INTEGRATED SURGICAL SYSTEMS INC, DEFS14A, 1999-10-06

INTEGRATED SURGICAL SYSTEMS INC
DEFS14A, 1999-10-06
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

INTEGRATED SURGICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.

(1) Amount Previously Paid:

------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:

------------------------------------------------------------------------

(3) Filing Party:

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(4) Date Filed:

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INTEGRATED SURGICAL SYSTEMS, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 9, 1999

To the Stockholders of Integrated Surgical Systems, Inc.:

Notice is hereby given that a Special Meeting of Stockholders of Integrated
Surgical Systems, Inc., a Delaware corporation (the "Company"), will be held on
November 9, 1999, at the Company's executive offices, 1850 Research Park Drive,
Davis, California 95616-4884, at the hour of 9:00 A.M., for the following
purposes:

1. To approve the issue and sale to ILTAG International Licensing Holding
S.A.L., Bernd Herrmann and Urs Wettstein of an aggregate of 2,922,396
shares of common stock and warrants to purchase an additional number of
shares of common stock that would give them 40% of the fully diluted
common stock, for a purchase price of $4 million pursuant to a Stock
and Warrant Purchase Agreement dated as of October 1, 1999. The
exercise price of the warrants is $1.02656 per share. The total number
of warrants will be determined at closing, assuming that all
outstanding convertible securities were converted and all outstanding
stock options and warrants were exercised as of that date, at the
conversion or exercise prices then in effect, after giving effect to
antidilution adjustments resulting from the sale. If the sale had
occurred and the number of warrants had been determined as of September
22, 1999, 10,158,000 warrants would have been issued to the purchasers,
based on the assumptions set forth in the notes to the table under the
caption "Proposal to Approve Sale of Shares and Warrants -- Dilution"
in the Company's Proxy Statement dated October 5, 1999. After giving
effect to the exercise of those warrants, but without giving effect to
the conversion of the outstanding convertible securities or the
exercise of the outstanding stock options and other warrants, the
purchasers would have owned approximately 60% of the shares of common
stock that would have been outstanding as of that date. As a condition
of the sale, Messrs. Herrmann, Wettstein and Falah Al-Khadi, the Vice
Chairman of The Dogmoch Group of Companies, the corporate parent of
ILTAG International Licensing Holding S.A.L., will become three of the
five members of the Board of Directors of the Company. Since the
purchasers will have control of the Board of Directors and effective
voting control of the Company following the sale, the sale will result
in a change in control of the Company.

2. To transact such other business as may properly come before the Special
Meeting or any adjournments thereof.

Only stockholders of record at the close of business on September 22, 1999
are entitled to notice of and to vote at the Special Meeting or any adjournments
thereof.

A list of stockholders entitled to vote at the Special Meeting will be open
to examination by any stockholder for any purpose germane to the meeting, at the
executive offices of the Company, 1850 Research Park Drive, California
95616-4884, for a period of ten days prior to the Special Meeting. Such list
also shall be available during the Special Meeting.

By Order of the Board of Directors

MARK W. WINN
Secretary

Davis, California

October 5, 1999

IMPORTANT:

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE PROMPTLY
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY, AND RETURN IT TO THE COMPANY. THE PROXY MAY BE REVOKED
AT ANY TIME BEFORE IT IS VOTED, AND STOCKHOLDERS EXECUTING PROXIES MAY ATTEND
THE MEETING AND VOTE IN PERSON SHOULD THEY SO DESIRE.
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INTEGRATED SURGICAL SYSTEMS, INC.
1850 RESEARCH PARK DRIVE
DAVIS, CALIFORNIA 95616-4884
(530) 792-2600
------------------------

PROXY STATEMENT
------------------------

This Proxy Statement is being furnished to holders of shares of common
stock, par value $.01 per share (the "Common Stock"), of Integrated Surgical
Systems, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board of
Directors" or the "Board") for use at a Special Meeting of Stockholders (the
"Special Meeting") to be held at 9:00 a.m., on Tuesday, November 9, 1999 at the
Company's executive offices, 1850 Research Park Drive, Davis, California
95616-4884. At the Special Meeting, Stockholders will vote on a proposal to
approve the issue and sale (the "Sale") to ILTAG International Licensing S.A.L.
("ILTAG"), Bernd Herrmann and Urs Wettstein of an aggregate of 2,922,396 shares
of Common Stock and three years warrants to purchase an additional number of
shares of Common Stock that would give them 40% of the fully diluted Common
Stock, for a purchase price of $4 million pursuant to a Stock and Warrant
Purchase Agreement dated as of October 1, 1999 (the "Purchase Agreement"). The
exercise price of the warrants is $1.02656 per share. The total number of
Warrants to be issued to the purchasers will be determined at closing, assuming
that all outstanding convertible securities were converted and all outstanding
warrants and stock options were exercised as of that date, at the conversion or
exercise prices then in effect, after giving effect to antidilution adjustments
resulting from the Sale. If the Sale had occurred and the number of warrants had
been determined on September 22, 1999, 10,158,000 warrants would have been
issued to the purchasers, based on the assumptions set forth in the notes to the
table under the caption "Proposal to Approve Sale of Shares and
Warrants -- Dilution." After giving effect to the exercise of those warrants,
but without giving effect to the conversion of the outstanding convertible
securities or the exercise of the outstanding stock options and other warrants,
the Purchasers would have owned approximately 60% of the shares of Common Stock
that would have been outstanding on that date. For information concerning the
methodology for calculating the number of warrants to be issued to the
purchasers, see "Proposal to Approve Sale of Shares and Warrants -- Dilution"
and note 5 to the table presented under that caption. As a condition of the
Sale, Messrs. Herrmann, Wettstein and Falah Al-Khadi, Vice Chairman of The
Dogmoch Group of Companies ("Dogmoch"), the corporate parent of ILTAG, will
become three of the five members of the Company's Board of Directors, and James
C. McGroddy, Paul A. H. Pankow, Patrick G. Hays and Gerald D. Knudson will
resign from the Board. John N. Kapoor will remain a Director and Ramesh C.
Trivedi, Chief Executive Officer and President of the Company and a Director of
the Company from November 1995 to April 26, 1999, will be appointed a Director
of the new Board. Since the purchasers will have control of the Board of
Directors and effective voting control of the Company following the sale, the
sale will result in a change in control of the Company.

The Board of Directors by this Proxy Statement and the enclosed proxy card
is soliciting proxies from holders of its Common Stock (the "Stockholders") to
approve the proposed Sale at the Special Meeting. The Company is submitting the
proposed Sale to Stockholders for approval in accordance with the rules of the
Nasdaq Stock Market, Inc. since the Sale involves a change in control and the
issuance of 20% or more of the outstanding Common Stock.

Only stockholders of record as of the close of business on September 22,
1999 will be entitled to vote at the Special Meeting or any adjournments
thereof. The total number of shares of Common Stock outstanding as of September
22, 1999, was 8,928,513 shares. The Common Stock is the only outstanding class
of securities of the Company entitled to vote. Each share of Common Stock has
one vote.

