Table of Contents





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

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|

FORM 10-Q

|
|

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

For the quarterly period ended:
September 30, 2009

or

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

For the transition period from ____________
to ___________________________________

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 |  | (I.R.S. Employer Identification No.)
|or Organization)                              |  |                                     
|                                              |  |                                     

|                                                    |                                                  | 
|--------------------------------------------------- | ------------------------------------------------ | 
|                                                    | 2555 Davie Road, Fort
 Lauderdale, Florida 33317 | 
|(Address of Principal Executive Offices) (Zip Code)

|                                                     |                | 
|---------------------------------------------------- | -------------- | 
|                                                     | (954) 927-2044 | 
|(Registrants Telephone Number, Including Area Code)

|
|

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (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.

Yesx    Noo

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).

Yeso    Noo

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

Large Accelerated Filer oAccelerated FileroNon-accelerated Filer
x    
Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

Yeso    No
x

Number of
shares outstanding of each of the issuers classes of common stock as of
October 29, 2009:

|             |       |            |  |                                 | 
|------------ | ----- | ---------- |  | ------------------------------- | 
|             | Class |            |  | Outstanding at October 29, 2009 | 
|Common Stock |       | 33,195,903 | 







MAKO
Surgical Corp.

INDEX TO FORM 10-Q

|               |  |                                                                                                     |  |          
|-------------- |  | --------------------------------------------------------------------------------------------------- |  | ---------
|               |  |                                                                                                     |  | Page
 No.
|               |  | Part I  Financial Information                                                                      |  |          
|               |  |                                                                                                     |  |          
|Item 1         |  | Financial
 Statements (unaudited)                                                                   |  | 1        
|               |  | Condensed Balance Sheets as of September 30, 2009 and
 December 31, 2008                            |  | 1        
|               |  | Condensed Statements of Operations for the three and
 nine months ended September 30, 2009 and 2008 |  | 2        
|               |  | Condensed Statements of Cash Flows for the nine
 months ended September 30, 2009 and 2008           |  | 3        
|               |  | Notes to Condensed Financial Statements                                                             |  | 4        
|Item 2         |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations              |  | 16       
|Item 3         |  | Quantitative
 and Qualitative Disclosures about Market Risk                                         |  | 26       
|Item 4T        |  | Controls
 and Procedures                                                                            |  | 26       
|               |  |                                                                                                     |  |          
|               |  | Part II  Other Information                                                                         |  |          
|               |  |                                                                                                     |  |          
|Item 1A        |  | Risk
 Factors                                                                                       |  | 27       
|Item 6         |  | Exhibits                                                                                            |  | 27       
|               |  |                                                                                                     |  |          
|Signatures     |  |                                                                                                     |  | 28       
|               |  |                                                                                                     |  |          
|Exhibit
 Index |  |                                                                                                     |  | 29       
|Exhibit 31.1   |  |                                                                                                    
|Exhibit 31.2   |  |                                                                                                    
|Exhibit 32.1   |  |                                                                                                    
|Exhibit 32.2   |  |                                                                                                    

i

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PART I
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

MAKO SURGICAL CORP.Condensed Balance Sheets(in thousands, except share and per share data)
(Unaudited)

|                                                                                                                                                                                                                              |  |                     |          |                    |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -------- | ------------------ | - | ------- | -
|                                                                                                                                                                                                                              |  | September 30,
 2009 |          | December 31,
 2008 |  
|ASSETS                                                                                                                                                                                                                        |  |                     |          |                    |   |         |  
|Current Assets:                                                                                                                                                                                                               |  |                     |          |                    |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                     |  | $                   | 65,029   |                    | $ | 62,547  |  
|Short-term investments                                                                                                                                                                                                        |  |                     | 10,991   |                    |   | 1,077   |  
|Accounts receivable                                                                                                                                                                                                           |  |                     | 3,580    |                    |   | 2,727   |  
|Inventory                                                                                                                                                                                                                     |  |                     | 12,072   |                    |   | 7,673   |  
|Deferred cost of revenue                                                                                                                                                                                                      |  |                     | ―        |                    |   | 3,608   |  
|Prepaids and other assets                                                                                                                                                                                                     |  |                     | 750      |                    |   | 483     |  
|Total current assets                                                                                                                                                                                                          |  |                     | 92,422   |                    |   | 78,115  |  
|Long-term investments                                                                                                                                                                                                         |  |                     | 4,100    |                    |   | ―       |  
|Property and equipment, net                                                                                                                                                                                                   |  |                     | 5,771    |                    |   | 3,424   |  
|Intangible assets, net                                                                                                                                                                                                        |  |                     | 4,458    |                    |   | 4,817   |  
|Other assets                                                                                                                                                                                                                  |  |                     | 105      |                    |   | 177     |  
|Total assets                                                                                                                                                                                                                  |  | $                   | 106,856  |                    | $ | 86,533  |  
|                                                                                                                                                                                                                              |  |                     |          |                    |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                          |  |                     |          |                    |   |         |  
|Current Liabilities:                                                                                                                                                                                                          |  |                     |          |                    |   |         |  
|Accounts payable                                                                                                                                                                                                              |  | $                   | 1,753    |                    | $ | 1,809   |  
|Accrued compensation and employee benefits                                                                                                                                                                                    |  |                     | 2,577    |                    |   | 2,338   |  
|Other accrued liabilities                                                                                                                                                                                                     |  |                     | 3,241    |                    |   | 4,283   |  
|Deferred revenue                                                                                                                                                                                                              |  |                     | 217      |                    |   | 11,518  |  
|Total current liabilities                                                                                                                                                                                                     |  |                     | 7,788    |                    |   | 19,948  |  
|                                                                                                                                                                                                                              |  |                     |          |                    |   |         |  
|Deferred revenue                                                                                                                                                                                                              |  |                     | 33       |                    |   | 71      |  
|Total liabilities                                                                                                                                                                                                             |  |                     | 7,821    |                    |   | 20,019  |  
|                                                                                                                                                                                                                              |  |                     |          |                    |   |         |  
|Stockholders equity:                                                                                                                                                                                                         |  |                     |          |                    |   |         |  
|Common stock, $0.001 par value; 135,000,000 authorized as of September
 30, 2009 and December 31, 2008; 32,917,995 and 24,684,786 shares issued and
 outstanding as of September 30, 2009 and December 31, 2008, respectively |  |                     | 33       |                    |   | 25      |  
|Additional paid-in capital                                                                                                                                                                                                    |  |                     | 203,855  |                    |   | 146,607 |  
|Accumulated deficit                                                                                                                                                                                                           |  |                     | (104,920 | )                  |   | (80,172 | )
|Accumulated other comprehensive income                                                                                                                                                                                        |  |                     | 67       |                    |   | 54      |  
|Total stockholders equity                                                                                                                                                                                                    |  |                     | 99,035   |                    |   | 66,514  |  
|Total liabilities and stockholders equity                                                                                                                                                                                    |  | $                   | 106,856  |                    | $ | 86,533  |  

