pruitt          |  | Director                                                                                                                                  |  | March 10, 2010
|William D.
 Pruitt              |  |                                                                                                                                           |  |               
|                                |  |                                                                                                                                           |  |               
|/s/ John J.
 Savarese, M.D.     |  | Director                                                                                                                                  |  | March 10, 2010
|John J.
 Savarese, M.D.         |  |                                                                                                                                           |  |               

113

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EXHIBIT INDEX

|             |  |                                                                                                   | 
|------------ |  | ------------------------------------------------------------------------------------------------- | 
|Exhibit
 No. |  | Description                                                                                       | 
|23           |  | Consent of
 Ernst & Young LLP, Independent Public Registered Accounting Firm                     
|             |  |                                                                                                  
|31.1         |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act         
|             |  |                                                                                                  
|31.2         |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act         
|             |  |                                                                                                  
|32.1         |  | Certification
 of Chief Executive Officer pursuant to18 U.S.C. §1350                             
|             |  |                                                                                                  
|32.2         |  | Certification
 of Chief Financial Officer pursuant to18 U.S.C. §1350                             
|             |  |                                                                                                  
|99.1         |  | Registration
 Rights Agreement by and between Registrant and Z-Kat, Inc. dated February 25,
 2010

114

---