The affirmative vote by the majority of the votes present at the Special
Meeting and entitled to vote is required to approve the Sale. All proxies will
be counted for determining the presence of a quorum. In the absence of specific
instructions, all proxies duly executed and received by the Company will be
voted FOR the Sale. Shares represented by proxies which are marked "abstain"
will only be counted for the purpose of
<PAGE> 4

determining the presence of a quorum. In addition, where brokers are prohibited
from exercising discretionary authority for beneficial owners who have not
provided voting instructions (commonly referred to as "broker non-votes"), those
shares will not be included in the vote totals.

A proxy may be revoked at any time before being voted by sending a new
proxy bearing a later date or a revocation notice to the Company at the above
address, attn: Secretary, or by notifying the Secretary of the Company at the
Special Meeting. The Company will pay all costs of this solicitation. The
Company will request banks and brokers to solicit their customers who
beneficially own shares listed of record in names of nominees, and will
reimburse those banks and brokers for the reasonable out-of-pocket expenses of
such solicitations. The Company will solicit proxies by mail. Officers and other
employees of the Company also may solicit proxies by telephone, telegram or in
person, but no additional compensation will be paid to such individuals. This
Proxy Statement is being mailed on or about October 5, 1999.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL TO APPROVE SALE OF SHARES AND WARRANTS
General................................................... 4
Change in Control......................................... 5
Interest of Certain Persons in the Sale................... 6
Reasons for the Sale...................................... 6
Discussions Leading to the Sale........................... 8
Recommendation of the Board of Directors.................. 9
Consequences of Failure to Approve the Sale............... 11
No Dissenter's Appraisal Rights........................... 11
Purchase Agreement........................................ 11
Warrants.................................................. 12
Registration Rights....................................... 12
Distribution Agreement.................................... 13
Preferred Stock Financings................................ 13
Capitalization............................................ 16
Effect on Book Value Per Share............................ 17
Dilution.................................................. 18
Tax Consequences to the Company........................... 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations..................................... 21
Liquidity and Capital Resources........................... 24
Year 2000 Compliance...................................... 26
Employees................................................. 27

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 28
GENERAL INFORMATION
Information About the Board of Directors and its
Committees............................................. 30
Executive Compensation.................................... 31
Stock Options............................................. 31
Certain Transactions...................................... 32
Independent Auditors...................................... 34

OTHER MATTERS............................................... 34

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1

APPENDIX I Stock and Warrant Purchase Agreement Exhibit A:
Schedule of Purchasers Exhibit B: Form of
Warrants Exhibit C: Registration and
Stockholders Rights Agreement
</TABLE>

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PROPOSAL TO APPROVE SALE OF SHARES AND WARRANTS

GENERAL

On October 1, 1999 the Company entered into a Stock and Warrant Purchase
Agreement (the "Purchase Agreement") with ILTAG, Bernd Herrmann and Urs
Wettstein (collectively, the "Purchasers") for the issue and sale of an
aggregate of 2,922,396 shares of Common Stock (the "Shares") and three-year
warrants (the "Warrants") to purchase an additional number of shares of Common
Stock that would give the Purchasers the right to purchase 40% of the fully
diluted Common Stock (the "Warrants Shares"). The exercise price of the Warrants
is $1.02656 per share. The purchase price for the Shares and Warrants is $4
million. The total number of Warrants to be issued to the Purchasers will be
determined at closing, assuming that all outstanding convertible securities were
converted and all outstanding warrants and stock options were exercised as of
that date, at the conversion or exercise prices then in effect, after giving
effect to antidilution adjustments resulting from the Sale. If the Sale had
occurred and the number of Warrants had been determined on September 22, 1999,
10,158,000 Warrants would have been issued to the Purchasers, based upon the
assumptions set forth in the notes to the table under the caption "Dilution".
After giving effect to the exercise of those Warrants, but without giving effect
to the conversion of the outstanding convertible securities or the exercise of
the outstanding stock options and other warrants, the Purchasers would have
owned approximately 60% of the outstanding shares of Common Stock that would
have been outstanding as of that date. For information concerning the
methodology for calculating the number of Warrants to be issued to the
Purchasers, see "Dilution" and note 5 to the table presented under that caption.
The Purchase Agreement is annexed as Appendix I to this Proxy Statement and the
form of Warrant appears as Exhibit B to Appendix I.

ILTAG will purchase 1,461,198 shares and one-half of the total number of
Warrants for $2 million. Messrs. Herrmann and Wettstein will each purchase
730,599 shares and one-quarter of the total number of Warrants for $1 million.
The following table sets forth the number of Shares and Warrants to be issued to
the Purchasers assuming the Sale had occurred and the number of Warrants had
been determined on September 22, 1999, based upon the assumptions set forth in
the notes to the table under the caption "Dilution", and their percentage
ownership of the outstanding Common Stock after the Sale, and as adjusted for
the exercise of the Warrants, and as further adjusted for the conversion of
outstanding convertible securities and exercise of outstanding stock options and
other warrants, all determined as of September 22, 1999:

<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING COMMON STOCK
------------------------------------------------
AS FURTHER ADJUSTED
FOR CONVERSION OF
OUTSTANDING
CONVERTIBLE
SECURITIES AND
EXERCISE OF
AS ADJUSTED OUTSTANDING STOCK
FOR EXERCISE OF OPTIONS AND OTHER
SHARES WARRANTS ACTUAL WARRANTS WARRANTS
--------- ---------- ------ --------------- -------------------
<S> <C> <C> <C> <C> <C>
ILTAG....................... 1,461,198 5,079,000 12.33% 29.72% 20.00%
Herrmann.................... 730,599 2,539,500 6.17% 14.86% 10.00%
Wettstein................... 730,599 2,539,500 6.17% 14.86% 10.00%
--------- ---------- ----- ----- -----
Total............. 2,922,396 10,158,000 24.67% 59.44% 40.00%
========= ========== ===== ===== =====
</TABLE>

For information concerning the outstanding convertible securities, stock options
and warrants and the computation of the percentages in the "As Further Adjusted"
column of the table, see "Dilution."

Messrs. Herrmann and Wettstein have advised the Company they will use their
personal funds to pay the purchase price, and ILTAG has advised the Company that
Dogmoch will make a capital contribution to ILTAG to fund all but $100,000 of
its purchase price, with the remainder to come from ILTAG's available cash.

ILTAG is a Lebanese company that invests in health care and information
technology companies. Dogmoch provides consulting and support services to over
20 German companies doing business in countries

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throughout the Middle East. The principal stockholder of Dogmoch is M.Y.
Dogmoch. The Company was introduced to Mr. Dogmoch by Manfred Schmitt, a German
venture capitalist and entrepreneur. Mr. Schmitt was introduced to the Company
by Dr. Andre Bauer, an orthopedic surgeon at a clinic in Frankfurt, Germany that
performs hip surgery with the ROBODOC System. The Company, three of its
directors, Messrs. Schmitt and Dogmoch are investors in a private orthopedic
clinic organized by Dr. Bauer in Marbella, Spain. See "General
Information -- Certain Transactions".