See accompanying notes.

1

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Table of Contents

MAKO SURGICAL CORP.

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

|                                                                            |  |                                  |        |                                 |   |         |   |      |         |   |   |         |  
|--------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------- | - | ---- | ------- | - | - | ------- | -
|                                                                            |  | Three months ended September 30, |        | Nine months ended September 30, |  
|                                                                            |  | 2009                             |        | 2008                            |   | 2009    |   | 2008 |        
|Revenue:                                                                    |  |                                  |        |                                 |   |         |   |      |         |   |   |         |  
|Procedures                                                                  |  | $                                | 1,986  |                                 | $ | 636     |   | $    | 4,810   |   | $ | 1,630   |  
|Systems  RIO                                                               |  |                                  | 4,634  |                                 |   | ―       |   |      | 8,928   |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                                  | ―      |                                 |   | ―       |   |      | 11,297  |   |   | ―       |  
|Service and other                                                           |  |                                  | 106    |                                 |   | 141     |   |      | 322     |   |   | 349     |  
|Total revenue                                                               |  |                                  | 6,726  |                                 |   | 777     |   |      | 25,357  |   |   | 1,979   |  
|Cost of revenue:                                                            |  |                                  |        |                                 |   |         |   |      |         |   |   |         |  
|Procedures                                                                  |  |                                  | 912    |                                 |   | 597     |   |      | 2,467   |   |   | 981     |  
|Systems  RIO                                                               |  |                                  | 2,893  |                                 |   | 611     |   |      | 5,593   |   |   | 1,076   |  
|Systems  RIO upgrades                                                      |  |                                  | ―      |                                 |   | ―       |   |      | 5,183   |   |   | ―       |  
|Systems  TGS, previously deferred                                          |  |                                  | ―      |                                 |   | ―       |   |      | 3,606   |   |   | ―       |  
|Service and other                                                           |  |                                  | 156    |                                 |   | 153     |   |      | 466     |   |   | 154     |  
|Total cost of revenue                                                       |  |                                  | 3,961  |                                 |   | 1,361   |   |      | 17,315  |   |   | 2,211   |  
|Gross profit (loss)                                                         |  |                                  | 2,765  |                                 |   | (584    | ) |      | 8,042   |   |   | (232    | )
|Operating costs and expenses:                                               |  |                                  |        |                                 |   |         |   |      |         |   |   |         |  
|Selling, general and administrative                                         |  |                                  | 7,910  |                                 |   | 6,265   |   |      | 22,115  |   |   | 16,032  |  
|Research and development                                                    |  |                                  | 3,758  |                                 |   | 3,111   |   |      | 9,361   |   |   | 9,206   |  
|Depreciation and amortization                                               |  |                                  | 595    |                                 |   | 483     |   |      | 1,662   |   |   | 1,330   |  
|Total operating costs and expenses                                          |  |                                  | 12,263 |                                 |   | 9,859   |   |      | 33,138  |   |   | 26,568  |  
|Loss from operations                                                        |  |                                  | (9,498 | )                               |   | (10,443 | ) |      | (25,096 | ) |   | (26,800 | )
|Interest and other income                                                   |  |                                  | 59     |                                 |   | 241     |   |      | 348     |   |   | 642     |  
|Interest and other expenses                                                 |  |                                  | ―      |                                 |   | ―       |   |      | ―       |   |   | (110    | )
|Net loss                                                                    |  |                                  | (9,439 | )                               |   | (10,202 | ) |      | (24,748 | ) |   | (26,268 | )
|Accretion of preferred stock                                                |  |                                  | ―      |                                 |   | ―       |   |      | ―       |   |   | (44     | )
|Dividends on preferred stock                                                |  |                                  | ―      |                                 |   | ―       |   |      | ―       |   |   | (521    | )
|Net loss attributable to common
 stockholders                               |  | $                                | (9,439 | )                               | $ | (10,202 | ) | $    | (24,748 | ) | $ | (26,833 | )
|Net loss per share  Basic and diluted attributable
 to common stockholders |  | $                                | (0.33  | )                               | $ | (0.56   | ) | $    | (0.95   | ) | $ | (1.76   | )
|Weighted average common shares outstanding
  Basic and diluted             |  |                                  | 28,615 |                                 |   | 18,149  |   |      | 26,068  |   |   | 15,266  |  

See accompanying notes.

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MAKO SURGICAL CORP.