Bernd Herrmann is a German venture capitalist who was an asset manager at
Deutsche Bank A.G. and Commerzbank A.G. He is on the supervising boards of
several European high-tech companies. Urs Wettstein is a Swiss tax and
accounting consultant. He has served on the boards of several private Swiss
companies.

The consummation of the Sale is subject to the execution and delivery of a
distribution agreement with Spark 1st Vision GmbH & Co. KG, a distributor based
in Germany of which Manfred Schmitt is the principal owner, that would give the
distributor the exclusive right to distribute the Company's products in Europe,
the Middle East and Africa through 2003. The distribution agreement obligates
the distributor to purchase minimum quantities of the Company's products during
the period commencing with the closing of the Sale and ending March 31, 2000 and
the 12 months ending March 31, 2001 and to make advance payments of $400,000 per
month to the Company commencing with the closing of the Sale through March 31,
2001, which may be offset against product purchases. For a summary of the
distribution agreement, see "Distribution Agreement."

The Company believes that through the business relationships of the
Purchasers and Mr. Schmitt it will improve its ability to expand the customer
base for the ROBODOC System throughout Europe, and with assistance from Dogmoch,
develop a customer base in the Middle East.

CHANGE IN CONTROL

Following the Sale, the Purchasers will own approximately 24.67% of the
shares of Common Stock outstanding on September 22, 1999, and together with the
Warrants, approximately 40% of the Common Stock on a fully diluted basis. As a
condition of the Sale, Messrs. Herrmann, Wettstein and Falah Al-Khadi, the Vice
Chairman of Dogmoch, will become three of the five members of the Board of
Directors. Since the Purchasers will have control of the Board and effective
voting control of the Company following the Sale, the Sale will result in a
change in control of the Company.

The Board of Directors consists of five members. The Directors of the
Company are James C. McGroddy (Chairman), John N. Kapoor, Paul A. H. Pankow,
Gerald D. Knudson and Patrick G. Hays, all of whom were elected at the Company's
Annual Meeting of Stockholders on April 27, 1999.

If the Sale is approved by Stockholders and the other conditions to closing
are satisfied, Dr. McGroddy and Messrs. Pankow, Knudson and Hays will resign
from the Board immediately prior to the closing of the Sale, and they will be
replaced by Messrs. Al-Khadi, Herrmann and Wettstein. Dr. John N. Kapoor will
continue to serve as a Director and Dr. Ramesh C. Trivedi will be appointed to
fill the remaining vacancy on the Board. Delaware law does not require that
Stockholders vote at the Special Meeting on the election of Messrs. Al-Khadi,
Herrmann, Wettstein and Dr. Trivedi as Directors, and the Company is not
soliciting proxies from Stockholders for their election. Section 3.4 of the
Company's By-laws permits Directors to resign effective at a future date, and
gives a majority of the Directors then in office, including those who have so
resigned, the power to fill such vacancies effective with the resignation of
those Directors who have resigned. Dr. Kapoor and each of the new Directors will
continue to serve as Directors until his successor is duly elected and qualified
following the next Annual Meeting of Stockholders or his earlier resignation.

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Messrs. Al-Khadi, Herrmann and Wettstein, as well as Dr. Trivedi, have
consented to be named in this Proxy Statement and to serve as Directors if the
Sale is approved by Stockholders. Information with respect Messrs. Al-Khadi,
Herrmann and Wettstein, as well as Dr. Trivedi, is set forth below.

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND RELATED INFORMATION
- ---- --- --------------------------------------------
<S> <C> <C>
Falah Al-Khadi....................... 50 Vice Chairman of the Dogmoch Group of Companies since
1994; owner and Managing Director of Business Advising
Bureau in Abu Dhabi from 1981 to 1993.
Bernd Herrmann....................... 32 Private investor since 1997; Asset Manager, Commerzbank
AG, Frankfurt/Main, Germany from 1995 to 1997 and
Deutsche Bank AG, Mannheim and Kaiserslautern, Germany
from 1986 to 1995.
Urs Wettstein........................ 44 Private investor; independent tax and accounting
consultant in Zurich, Switzerland since 1983; Financial
and Tax Consultant, Coopers and Lybrand, Zurich,
Switzerland from 1977 to 1982.
Ramesh C. Trivedi.................... 59 Chief Executive Officer of the Company since November
1995; Director of the Company from November 1995 through
April 1999; consultant to the Company from February 1995
until November 1995; Principal of California Biomedical
Consultants (an international consulting firm) since
1987; President and Chief Executive Officer of DigiRad
Corporation (a medical imaging company) from 1985 to
1986.
</TABLE>

INTEREST OF CERTAIN PERSONS IN THE SALE

Ramesh C. Trivedi, Chief Executive Officer and President of the Company,
and a Director of the Company from November 1995 to April 1999, has an interest
in the Sale since a condition of the Sale is the appointment of Dr. Trivedi to
the Company's Board of Directors. Dr. Trivedi resigned his positions with the
Company on April 26, 1999. Following his resignation he continued marketing and
selling the Company's products, and together with John N. Kapoor, negotiated the
terms of the Sale.

Subject to the consummation of the Sale, the Board of Directors has amended
options granted to James C. McGroddy, Paul A.H. Pankow, Patrick G. Hays and
Gerald D. Knudson, independent Directors of the Company who will resign as a
condition of the Sale prior to closing, to accelerate vesting and eliminate
termination provisions that would have otherwise terminated their options upon
their resignation. The financial benefit of the amended options to these
directors, estimated at approximately $15,000 in the aggregate based upon the
market price of the Common Stock on September 28, 1999, will be determined based
upon the market price of the Common Stock on the date of the Sale compared to
the exercise prices of the amended options. See "General Information -- Certain
Transactions".

REASONS FOR THE SALE

The Company requires additional financing to fund its operations and
research and development activities until it generates sufficient cash flow from
sales of its semi-autonomous surgical robotic systems. The Company experienced
net losses of approximately $10.3 million and approximately $4.5 million during
1998 and 1997, respectively, and a net loss of approximately $4.7 million for
the six months ended June 30, 1999. Since 1998, the Company has incurred
significant expenses in building a sales and marketing organization and field
support staff in Europe. It also has incurred substantial research and
development costs to develop its DigiMatch pinless registration system and
expand the number of implants compatible with the ROBODOC(R) Surgical Assistant
System. See the Company's audited consolidated financial statements for the year
ended December 31, 1998 and its unaudited consolidated financial statements for
the six months ended June 30, 1999 commencing on page F-1 of this Proxy
Statement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

6
<PAGE> 9

The principal market for the Company's ROBODOC(R) Surgical Assistant System
has been Europe, with most sales in Germany and Austria. In marketing the
ROBODOC System in Germany, the Company's sales representatives in presentations
to decision makers of several potential customers experienced resistance since
the Company was not German and did not have its headquarters in Germany.
Although the Company has a sales and service staff in Germany, several potential
customers have indicated a preference for doing business with a locally based
company whose operations and offices are headquartered in Germany. The Company's
principal competitor, Orto Maquet, a German manufacturer and major supplier of
operating tables to hospitals and physicians in Europe, has entered the market
with a device intended to compete with the ROBODOC System. Orto Maquet's robotic
system also is aimed at the orthopedic market and competes directly with the
Company's ROBODOC System in performing total hip arthroplasty. Orto Maquet's
system incorporates pin-based registration and therefore requires a second
surgical procedure to place pins in the patient's femur prior to performing the
hip replacement surgery. Both companies have computerized pre-surgical planning
stations; however, the Company's product provides enhancements that allow the
surgeon to plan and perform revision hip surgery -- the replacement of a
previous hip implant. Orto Maquet has relationships with hospitals and
physicians throughout Europe as a supplier of operating tables and has greater
financial, marketing and distribution resources than the Company. Several
potential customers in Germany have decided to purchase the Orto Maquet system
instead of the ROBODOC System due to their preference for doing business with a
German company.

The Company entered into the Purchase Agreement to obtain financing
required to continue its operations and research and development activities
until it can generate sufficient cash flow from sales of its semi-autonomous
surgical robotic systems. As a condition of the Sale, Messrs. Herrmann,
Wettstein and Falah Al-Khadi will become three of the five members of the
Company's Board of Directors. ILTAG invests in health care and information
technology companies. Dogmoch, the corporate parent of ILTAG, provides
consulting and support services to over 20 German companies doing business in
countries throughout the Middle East. The principal stockholder of Dogmoch is
M.Y. Dogmoch. Bernd Herrmann is a German venture capitalist who will provide the
Company with business and financial advice and Urs Wettstein is a Swiss tax and
accounting consultant who will provide the Company with expertise on European
financial and tax matters.

The Company also has negotiated a distribution agreement with Spark 1st
Vision GmbH & Co. KG, a distributor based in Germany controlled by Manfred
Schmitt, that would give the distributor the exclusive right to distribute the
Company's products in Europe, the Middle East and Africa through 2003. The
distribution agreement obligates the distributor to purchase minimum quantities
of the Company's products during the period commencing with the closing of the
Sale and ending March 31, 2000 and the 12 months ending March 31, 2001 and to
make advance payments of $400,000 per month to the Company commencing with the
closing of the Sale through March 31, 2001, which may be offset against product
purchases. The consummation of the Sale is subject to the execution and delivery
of the distribution agreement. For a summary of the distribution agreement, see
"Distribution Agreement."

The Company believes that its ability to achieve greater market penetration
in Germany, Austria and other European countries will be enhanced as a result of
the Sale and the distribution arrangement. It also believes that with assistance
from Dogmoch, it will be able to develop a customer base in the Middle East.

The proposed Sale would provide the Company with an immediate cash infusion
of approximately $3,850,000, after transaction costs. The Company believes that
the net proceeds from the Sale together with cash flows from sales to the
distributor, will allow the Company to continue operations and fund on-going
research and developments activities through 2000, without additional financing.
Additional funds may be provided from the exercise of outstanding warrants,
including the Warrants issued to the Purchasers and the warrants issued in
connection with the Company's initial public offering which expire in November
2001 and will have an exercise price of $3.14 per share, after giving effect to
the Sale. The net proceeds from the Sale will be used primarily as working
capital to finance the Company's operations. However, to the extent operating
cash flows are available to satisfy the Company's operating expenses, a portion
of the net proceeds may be used to finance the development of the Company's
total knee arthroplasty application for the ROBODOC System. The net proceeds
from the exercise of the Warrants will be used as working capital.

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<PAGE> 10

DISCUSSIONS LEADING TO THE SALE

During 1998, the Company, three of its independent Directors and Manfred
Schmitt agreed to organize a Company to finance an orthopedic clinic in
Marbella, Spain. The clinic was founded by Dr. Andre Bauer, an orthopedic
surgeon at a clinic in Frankfurt, Germany that performs hip surgery with the
ROBODOC System. Dr. Bauer introduced Mr. Schmitt to the Company in connection
with Mr. Schmitt's investment in the Marbella clinic. Subsequently, Mr. Schmitt
introduced M.Y. Dogmoch to the Company and the Marbella clinic and Mr. Dogmoch
made an investment in the Marbella clinic. In November 1998, the Company entered
into a distribution agreement appointing Dogmoch the exclusive distributor of
the Company's products in the Middle East. Dogmoch, which has offices throughout
the Middle East, has initiated a marketing campaign for the Company's products
in the Middle East. However, as a result of the proposed equity investment in
the Company by its affiliate ILTAG, the distribution agreement with Dogmoch will
be terminated prior to the closing.

Following Mr. Dogmoch's investment in the Marbella clinic, Manfred Schmitt
solicited Mr. Dogmoch's interest in making an equity investment in the Company.
After several discussions with Mr. Dogmoch, Mr. Schmitt advised the Company in
March 1999 that Dogmoch, as a lead investor, was interested in acquiring,
together with other unidentified foreign investors, a 40% fully diluted equity
interest in the Company for $4 million. The proposed equity investment was
subject to the Company establishing a European identity, including European
management and a significant European presence, to signify its long-term
commitment to the European market.

At a meeting of the board of directors of Marbella in Spain in April 1999,
Dr. Trivedi discussed the terms of a proposed equity financing with Messrs.
Dogmoch and Schmitt. In negotiating the terms of the investment, Messrs. Dogmoch
and Schmitt sought a discount from the prevailing market price for the purchase
of shares of Common Stock and the exercise price of warrants that would give
investors 40% of the fully diluted equity of the Company. Messrs. Dogmoch and
Schmitt expressed their doubts as to the Company's ability to fully exploit the
potential market opportunities for the Company's semi-autonomous robotic
surgical products in Europe. In view of this concern and to ensure the
implementation of the business objectives of the Purchasers, they stated that
the investment was conditioned on obtaining control of the Board and granting
exclusive distribution rights to the Company's products in Europe to a European
distributor, preferably based in Germany. Dr. Trivedi related the investors'
demands to the Board. From the start of the negotiations, there was general
agreement on the dollar amount of the initial equity investment and percentage
fully diluted equity interest. The Board rejected the request for a market
discount in pricing the share component of the investment, but expressed
interest in a distribution arrangement with a European distributor that would
obligate the distributor to purchase minimum quantities of the Company's
products as a source of predictable revenues. Although the Board was reluctant
to give the investors control of the Board given the amount of the initial
investment, it conceded the issue of Board control since Dogmoch was unwilling
to make the investment without control of the Board. After further discussions
during May, the Company and Dogmoch negotiated a letter of intent for the
investment.