Condensed
Statements of Cash Flows(in thousands, except per share data)
(Unaudited)

|                                                                                                               |  |                                 |         |      |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | -
|                                                                                                               |  | Nine months ended September 30, |        
|                                                                                                               |  | 2009                            |         | 2008 |  
|Operating activities:                                                                                          |  |                                 |         |      |   |         |  
|Net loss                                                                                                       |  | $                               | (24,748 | )    | $ | (26,268 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities:                                   |  |                                 |         |      |   |         |  
|Depreciation                                                                                                   |  |                                 | 1,587   |      |   | 1,041   |  
|Amortization of intangible assets                                                                              |  |                                 | 509     |      |   | 495     |  
|Stock-based compensation                                                                                       |  |                                 | 2,948   |      |   | 2,668   |  
|Inventory write-down                                                                                           |  |                                 | 629     |      |   | 595     |  
|Amortization of premium on investment securities                                                               |  |                                 | 93      |      |   | ―       |  
|Accrued interest expense on deferred license fee                                                               |  |                                 | ―       |      |   | 45      |  
|Changes in operating assets and liabilities:                                                                   |  |                                 |         |      |   |         |  
|Accounts receivable                                                                                            |  |                                 | (853    | )    |   | (1,236  | )
|Inventory                                                                                                      |  |                                 | (7,853  | )    |   | (2,949  | )
|Prepaid and other assets                                                                                       |  |                                 | (267    | )    |   | (221    | )
|Other assets                                                                                                   |  |                                 | 72      |      |   | (31     | )
|Accounts payable                                                                                               |  |                                 | (56     | )    |   | (499    | )
|Accrued compensation and employee benefits                                                                     |  |                                 | 239     |      |   | 741     |  
|Other accrued liabilities                                                                                      |  |                                 | (1,042  | )    |   | (193    | )
|Deferred cost of revenue                                                                                       |  |                                 | 3,608   |      |   | (2,035  | )
|Deferred revenue                                                                                               |  |                                 | (11,339 | )    |   | 5,539   |  
|Net cash used in operating activities                                                                          |  |                                 | (36,473 | )    |   | (22,308 | )
|Investing activities:                                                                                          |  |                                 |         |      |   |         |  
|Purchase of investments                                                                                        |  |                                 | (17,369 | )    |   | (1,990  | )
|Proceeds from sales and maturities of investments                                                              |  |                                 | 3,275   |      |   | 4,047   |  
|Acquisition of property and equipment                                                                          |  |                                 | (1,109  | )    |   | (1,038  | )
|Acquisition of intangible assets                                                                               |  |                                 | (150    | )    |   | ―       |  
|Payment of deferred license fee on IBM license                                                                 |  |                                 | ―       |      |   | (4,000  | )
|Net cash used in investing activities                                                                          |  |                                 | (15,353 | )    |   | (2,981  | )
|Financing activities:                                                                                          |  |                                 |         |      |   |         |  
|Proceeds from issuance of common stock in equity financing, net of
 underwriting fees of $3,502                |  |                                 | 54,861  |      |   | ―       |  
|Deferred equity financing costs                                                                                |  |                                 | (615    | )    |   | ―       |  
|Proceeds from initial public offering of common stock, net of
 underwriting fees of $3,570                     |  |                                 | ―       |      |   | 47,430  |  
|Deferred initial public offering costs                                                                         |  |                                 | ―       |      |   | (972    | )
|Proceeds from employee stock purchase plan                                                                     |  |                                 | 333     |      |   | ―       |  
|Payment of payroll taxes relating to the vesting of restricted stock                                           |  |                                 | (350    | )    |   | ―       |  
|Exercise of common stock options for cash                                                                      |  |                                 | 79      |      |   | 31      |  
|Net cash provided by financing activities                                                                      |  |                                 | 54,308  |      |   | 46,489  |  
|Net increase in cash and cash equivalents                                                                      |  |                                 | 2,482   |      |   | 21,200  |  
|Cash and cash equivalents at beginning of period                                                               |  |                                 | 62,547  |      |   | 9,615   |  
|Cash and cash equivalents at end of period                                                                     |  | $                               | 65,029  |      | $ | 30,815  |  
|                                                                                                               |  |                                 |         |      |   |         |  
|Non-cash investing and financing activities:                                                                   |  |                                 |         |      |   |         |  
|Receipt of 40,211 shares of common stock delivered in payment of
 payroll taxes                                |  | $                               | 350     |      | $ | ―       |  
|Transfers of inventory to property and equipment                                                               |  |                                 | 2,825   |      |   | 606     |  
|Accretion of redeemable convertible preferred stock                                                            |  |                                 | ―       |      |   | 44      |  
|Accrued dividends on redeemable convertible preferred stock                                                    |  |                                 | ―       |      |   | 521     |  
|Conversion of redeemable convertible preferred stock into 10,945,080
 common shares                            |  |                                 | ―       |      |   | 53,667  |  
|Reclassification of accrued dividends on redeemable convertible
 preferred stock to additional paid-in capital |  |                                 | ―       |      |   | 6,385   |  
|Reclassification of deferred initial public offering costs to
 additional paid-in capital                      |  |                                 | ―       |      |   | 3,700   |  

See accompanying notes.

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MAKO SURGICAL CORP.

Notes to
Condensed Financial Statements
September 30, 2009
(Unaudited)

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. The financing resulted in net proceeds to the Company of
approximately $39.7 million, after expenses of approximately $525,000. See Note
6 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

In
the opinion of management, the accompanying unaudited condensed financial
statements (condensed financial statements) of the Company have been prepared
on a basis consistent with the Companys December 31, 2008 audited
financial statements and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set forth
herein. These condensed financial statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC) and,
therefore, omit certain information and footnote disclosure necessary to
present the statements in accordance with accounting principles generally
accepted in the United States of America. These quarterly condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Companys annual report on Form 10-K for the
fiscal year ended December 31, 2008 (the Form 10-K). The results of
operations for the third quarter of 2009 may not be indicative of the results
to be expected for the entire year or any future periods.

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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 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 deposited in demand and money
market accounts at two 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 and investment grade rated U.S. corporate debt
at two 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 Companys 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.

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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 Accounting Standards Codification (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 cost of revenue. Revenue for all
previously deferred TGS sales was recognized in our statement of operations
during the six months ended June 30, 2009 upon delivery of the RIO system. As
of September 30, 2009, the deferred revenue balance consists primarily of
deferred service revenue as discussed below.

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.

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 completion of the related surgical procedure).

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.

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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 September 30, 2009 consists
primarily of deferred service revenue for extended warranty services on the RIO
system hardware.