On May 25, 1999 the Company entered into a definitive letter of intent with
ILTAG, as lead investor, for an equity investment in the Company. The letter of
intent contemplated the sale to ILTAG, as lead investor, and other unidentified
foreign investors of a 40% fully-diluted equity interest in the Company. Messrs.
Herrmann and Wettstein subsequently were identified as investors during the
negotiation of the Purchase Agreement. They were introduced to the transaction
through Mr. Schmitt.

The investment would consist of shares of Common Stock and three-year
warrants to purchase additional shares of Common Stock. The number of shares of
Common Stock to be purchased was to be determined by dividing $4 million by the
average closing price of the Common Stock on The Nasdaq SmallCap Market during
the ten trading days preceding May 24, 1999. The purchase price per share as so
determined was $1.36874. The exercise price of the Warrants was to be 75% of the
per share purchase price for the Shares, or consequently, $1.02656 per share.
The investors also would have the right to designate three of the five members
of the Board. In addition, the letter of intent contemplated that the Company
would enter into a

8
<PAGE> 11

distribution agreement granting the distributor exclusive distribution rights to
the Company's products in Europe, the Middle East and Africa through 2003.

The high and low sale prices of the Common Stock on The Nasdaq SmallCap
Market were $1.125 and $1.031, respectively, on May 24, 1999, the day before the
Company issued a press release announcing that it had entered into a letter of
intent for the proposed Sale. The closing sale price of the Common Stock on May
24, 1999 was $1.125. The high and low sale prices of the Common Stock on the
Nasdaq SmallCap Market on June 30, 1999, the date the Board of Directors
approved the Sale and the form of Purchase Agreement, were $2.9688 and $2.75,
respectively, and the closing sale price of the Common Stock on that date was
$2.9688. On September 30, 1999, the date before the signing of the Purchase
Agreement, the high and low sale prices of the Common Stock were $2.6875 and
$2.50, respectively, and the closing sale price of the Common Stock on that date
was $2.6875.

The terms of the Sale, including the purchase price for the Shares and the
exercise price of the Warrants were negotiated between representatives of the
Purchasers, including Mr. Schmitt, and Drs. Kapoor and Trivedi on behalf of the
Company, taking into account the following factors:

- The Company's financial condition. In early May, the Company required
additional financing since expenses exceeded sales and collections from
accounts receivable.

- The availability of alternative sources of financing. Although the
Company was able to secure financing through the sale of the Series B
preferred stock in late March 1999, as a result of a decline in the
market price of the Common Stock from $2.00 at the end of March to $1.53
at the end of April 1999 following the resignation of Dr. Trivedi as the
Company's Chief Executive Officer and President, investors were waiting
for positive developments before providing financing to the Company.

- The size of the equity investment by the Purchasers. The amount of the
investment by the Purchasers was sufficiently large to warrant
consideration of a discount from the prevailing market price of the
Common Stock. The cost of securing the preferred stock financings was
approximately 20%, considering the 15% discount to the market price for
conversion into Common Stock and the warrants issued to the preferred
stock investors, plus the fee paid to the party who arranged the
financing.

- The range of market prices of the Common Stock. During the months
preceding the announcement of the letter of intent, the market price of
the Common Stock had declined from a high of $3.9375 on January 11, 1999
to a low of $1.00 on May 19, 1999.

The Board of Directors by unanimous vote (except for Mr. Hays who was
unable to attend) approved the terms of the letter of intent on May 24, 1999.

RECOMMENDATION OF THE BOARD OF DIRECTORS

On June 30, 1999, the Board by unanimous vote (except for Mr. Hays who was
unable to attend) approved the issue and sale of the Shares and Warrants to the
Purchasers and the form of Purchase Agreement. In evaluating the proposed Sale,
the Board considered the following material factors. The favorable factors
considered by the Board were as follows:

- The Sale would provide the Company with an immediate cash infusion of
$3,850,000 to continue operations and on-going research and development
activities.

- The distribution agreement would provide the Company with advances of
$400,000 per month through March 31, 2001 and obligate the distributor to
purchase minimum quantities of the ROBODOC System through March 31, 2001.
Furthermore, the distribution arrangement eliminates marketing, sales and
administrative expenses associated with the Company's European activities
and allows the Company to concentrate on manufacturing, research and
development and regulatory matters, including the preparation of a
pre-market approval application for submission to the U.S. Food and Drug
Administration to market the ROBODOC System in the United States.
Potential German customers with a preference for doing business with a
German company will be able to acquire the Company's products from a
German distributor.

9
<PAGE> 12

- The Company would obtain a European identity as a result of the
investments by Messrs. Herrmann and Wettstein and through their service
on the Board.

- Through the ILTAG investment and the representation on the Board of Mr.
Al-Khadi, the Company would establish a strategic alliance with Dogmoch
and gain access to the financial, marketing, technical and distribution
resources of Dogmoch and an entree into the Middle Eastern market.

- The potential future capital infusion available to the Company through
the exercise of the Warrants.

- Absence of viable alternatives. During the second quarter of 1999, the
Company pursued strategic relationships with three medical companies that
may have had an interest in the computer assisted surgery market,
including exclusive agreements for development projects in consideration
for financing those projects, and a merger with a small neurosurgical
company. The Company did not receive any substantive proposals or
definitive offers from these or any other sources, and the Board did not
believe that any of these sources was prepared to move quickly at that
time toward negotiation and consummation of an alternative transaction.
Without the equity infusion by the Purchasers, the Company would have to
consider financial alternatives available to it, including reducing
operations, deferring research and development projects and reducing
staffing. See "Consequences of Failure to Approve the Sale."

- Despite the change in control of the Board and the dilution resulting
from the Sale, existing Stockholders would be able to participate in any
future growth and profitability of the Company and the Company's efforts
to realize long-term value.

- Full disclosure of the Sale would be made to Stockholders, and the
consummation of the Sale would be subject to the approval of the
Stockholders.

The negative factors considered by the Board were as follows:

- The Purchasers would acquire control of the Board for the purchase of
approximately 25% of the outstanding shares of Common Stock.

- The Sale would cause substantial dilution in the percentage ownership of
existing Stockholders.

- The issuance of Warrants to purchase approximately 30% of the fully
diluted Common Stock at an exercise price of $1.03 per share could have a
depressive effect on the market price of the Common Stock. This would
exacerbate the potential depressive effect that already exists as a
result of the issuance of shares of Common Stock upon conversion of the
preferred stock at an approximate 15% discount to the market price of the
Common Stock without a minimum conversion price, and the issuance of up
to 2,274,066 shares of Common Stock upon exercise of warrants owned by
IBM at exercise prices ranging from $.01 to $.07.

- If the Purchasers exercised the Warrants, but none of the outstanding
shares of preferred stock were converted and none of the outstanding
stock options or warrants were exercised, the Purchasers could own over
50% of the outstanding Common Stock.