Intangible Assets

The
Companys intangible assets are comprised of a purchased patent application and
licenses to intellectual property rights. These intangible assets are carried
at cost, net of accumulated amortization. Amortization is recorded using the
straight-line method, over their respective useful lives (generally the life of
underlying patents), which range from approximately 5 to 19 years.

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 September 30, 2009 and December
31, 2008, capitalized manufacturing overhead included in inventory was
approximately $868,000 and $282,000, respectively. Previously, such overhead
costs were fully expensed as selling, general and administrative expense as
capitalizable amounts were not significant.

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 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)                     |  | September
 30, |      
|                                   |  | 2009           |       | 2008 | 
|Stock options outstanding          |  |                | 3,533 |      |  | 2,188 | 
|Warrants to purchase common
 stock |  |                | 2,076 |      |  | 463   | 

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

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 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. In accordance with ASC 855-10, the Company has
evaluated subsequent events through the time of filing this Form 10-Q with the
SEC on November 4, 2009. No material subsequent events have occurred since
September 30, 2009 that required recognition or disclosure in these financial
statements.

8

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Effective
July 1, 2009, the Company adopted The 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.

Reclassifications

Certain
reclassifications have been made to the prior periods statement 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. Realized
gains and losses and declines in value determined to be other-than-temporary on
available-for-sale securities are included in interest and other expenses.
Interest and dividends on securities classified as available-for-sale are
included in interest and other income. The cost of securities sold is based on
the specific identification method.

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

9

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As of September 30, 2009

|                         |  |                 |        |                          |   |                           |  |             |   |  |   |        | 
|------------------------ |  | --------------- | ------ | ------------------------ | - | ------------------------- |  | ----------- | - |  | - | ------ | 
|(in thousands)           |  | Amortized
 Cost |        | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|Short-term investments:  |  |                 |        |                          |   |                           |  |             |   |  |   |        | 
|U.S. government agencies |  | $               | 10,923 |                          | $ | 43                        |  | $           | ― |  | $ | 10,966 | 
|Certificates of deposit  |  |                 | 25     |                          |   | ―                         |  |             | ― |  |   | 25     | 
|Long-term investments:   |  |                 |        |                          |   |                           |  |             |   |  |   |        | 
|U.S. government agencies |  |                 | 1,029  |                          |   | 2                         |  |             | ― |  |   | 1,031  | 
|U.S. corporate debt      |  |                 | 3,047  |                          |   | 22                        |  |             | ― |  |   | 3,069  | 
|Total investments        |  | $               | 15,024 |                          | $ | 67                        |  | $           | ― |  | $ | 15,091 | 

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 September 30, 2009, all short-term investments had maturity dates of less
than one year. As of September 30, 2009, all long-term investments had maturity
dates between one and three years.

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

10

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|                         |  |                     |        |                                                                           |                                                     |                                                       |  |                                               |   |  |   |   | 
|------------------------ |  | ------------------- | ------ | ------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------- |  | --------------------------------------------- | - |  | - | - | 
|(in thousands)           |  |                     |        |                                                                           | Fair Value Measurements at the Reporting Date Using |                                                      
|                         |  | September
 30, 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 |  | $                   | 10,966 |                                                                           | $                                                   | 10,966                                                |  | $                                             | ― |  | $ | ― | 
|Certificates of deposit  |  |                     | 25     |                                                                           |                                                     | 25                                                    |  |                                               |   |  |   |   | 
|Long-term
 investments:  |  |                     |        |                                                                           |                                                     |                                                       |  |                                               |   |  |   |   | 
|U.S. government agencies |  |                     | 1,031  |                                                                           |                                                     | 1,031                                                 |  |                                               | ― |  |   | ― | 
|U.S. corporate debt      |  |                     | 3,069  |                                                                           |                                                     | 3,069                                                 |  |                                               | ― |  |   | ― | 
|Total
 investments       |  | $                   | 15,091 |                                                                           | $                                                   | 15,091                                                |  | $                                             | ― |  | $ | ― | 

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 three and nine months ended September 30, 2009.

|                                                                                                                                                                                       |  |                                                                 |   |                                      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | - | ------------------------------------ | - | ------ | -
|(in thousands)                                                                                                                                                                         |  | Fair Value Measurements Using 
 Significant Unobservable Inputs |  
|                                                                                                                                                                                       |  | Three Months Ended
 September 30, 2009                          |   | Nine Months Ended September 30, 2009 |  
|Balance at beginning of period                                                                                                                                                         |  | $                                                               | ― |                                      | $ | 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 September 30, 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.

Fair Value of Financial Instruments

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

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4. Inventory

Inventory
consisted of the following:

|                |  |                    |        |                   |   |       | 
|--------------- |  | ------------------ | ------ | ----------------- | - | ----- | 
|(in thousands)  |  | September
 30,2009 |        | December
 31,2008 |  
|Raw materials   |  | $                  | 4,335  |                   | $ | 3,809 | 
|Work-in-process |  |                    | 1,758  |                   |   | 748   | 
|Finished goods  |  |                    | 5,979  |                   |   | 3,116 | 
|Total inventory |  | $                  | 12,072 |                   | $ | 7,673 | 

5. Commitments and Contingencies

Purchase Commitments

At
September 30, 2009, the Company was committed to make future purchases for
inventory related items under various purchase arrangements with fixed purchase
provisions aggregating approximately $5.0 million.

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.

6. 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 Second Closing). 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 will have the right (but
not the obligation) to require certain participants in the financing to
purchase an additional $20 million of common stock and warrants to purchase
common stock. At the initial closing, the investors that agreed to provide the
additional $20 million investment received warrants to purchase an additional
322,581 shares of common stock at a purchase price of $0.125 per warrant and an
exercise price of $6.20 per share. These warrants will not be exercisable until
the earlier of the Second Closing or December 31, 2009, and are subject to
forfeiture if the investors do not participate in the Second Closing.

7. Preferred Stock and Stockholders Equity

Preferred Stock

As
of September 30, 2009 and December 31, 2008, the Company was authorized to
issue 27,000,000 shares of $0.001 par value preferred stock. As of
September 30, 2009, there were no shares of preferred stock issued or
outstanding.

Common Stock

As
of September 30, 2009 and December 31, 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.

12

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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 nine months
ended September 30, 2008 based on the IPO price of $10.00 per share.

Comprehensive Loss

Comprehensive
loss is defined as the change in equity from transactions and other events and
circumstances other than those resulting from investments by owners and
distributions to owners. For the three months ended September 30, 2009 and
2008, the Company recorded comprehensive losses of approximately $9,438,000 and
$10,184,000, respectively. For the nine months ended September 30, 2009 and
2008, the Company recorded comprehensive losses of approximately $24,735,000
and $26,247,000, respectively. The difference between comprehensive loss and
net loss for the three and nine months ending September 30, 2009 and 2008 is
due to changes in unrealized gains and losses on the Companys
available-for-sale securities.

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 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.

On
May 22, 2009, the Company issued 100,000 shares of restricted stock to its
Chief Executive Officer at a fair value of $8.70 per share on the date of
issuance. The restricted stock will vest over a four-year period. On May 22,
2009, 40,211 shares of common stock were surrendered by the Chief Executive
Officer to the Company to cover payroll taxes associated with the taxable income
from the vesting of restricted stock previously granted to the Companys Chief
Executive Officer. As of September 30, 2009, 795,864 shares of restricted stock
granted to the Companys Chief Executive Officer were issued and outstanding.

During
the three months ended September 30, 2009 and 2008, stock-based compensation
expense was approximately $1.1 million and $609,000, respectively. Included
within stock-based compensation expense for the three months ended September
30, 2009 were $783,000 related to stock option grants, $258,000 related to the
partial vesting of 795,864 shares of restricted stock granted to the Companys
Chief Executive Officer at various dates from 2005 through 2009, and $41,000
related to employee stock purchases under the MAKO Surgical Corp. 2008 Employee
Stock Purchase Plan (the 2008 Employee Stock Purchase Plan). During the nine
months ended September 30, 2009 and 2008, stock-based compensation expense was
approximately $2.9 million and $2.7 million, respectively. Included within
stock-based compensation expense for the nine months ended September 30, 2009
were $2.1 million related to stock option grants, $735,000 related to the
partial vesting of 795,864 shares of restricted stock granted to the Companys
Chief Executive Officer at various dates from 2005 through 2007, and $116,000
related to employee stock purchases under the 2008 Employee Stock Purchase
Plan.

The
Companys 2004 Stock Incentive Plan (the 2004 Plan), its MAKO Surgical Corp.
2008 Omnibus Incentive Plan (the 2008 Plan, and together with the 2004 Plan,
the Plans), and its 2008 Employee Stock Purchase Plan are described in the
notes to financial statements in the Form 10-K. Generally, the Companys
outstanding stock options vest over four years. However, certain stock options
granted in 2004 vested on the date of grant. Stock options granted to certain
non-employee directors generally vest over three years. Continued vesting
typically terminates when the employment or consulting relationship ends.
Vesting generally begins on the date of grant; however, certain stock options
granted in 2007 began vesting upon the achievement of performance conditions.

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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 five years. The maximum term of
all other options is ten years. Options issued under the 2008 Plan that are
forfeited or expire will be made available for new grants under the 2008 Plan.
Options issued under the 2004 Plan that are forfeited or expire will not be
made available for new grants under the 2008 Plan. All future awards will be
made under the 2008 Plan.

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

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                        |  |                                      | (1,446 | )                   |                      | 1,446                              |   |   | 7.97  | 
|Options exercised                      |  |                                      | ―      |                     |                      | (79                                | ) |   | 1.01  | 
|Options forfeited under the
 2004 Plan |  |                                      | ―      |                     |                      | (9                                 | ) |   | 10.92 | 
|Options forfeited under the
 2008 Plan |  |                                      | 18     |                     |                      | (18                                | ) |   | 8.34  | 
|Balance at
 September 30, 2009         |  |                                      | 203    |                     |                      | 3,533                              |   |   | 6.61  | 

As of September 30, 2009, there was total unrecognized compensation cost of
approximately $10.7 million, net of estimated forfeitures, related to
non-vested stock-based payments (including stock option grants, restricted
stock grants and compensation expense relating to shares issued under the 2008
Employee Stock Purchase Plan) granted to the Companys employees and
non-employee directors. Total unrecognized compensation cost will be adjusted
for future changes in estimated forfeitures, and is expected to be recognized
over a remaining weighted average period of 2.9 years as of September 30, 2009.

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:

|                        |  |                                  |  |                 
|----------------------- |  | -------------------------------- |  | ----------------
|                        |  | Nine
 Months Ended September 30,
|                        |  | 2009                             |  | 2008            
|Risk-free interest rate |  | 1.99%
 - 3.53%                   |  | 3.44%
 - 3.62%  
|Expected life           |  | 6.25
 years                      |  | 6.25
 years     
|Expected dividends      |  | ―                                |  | ―               
|Expected volatility     |  | 55.04%
 - 57.71%                 |  | 56.49%
 - 56.78%

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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 September 30, 2009, all the warrants were
outstanding and exercisable, and none have been exercised.

See
Note 6 for disclosure regarding the issuance of warrants in connection with the
Companys October 2008 financing transaction.

8. 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.