- If as a result of the exercise of the Warrants or other acquisition of
additional shares of Common Stock the Purchasers have the right to vote
more than 50% of the outstanding Common Stock, they would be able to
affect certain transactions, including mergers, consolidations and sales
of substantially all of the assets of the Company, without the consent of
the Company's other stockholders. The Purchasers also will be able to
affect a change in control of the Company or prevent such a change in
control.

- The sale of a substantial portion of the Purchaser's shares of Common
Stock (or the possibility that such a sale may occur) could adversely
affect the market price of the Common Stock.

- The possible adverse affect on the liquidity of the market for the Common
Stock resulting from the substantial ownership interest acquired by the
Purchasers, their ability to increase their ownership interest through
the exercise of the Warrants and their control of the Board.

10
<PAGE> 13

- Antidilution adjustments resulting from the sale of the Shares and
Warrants would reduce the maximum conversion price of the Series B
Preferred Stock from $3.063 to $1.02656 per share and the Series C
Preferred Stock from $2.484 to $1.02656 per share and the exercise price
of the publicly traded warrants from $4.60 to $3.14 per share.

The Board of Directors unanimously recommends that Stockholders approve the
Sale. The Board of Directors believes that the terms of the equity investment
represented by the Shares and Warrants is in the best interests of the Company
and the Stockholders and is fair to Stockholders. The Board believes that it was
necessary to give the Purchasers control of the Board as a condition of the
Sale, even though their initial investment represents approximately 25% of the
outstanding Common Stock, since it was a condition of their investment so they
can implement their business objectives. Messrs. Herrmann and Wettstein are more
experienced than the current Board in doing business in Europe, particularly
Germany, and their presence on the Board will assist the Company to establish a
European identity. Their business relationships with financial intermediaries
may be helpful to the Company in assisting prospective customers secure
financing for the purchase or lease of the ROBODOC System. Furthermore, the
Company expects to benefit from its relationship with Dogmoch, a diversified
company with investments in European companies, particularly German companies,
and offices in London, Paris, Hamburg (Germany), Prague (the Czech Republic) and
Marbella (Spain), and throughout the Middle East. The Company believes that
these relationships, together with the distribution agreement, will increase
sales opportunities for the Company's products in the European market and, with
the assistance of Dogmoch, facilitate the development of a client base for the
Company's products in the Middle East.

EJ Financial Investments V, L.P., a limited partnership of which John N.
Kapoor is the managing general partner, which owns 1,039,792 shares of Common
Stock, representing approximately 11.65% of the shares entitled to vote on the
Sale at the Special Meeting, has advised the Company that it intends to vote for
the Sale. Directors and officers owning an additional 39,000 shares of Common
Stock also have advised the Company that they intend to vote for the Sale.

CONSEQUENCES OF FAILURE TO APPROVE THE SALE

If the proposed sale to the Purchasers is not approved by Stockholders, or
the Company is unable to obtain alternative financing before the end of 1999, it
may have to reduce its operations, defer research and development projects and
reduce staffing. No alternative financings are under consideration at this time
and there can be no assurance that alternative financing will be available on
terms acceptable to the Company or its stockholders. Furthermore, if the Sale is
not approved by Stockholders and alternative financing is not available, in the
absence of disclosure of positive business developments concerning the Company,
the market price of the Common Stock could decline. If the bid price of the
Common Stock declines below $1.00 for 30 consecutive days, the Common Stock will
be subject to the delisting procedures of the Nasdaq SmallCap Market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, which begin on
page F-1 of this Proxy Statement.

NO DISSENTER'S APPRAISAL RIGHTS

Under Delaware law, stockholders who vote against the Sale are not entitled
to exercise dissenter's appraisal rights.

PURCHASE AGREEMENT

The following is brief summary of the Purchase Agreement that sets forth
all its material terms. It does not purport to be complete and is qualified in
its entirety by reference to the Purchase Agreement, a copy of which is attached
as Appendix I to this Proxy Statement.

The Purchase Agreement provides for the purchase by the Purchasers from the
Company of an aggregate of 2,922,396 shares of Common Stock and warrants to
purchase an additional number of shares of Common Stock that would give the
Purchasers 40% of the fully diluted Common Stock, for a purchase price of
$4,000,000. The exercise price of the Warrants is $1.02656 per share. The total
number of Warrants to be

11
<PAGE> 14

issued to the Purchasers will be determined at closing, assuming that all
outstanding convertible securities were converted and all outstanding warrants
and stock options were exercised as of that date, at the conversion or exercise
prices then in effect, after giving effect to antidilution adjustments resulting
from the Sale. If the Sale had occurred and the number of Warrants had been
determined on September 22, 1999, 10,158,000 Warrants would have been issued to
the Purchasers, based upon the assumptions set forth in the notes to the table
under the caption "Dilution". After giving effect to the exercise of those
Warrants, but without giving effect to the conversion of the outstanding
convertible securities or the exercise of the outstanding stock options and
other warrants, the Purchasers would have owned approximately 60% of the shares
of Common Stock that would have been outstanding as of that date. For
information concerning the methodology for calculating the number of Warrants to
be issued to the Purchasers, see "Dilution" and note 5 to the table presented
under that caption. The Purchase Agreement also provides, as a condition of
closing, that Messrs. Herrmann, Wettstein and Al-Khadi become members of a
reconstituted Board of Directors consisting of five members. The consummation of
the Sale is subject to approval of Stockholders, the consent of IBM, which owns
warrants to purchase 2,274,066 shares of Common Stock, and the holders of the
Company's Series B Convertible Preferred Stock. Other material conditions to
closing require that no proceedings are pending or threatened against the
Purchasers, or any of their affiliates, challenging or seeking damages or other
relief in connection with the transactions contemplated by the Purchase
Agreement, or that may have the effect of preventing, delaying, making illegal
or otherwise interfering with any such transactions, and that no material
adverse change has occurred in the business, condition, assets, liabilities,
financial performance, net income or prospects of the Company since the date of
the Purchase Agreement. The Purchasers have the right to terminate the Purchase
Agreement if the Sale does not close by November 30, 1999. The consummation of
the Sale also is subject to the execution and delivery of the distribution
agreement. The terms of the distribution agreement are summarized below.

WARRANTS

The following description of the Warrants sets forth all their material
terms. It does not purport to be complete and is qualified in its entirety by
reference to the Warrants, the form of which is annexed as Exhibit B to Appendix
I to this Proxy Statement.

The Warrants entitle the holders to purchase that number of shares of
Common Stock that if exercised, together with the Shares, would give them 40% of
the fully diluted Common Stock. Warrants may be exercised at any time or from
time to time for a period of three years from the date of the closing of the
issue and sale of the Shares and Warrants to the Purchasers. The exercise price
of the Warrants is $1.02656 per share. The exercise price and number and kind of
shares of Common Stock or other securities purchasable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events,
including the subdivision, combination, or reclassification of outstanding
shares of Common Stock. No fractional shares will be issued upon exercise;
however, the Company will pay a cash adjustment for any fractional shares based
on the exercise price of the Warrants. The Warrants do not confer upon the
holder any voting or preemptive rights, or any other rights of a stockholder of
the Company.