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 income tax assets. If it is determined in the future that it is
more likely than not that the deferred income tax assets are realizable, the
valuation allowance will be reduced.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

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

The
following discussion and analysis of our financial condition and results of
operations should be read together with our financial statements and related
notes appearing elsewhere in this report. This report contains forward-looking
statements regarding, among other things, statements related to expectations,
goals, plans, objectives and future events. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Reform Act of 1995. In some cases, you can identify
forward-looking statements by the following words: may, will, could,
would, should, expect, intend, plan, anticipate, believe,
estimate, predict, project, potential, continue, ongoing or the
negative of these terms or other comparable terminology, although not all
forward-looking statements contain these words. Examples of such statements
include, but are not limited to, statements about the nature, timing and number
of planned new product introductions; market acceptance of the MAKOplasty®
solution; the future availability from third-party suppliers, including single
source suppliers of implants and components of our RIO® Robotic Arm Interactive
Orthopedic system, or RIO system; the anticipated adequacy of our capital
resources to meet the needs of our business; our ability to sustain, and our
goals for, sales and earnings growth including projections regarding systems
installations; and our success in achieving timely approval or clearance of
products with domestic and foreign regulatory entities. These statements are
based on the current estimates and assumptions of our management as of the date
of this report and are subject to risks, uncertainties, changes in
circumstances, assumptions and other factors that may cause actual results to
differ materially from those indicated by forward-looking statements, many of
which are beyond our ability to control or predict. Such factors, among others,
may have a material adverse effect on our business, financial condition and
results of operations and may include the potentially significant impact of a
further or continued economic downturn on the ability of our customers to
secure adequate funding to buy our products or cause our customers to delay a
purchasing decision, changes in competitive conditions and prices in our
markets, unanticipated issues relating to product releases, decreases in sales
of our principal product lines, increases in expenditures related to increased
or changing governmental regulation or taxation of our business, unanticipated
issues in securing regulatory clearance or approvals for new products or
upgrades or changes to our current products, unanticipated issues associated
with any healthcare reform that may be enacted, loss of key management and
other personnel or inability to attract such management and other personnel and
unanticipated intellectual property expenditures required to develop and market
our products. These and other risks are described in greater detail under Item
1A, Risk Factors, contained in our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009 and our other periodic reports filed from time to
time with the Securities and Exchange Commission. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We do
not undertake any obligation to release any revisions to these forward-looking
statements publicly to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.

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

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. In
February 2008, our common stock began trading on The NASDAQ Global Market under
the ticker symbol MAKO and we closed our initial public offering, or IPO.

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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 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 six months ended June 30, 2009 upon delivery of the
RIO system. We have incurred net losses in each year since our inception and,
as of September 30, 2009, we had an accumulated deficit of $104.9 million. We
expect to continue to incur significant operating losses as we increase our
sales and marketing activities and otherwise continue to invest capital in the
development and expansion of our products and our business generally. We 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 six months ended June 30, 2009 upon delivery of the RIO
 system. In addition, we recognized the revenue and the direct cost of revenue
 from twelve new unit sales of our RIO system during the nine month period
 ended September 30, 2009, bringing the total number of commercial MAKOplasty
 sites to 29 as of September 30, 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
 September 30, 2009, 89 RESTORIS MCK bicompartmental knee MAKOplasty
 procedures were performed since the release of RESTORIS MCK.                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 
 During the nine month period ended September 30, 2009, a total of 1,041 knee
 MAKOplasty procedures were performed, including unicompartmental and
 bicompartmental procedures, representing a 160% increase over the same period
 in 2008.                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  In September 2009, we
 received 510(k) clearance from the FDA for an application that assists a
 surgeon in acetabular reaming during total hip arthroplasty using the RIO
 system platform. We believe this represents achievement of a necessary
 milestone towards what we anticipate will be our future development and
 clearance of a RIO-enabled hip MAKOplasty 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.

Factors Which May Influence Future
Results of Operations

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

Revenue

Revenue
is generated from unit sales of our 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 three and nine months ended September 30, 2009, we also recognized revenue
from sales of our RIO systems in our statement of operations as discussed
below.

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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 six months ended June 30,
2009 upon delivery of the RIO system. Our deferred revenue balance as of
September 30, 2009 consists primarily of deferred service revenue for extended
warranty services on the RIO system hardware.

Future
revenue from sales of our products is difficult to predict and we expect that
it will only modestly reduce our continuing and increasing losses resulting
from selling, general and administrative expenses, research and development and
other activities for at least the next two or three years. Our future revenue
may also be adversely affected by the current general economic downturn and the
resulting tightening of the credit markets, which may cause 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 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 six months ended June 30, 2009 upon delivery of the
RIO system.

Beginning
with the fourth quarter of 2008, manufacturing overhead costs are capitalized
in inventory and included in cost of revenue as products are sold and revenue
is recognized in the statements of operations. Previously, such overhead costs
were fully expensed as selling, general and administrative expense as
capitalizable amounts were not significant.

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Selling, General
and Administrative Expenses

Our
selling, general and administrative expenses consist primarily of compensation,
including stock-based compensation and benefits, for sales, marketing,
operations, regulatory, quality, executive, finance, legal and administrative
personnel. Other significant expenses include costs associated with sales and
marketing activities, marketing and advertising materials, insurance, professional
fees for legal and accounting services, consulting fees, travel expenses,
facility and related operating costs, and recruiting expenses. Our selling,
general and administrative expenses are expected to continue to increase due to
the 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 taking preliminary steps to investigate the feasibility of
establishing clinical sites outside the United States, which may also increase
our selling, general and administrative expenses, and we expect to incur
additional costs associated with securing and protecting our intellectual
property rights as necessary to support our future product offerings.

Research and
Development Expenses

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

A
summary of our critical accounting policies is included in our Form 10-K, Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations. There have been no changes to those policies for the nine months
ended September 30, 2009.

Results of Operations

Comparison of the
Three Months Ended September 30, 2009 to the Three Months Ended September 30,
2008

Revenue. Revenue was $6.7 million for the three
months ended September 30, 2009, compared to $777,000 for the three months
ended September 30, 2008. The increase in revenue of $5.9 million was primarily
due to $4.6 million of revenue from six unit sales of our RIO system. Prior to
2009, recognized revenue was primarily generated from the sale of implants and
disposable products utilized in knee MAKOplasty procedures. In accordance with
our revenue recognition policy, recognition of revenue on unit sales of our TGS
was deferred until they were upgraded to RIO systems, which we commercially
released in the first quarter of 2009. Revenue for all previously deferred TGS
sales was recognized in our statement of operations during the six months ended
June 30, 2009. Total revenue was also positively impacted by a $1.4 million
increase in procedure revenue attributable to an increase in knee MAKOplasty
procedures performed during the three months ended September 30, 2009 as
compared with the three months ended September 30, 2008. There were 418 knee
MAKOplasty procedures performed during the three months ended September 30,
2009 compared to 159 knee MAKOplasty procedures performed during three months
ended September 30, 2008. We expect our revenue to increase as unit sales of our
RIO system increases in future periods and the number of knee MAKOplasty
procedures performed increases in future periods.

Cost
of Revenue. Cost of
revenue was $4.0 million for the three months ended September 30, 2009,
compared to $1.4 million for the three months ended September 30, 2008. The
increase in cost of revenue of $2.6 million was primarily due to the
recognition of the cost of revenue from six unit sales of our RIO system and to
an increase in knee MAKOplasty procedures performed. We expect our cost of
revenue to increase as unit sales of our RIO system increases 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 $7.9 million for
the three months ended September 30, 2009, compared to $6.3 million for
the three months ended September 30, 2008. The increase of $1.6 million,
or 26%, 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 three months ended September 30, 2009 also
included $883,000 of stock-based compensation expense compared with $501,000
for the three months ended September 30, 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 MAKOplasty,
continued growth in operations and the costs associated with operating as a
public company.

Research
and Development.
Research and development expense was $3.8 million for the three months
ended September 30, 2009, compared to $3.1 million for the three months
ended September 30, 2008. The increase of $647,000, or 21%, 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. 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 $595,000 for the three months ended
September 30, 2009, compared to $483,000 for the three months ended September
30, 2008. The increase of $112,000, or 23%, 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 $59,000 for the three months ended September 30,
2009, compared to $241,000 for the three months ended September 30, 2008. The
decrease of $182,000, or 76%, was primarily due to lower yields realized on our
cash, cash equivalents and investments for the three months ended
September 30, 2009 compared with the same period of 2008.

Income
Taxes. No income
taxes were recognized for the three months ended September 30, 2009 and 2008,
due to net operating losses in each period. In addition, no current or deferred
income taxes were recorded for the three months ended September 30, 2009 and
2008, as all income tax benefits were fully offset by a valuation allowance
against our net deferred income tax assets.

Comparison of the
Nine Months Ended September 30, 2009 to the Nine Months Ended September 30,
2008

Revenue. Revenue was $25.4 million for the nine
months ended September 30, 2009, compared to $2.0 million for the nine months
ended September 30, 2008. The increase in revenue of $23.4 million was
primarily due to the recognition of approximately $11.3 million of revenue from
seventeen previously deferred unit sales of our TGS and $8.9 million of revenue
from twelve unit sales of our RIO system. 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 $3.2 million
increase in procedure revenue attributable to an increase in knee MAKOplasty
procedures performed during the nine months ended September 30, 2009 as
compared with the nine months ended September 30, 2008. There were 1,041 knee
MAKOplasty procedures performed during the nine months ended September 30, 2009
compared to 401 knee MAKOplasty procedures performed during nine months ended
September 30, 2008.

Cost
of Revenue. Cost of
revenue was $17.3 million for the nine months ended September 30, 2009,
compared to $2.2 million for the nine months ended September 30, 2008. The
increase in cost of revenue of $15.1 million was primarily due to 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 Factors Which May Influence Future Results of Operations
section above, the cost of revenue from twelve unit sales of our RIO system and
an increase in knee MAKOplasty procedures performed.

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Selling,
General and Administrative. Selling, general and administrative expense was $22.1 million for
the nine months ended September 30, 2009, compared to $16.0 million for
the nine months ended September 30, 2008. The increase of $6.1 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 nine months ended September 30, 2009 also
included $2.4 million of stock-based compensation expense compared with $1.4
million for the nine months ended September 30, 2008. The increase in
stock-based compensation expense was primarily due to additional option and
restricted stock grants made in 2009.

Research
and Development.
Research and development expense was $9.4 million for the nine months
ended September 30, 2009, compared to $9.2 million for the nine months
ended September 30, 2008. The increase of $155,000, or 2%, was primarily due to
an increase in research and development activities associated with on-going
development of our RIO system, our MAKO implant systems and potential future
products. This was partially offset by a nonrecurring charge of $949,000
incurred in the first quarter of 2008 associated with the vesting in full, upon
completion of our IPO in February 2008, of restricted common stock issued
pursuant to business consultation agreements entered into in December 2004.

Depreciation
and Amortization.
Depreciation and amortization expense was $1.7 million for the nine months
ended September 30, 2009, compared to $1.3 million for the nine months ended
September 30, 2008. The increase of $332,000, or 25%, 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 $348,000 for the nine months ended September 30,
2009, compared to $642,000 for the nine months ended September 30, 2008. The
decrease of $294,000, or 46%, was primarily due to lower yields realized on our
cash, cash equivalents and investments for the nine months ended
September 30, 2009 compared with the same period of 2008.

Interest
and Other Expense.
Interest and other expense was $0 for the nine months ended September 30, 2009,
compared to $110,000 for the nine months ended September 30, 2008. Through
February 2008, interest and other expense consisted primarily of the
amortization of a $590,000 discount associated with a deferred payment to IBM
of $4.0 million which had been fully amortized and paid upon the completion of
our IPO in February 2008.

Income
Taxes. No income
taxes were recognized for the nine months ended September 30, 2009 and 2008,
due to net operating losses in each period. In addition, no current or deferred
income taxes were recorded for the nine months ended September 30, 2009 and
2008, as all income tax benefits were fully offset by a valuation allowance
against our net deferred income tax assets.