REGISTRATION RIGHTS

The following description of the registration rights granted to the
Purchasers sets forth all its material terms. It does not purport to be complete
and is qualified in its entirety by reference to the Registration and
Stockholder Rights Agreement, the form of which is annexed as Exhibit C to
Appendix I to this Proxy Statement.

Holders of not less than the lesser of (x) 25% of the Shares and Warrant
Shares (including for this purpose, holders of the Warrants), and (y) Shares and
Warrant Shares (together, the "Registrable Securities") having an anticipated
aggregate offering price (net of underwriting discounts and commissions) of at
least $2,000,000 will have the right to request the filing of registration
statements under the Securities Act for the sale of their Shares and/or Warrant
Shares. The number of registration statements that the Company must file on a
registration form other than Form S-3 is limited to two registrations. In
addition, holders of the Registrable Securities will have the right (with
certain limited exceptions) to include their

12
<PAGE> 15

Shares and/or Warrant Shares in any registration statement filed by the Company
on its own behalf or on behalf of other stockholders. The Company has agreed to
pay all expenses of registering the Registrable Securities, including all
registration and filing fees, printing expenses, reasonable fees and
disbursements (not to exceed $25,000) of a single special counsel to the holders
of the Registrable Securities, blue sky fees and expenses and the expenses of
any special audits incident to or required by such registration. The holders of
the Registrable Securities are responsible for the payment of underwriting
discounts and selling commissions.

DISTRIBUTION AGREEMENT

The Company has negotiated a distribution agreement with Spark 1st Vision
GmbH & Co. KG, a German company controlled by Manfred Schmitt, that would give
the distributor the exclusive right to distribute the Company's products in
Europe, the Middle East and Africa through 2003. The distribution agreement will
become effective at the closing of the Sale. The distributor would be obligated
to purchase a minimum of 24 ROBODOC Systems (less the number previously sold by
the Company) during the period commencing with the closing of the Sale and
ending March 31, 2000 and 32 ROBODOC Systems during the 12 months ending March
31, 2001. As of September 22, 1999, the Company had sales or orders for ten
ROBODOC Systems for 1999. The distributor would be required to pay the Company
advance payments of $400,000 per month commencing with the closing of the Sale
through March 31, 2001, offset by the purchase price of products purchased.
However, the distributor will have no minimum purchase or advance payment
obligation after March 31, 2001, even though it will retain exclusive rights to
distribute the Company's products in Europe, the Middle East and Africa through
2003. The distributor's only obligation to the Company after March 31, 2001 is
to pay for products that it purchases. The distributor's liability to the
Company under the distribution agreement is limited to $1 million, exclusive of
the minimum purchase obligation. The Company has the right to purchase the
assets of the distributor relating to the distribution of the Company's products
at their book value upon not less than 30 days prior written notice at any time
during the twelve months ending March 31, 2002. It is anticipated that the
Company's European sales and marketing personnel, as well as its European field
support staff, will join the distributor.

The distribution agreement will eliminate marketing, sales and
administrative expenses associated with the Company's European activities and
provide the Company with a more predictable source of revenues based upon the
minimum purchase commitments of the distributor. Although the Purchasers and Mr.
Schmitt have participated in business ventures, neither the distributor nor Mr.
Schmitt is affiliated with, or has any financial interest in, any of the
Purchasers. As a result of open market purchases of Common Stock and warrants
subsequent to the public announcement of the letter of intent concerning the
Sale, as of August 20, 1999, Mr. Schmitt beneficially owned slightly more than
five percent of the Common Stock. See "Security Ownership of Certain Beneficial
Owners and Management." The Company believes that the terms of the distribution
agreement are as fair to the Company as those that could have been obtained from
an unaffiliated party.

PREFERRED STOCK FINANCINGS

Since September 1998, the Company has received aggregate net proceeds of
approximately $9.5 million from the sale of five series of its convertible
preferred stock. Information concerning the purchasers and the amount invested
in each series is set forth below.

13
<PAGE> 16

AMOUNT OF INVESTMENT IN PREFERRED STOCK

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
(9/10/98) (3/26/99) (6/10/99) (6/30/99) (7/30/99)
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
The Shaar Fund Ltd.(1)................ $2,520,000 $500,000 $2,000,000
AMRO International, S.A.(2)........... 1,000,000 250,000 $ 800,000
Esquire Trade & Finance, Inc.(3)...... $ 375,000 375,000
Austinvest Anstalt Balzers(4)......... 375,000 375,000
The Endeavour Capital Fund S.A.(5).... 550,000
Britannica Associates Limited(6)...... 500,000
Gross Foundation Inc.(7).............. 150,000
Guarantee & Finance, Corp.(8)......... 150,000 100,000
Nesher Ltd.(9)........................ 100,000 100,000
Nidus Enterprises Co., Inc.(10)....... 50,000
---------- ---------- -------- ---------- ----------
TOTAL....................... $3,520,000 $1,000,000 $750,000 $2,000,000 $3,000,000
========== ========== ======== ========== ==========
</TABLE>

- ---------------
(1) Shaar Investment Advisory Services N.V. is the investment advisor for The
Shaar Fund Ltd. InterCaribbean Services Ltd., a subsidiary of Citco Fund
Services, Inc., is the sole director of the fund. Luc Hollman, managing
director of the advisor, has sole voting and dispositive power with respect
to shares owned by The Shaar Fund Ltd.

(2) Hans Ulrich Bachofen and Michael Klee share voting and dispositive power
with respect to shares owned by AMRO International, S.A.

(3) Rowland Wininger has sole voting and dispositive power with respect to
shares owned by Esquire Trade & Finance, Inc.

(4) Walter Grill has sole voting and dispositive power with respect to shares
owned by Austinvest Anstalt Balzers.

(5) Shmuli Margulies, director of The Endeavour Capital Fund S.A., has sole
voting and dispositive power with respect to shares owned by that fund.

(6) Jacques Tizabi and Ali Moussavi of Astor Capital, investment advisor for
Britannica Associates Limited, share voting and dispositive power with
respect to shares owned by Britannica Associates Limited.

(7) Chaim Gross, president of the Gross Foundation, Inc., has sole voting and
dispositive power with respect to shares owned by the Gross Foundation,
Inc.

(8) Marcus Katz has sole voting and dispositive power with respect to shares
owned by Guarantee & Finance, Corp.

(9) David Grin has sole voting and dispositive power with respect to shares
owned by Nesher Ltd.

(10) Martin Lang has sole voting and dispositive power with respect to shares
owned by Nidus Enterprises Co., Inc.

Each series of preferred stock has a stated value of $1,000 per share and
is convertible into Common Stock at a conversion price equal to 85% of the
lowest sale price of the Common Stock on the Nasdaq SmallCap Market over the
five trading days preceding the date of conversion. The number of shares of
Common Stock that may be acquired upon conversion is determined by dividing the
stated value of the number of shares of preferred stock to be converted by the
conversion price.