Liquidity and Capital Resources

|                                           |  |                                  |         |      |   |         |  
|------------------------------------------ |  | -------------------------------- | ------- | ---- | - | ------- | -
|(in thousands)                             |  | Nine
 Months Ended September 30, |        
|                                           |  | 2009                             |         | 2008 |  
|Cash used in operating
 activities         |  | $                                | (36,473 | )    | $ | (22,308 | )
|Cash used in investing
 activities         |  |                                  | (15,353 | )    |   | (2,981  | )
|Net cash provided by
 financing activities |  |                                  | 54,308  |      |   | 46,489  |  
|Net increase in cash and
 cash equivalents |  | $                                | 2,482   |      | $ | 21,200  |  

We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of September 30, 2009, we
had an accumulated deficit of $104.9 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 equity financing in August
2009. We received net proceeds of $52.2 million from the issuance of
Series A, B and C redeemable convertible preferred stock. In February
2008, we completed our IPO of common stock, issuing a total of 5.1 million
shares at an 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.

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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 at our discretion to an additional $20 million, which we
refer to as the Second Closing. In connection with the financing, we issued and
sold to the participating investors 6,451,613 shares of our common stock at a
purchase price of $6.20 per share and issued warrants to the participating
investors to purchase 1,290,323 shares of common stock at a purchase price of
$0.125 per warrant and an exercise price of $7.44 per share. In addition, we
issued warrants to purchase 322,581 shares of common stock at a purchase price
of $0.125 per warrant and an exercise price of $6.20 per share to investors
that agreed to purchase an additional $20 million of common stock in the Second
Closing. The financing resulted in net proceeds of approximately $39.7 million,
after expenses of approximately $525,000.

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 September 30, 2009, we had approximately $80.1 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 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 operating
activities was also affected by changes in operating assets and liabilities.
Included in changes in operating assets and liabilities for the nine months
ended September 30, 2009 are approximately $11.3 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, and $7.9 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.
Included in changes in operating assets and liabilities for the nine months
ended September 30, 2008 are approximately $5.5 million and $2.0 million of
increases to the deferred revenue balance and deferred cost of revenue balance,
respectively, due primarily to unit sales of our TGS, and $2.9 million of
increases in inventory necessitated by the commercial release of our RESTORIS
unicompartmental knee implant system in the third quarter of 2008. In
accordance with our revenue recognition policy, recognition of revenue and
direct cost of revenue associated with the unit sales of our TGS was deferred
until delivery of the RIO system, which we commercially released in the first
quarter of 2009

Net Cash Used in
Investing Activities

Net
cash used in investing activities for the nine months ended September 30, 2009
was primarily attributable to the purchase of investments of $17.4 million,
which was partially offset by proceeds of $3.3 million from sales and
maturities of investments. Net cash used in investing activities for the nine
months ended September 30, 2008 was primarily attributable to the payment of a
$4.0 million deferred license fee due to IBM upon completion of our IPO and to
$2.0 million of purchases 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 nine months ended September
30, 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 nine months ended September 30, 2008 was primarily
attributable to net proceeds received in connection with our IPO in February
2008.

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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
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

At
September 30, 2009, we were committed to make future purchases for inventory
related items under various purchase arrangements with fixed purchase
provisions aggregating approximately $5.0 million.

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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 $200,000 for the year ended
December 31, 2009, 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 $1.0
million annually.

In
June 2009, we 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 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 September 30, 2009, we had paid the $450,000
up-front payment and we had paid a $350,000 milestone payment which became due
upon the achievement of the related milestone. 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.

Other
than as described above and scheduled payments through September 30, 2009,
there have been no significant changes in our contractual obligations during
the nine months ended September 30, 2009 as compared to the contractual
obligations described in our Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

Adopted Accounting Pronouncements

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.

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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. In accordance with ASC 855-10, we have evaluated
subsequent events through the time of filing this Form 10-Q with the Securities
and Exchange Commission, or SEC, on November 4, 2009. No material subsequent
events have occurred since September 30, 2009 that required recognition or
disclosure in these financial statements.

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
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.

Other
than as described above, there have been no significant changes in Recent
Accounting Pronouncements during the nine months ended September 30, 2009 as
compared to the Recent Accounting Pronouncements described in our Form 10-K for
the year ended December 31, 2008.

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Off-Balance Sheet Arrangements

We
do not have any off-balance sheet arrangements.

ITEM 3. 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 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.

ITEM 4T. 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 September
30, 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 September 30, 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.

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PART II 
OTHER INFORMATION

ITEM 1A. RISK FACTORS.

There
have been no material changes in our risk factors from those disclosed in our
Form 10-Q for the quarter ended June 30, 2009.

ITEM 6. EXHIBITS.

|              |  |                                                                                          | 
|------------- |  | ---------------------------------------------------------------------------------------- | 
|Exhibit 
 No. |  | Description                                                                              | 
|              |  |                                                                                          | 
|              |  |                                                                                         
|31.1          |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
|31.2          |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
|32.1          |  | Certification
 of Chief Executive Officer pursuant to 18 U.S.C. §1350                   
|32.2          |  | Certification
 of Chief Financial Officer pursuant to 18 U.S.C. §1350                   

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SIGNATURES

Pursuant
to the requirements 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.

|                        |                      |                                              | 
|----------------------- | -------------------- | -------------------------------------------- | 
|                        | MAKO
 Surgical Corp. |                                             
|                        |                      |                                              | 
|Date:
 November 4, 2009 | By:                  | /s/ Fritz L.
 LaPorte                        | 
|                        |                      |                                              | 
|                        |                      | Fritz L.
 LaPorte                           
|                        |                      | Senior Vice
 President of Finance and       
|                        |                      | Administration,
 Chief Financial Officer and
|                        |                      | Treasurer                                   

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EXHIBIT INDEX

|             |  |                                                                                          | 
|------------ |  | ---------------------------------------------------------------------------------------- | 
|Exhibit
 No. |  | Description                                                                              | 
|             |  |                                                                                          | 
|             |  |                                                                                         
|31.1         |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
|31.2         |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
|32.1         |  | Certification
 of Chief Executive Officer pursuant to 18 U.S.C. §1350                   
|32.2         |  | Certification
 of Chief Financial Officer pursuant to 18 U.S.C. §1350                   

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