The maximum conversion price for each series of preferred stock is as
follows: Series A -- $4.875; Series B -- $3.063; Series C -- $2.484; Series
D -- $3.938 and Series E -- $5.063. Following the Sale, the maximum conversion
price of the Series B and Series C preferred stock will be reduced to $1.03, the
exercise price of the Warrants, due to antidilution adjustments resulting from
the Sale.

14
<PAGE> 17

There is no minimum conversion price for any series of preferred stock.
Consequently, there is no limit on the number of shares of Common Stock that may
be issued upon conversion, except that the terms of each series, set forth in
the certificate of designations for that series, limit:

- The number of shares of Common Stock that a holder of preferred stock may
acquire upon conversion, together with shares beneficially owned by the
holder and its affiliates, to five percent (5%) of the total outstanding
shares of Common Stock.

- The number of shares of Common Stock that the holders of a series of
preferred stock may acquire upon conversion to that number of shares
representing 19.9% of the shares outstanding on the date upon which that
series was issued (the "Nasdaq Limit"), until stockholders approve the
issuance upon conversion of shares in excess of the Nasdaq Limit. This
limitation is required by the rules of The Nasdaq Stock Market, Inc. At
the Company's Annual Meeting of Stockholders on April 27, 1999,
stockholders approved the issuance of shares of Common Stock in excess of
the Nasdaq Limit upon conversion of the Series A and Series B Preferred
Stock.

The number of shares of Common Stock issued upon conversion of each series
of preferred stock as of September 22, 1999 was as follows: Series
A -- 2,867,000; Series B -- 353,000; Series C -- none; Series D -- none; Series
E -- none. The average actual conversion price for shares of each series of
preferred stock converted into shares of Common Stock as of September 22, 1999
was as follows: Series A -- $1.23; Series B -- $2.30.

The number of shares of Common Stock that may be acquired upon conversion
of the outstanding shares of preferred stock as of September 22, 1999, based
upon assumed conversion prices of $3.00, $2.00 and $1.00, is as follows:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES OF COMMON STOCK
SHARES OF THAT MAY BE ACQUIRED UPON CONVERSION OF
PREFERRED STOCK PREFERRED STOCK AT ASSUMED CONVERSION PRICE OF
SERIES OF OUTSTANDING AT ------------------------------------------------
PREFERRED STOCK SEPTEMBER 22, 1999 $3.00 $2.00 $1.00
- --------------- ------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
A None -- -- --
B 190 63,333(1) 95,000(1) 190,000
C 750 250,000(2) 375,000(2) 750,000
D 2,000 666,667 1,000,000 2,000,000
E 3,000 1,000,000 1,500,000 3,000,000
----- --------- --------- ---------
Total 5,940 1,980,000 2,970,000 5,940,000
===== ========= ========= =========
</TABLE>

- ---------------

(1) The maximum conversion price of the Series B preferred stock is $3.063.
Following the Sale, the maximum conversion price will be reduced to
$1.02656, the exercise price of the Warrants, due to antidilution
adjustments resulting from the Sale.

(2) The maximum conversion price of the Series C preferred stock is $2.484. At
that conversion price, holders of the Series C preferred stock could acquire
301,932 shares of Common Stock. Following the Sale, the maximum conversion
price will be reduced to $1.02656, the exercise price of the Warrants, due
to antidilution adjustments resulting from the Sale.

Since there is no minimum conversion price for any series of preferred stock,
the number of shares of Common Stock that the holders of the preferred stock may
acquire upon conversion will increase as the market price of the Common Stock
declines below the assumed prices in the above table, and could result in
substantial dilution to the interests of existing stockholders. Furthermore, the
holders of the preferred stock may sell at market price the shares of Common
Stock they have acquired upon conversion at a 15% discount to prevailing market
prices concurrently with, or shortly after, conversion, realizing a profit equal
to the difference between the market price and the discounted conversion price.
The holders of the preferred stock also could engage in short sales of the
Common Stock (even though the purchase agreements with the preferred investors
prohibit them from engaging in short sales of the Common Stock prior to a
request for

15
<PAGE> 18

conversion), which could contribute to a decline in the market price of the
Common Stock and give them the opportunity to profit from that decrease by
covering their short position with shares acquired upon conversion at a 15%
discount to the prevailing market price. The conversion of the preferred stock
and subsequent sale of the Common Stock acquired upon conversion during periods
when the market price of the Common Stock declines, or the possibility of such
conversions and sales, could exacerbate the decline or impede increases in the
market price of the Common Stock.

The market price of the Common Stock on the date of issue of each series of
preferred stock was as follows: Series A -- $3.563; Series B -- $1.969; Series
C -- $1.813; Series D -- $2.969; Series E -- $3.50.

The conversion price of each series of preferred stock on the date of issue
would have been as follows: Series A -- $2.763; Series B -- $1.488; Series
C -- $1.408; Series D -- $2.231; Series E -- $2.869. The number of shares of
Common Stock into which the preferred stock would have been convertible on the
date of issue would have been as follows: Series A -- 1,274,000; Series
B -- 672,000; Series C -- 533,000; Series D -- 896,000; Series E -- 1,046,000.

The net proceeds from the Series A Preferred Stock financing were used to
fund the operations of the Company during the fourth quarter of 1998 and first
quarter of 1999. In the first half of 1999, the Company received net proceeds
from the Series B, C, and D Preferred Stock financings of approximately
$3,400,000. Of this amount, approximately $700,000 was used to pay bank loans,
approximately $600,000, together with approximately $1,000,000 of the remaining
net proceeds from the Series A Preferred Stock financing carried over into 1999,
and was the Net Cash Used in Operating Activities in the first half of 1999. The
$1,500,000 Net Cash Used in Operating Activities in the first half of 1999
represents approximately $4,000,000 in cash operating losses, offset by
$2,500,000 positive cash change in operating assets and liabilities. See the
Company's consolidated financial statements commencing on page F-1 of this proxy
statement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
June 30, 1999, (ii) the pro forma capitalization as of that date, after giving
effect to the issuance and sale of 3,000 shares of Series E Convertible
Preferred Stock, and an aggregate of 4,284 shares of Common Stock in connection
with that convertible preferred stock financing, the conversion of 100 shares of
Series A Convertible Preferred Stock and 690 shares of Series B Convertible
Preferred Stock into an aggregate of 340,266 shares of Common Stock and the
exercise of options to purchase an aggregate of 7,008 shares of Common Stock,
all of which occurred during the period from July 1 through September 22, 1999,
and (iii) the pro forma capitalization, as further adjusted for the proposed
issuance and sale of the Shares and Warrants.

<TABLE>
<CAPTION>
PRO FORMA,
AS
ACTUAL PRO FORMA(2) ADJUSTED(3)
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized.
Series A, 3,520 shares authorized; 100 issued
and outstanding at June 30, 1999, none pro
forma and pro forma, as adjusted............ $ 1 $ -- $ --
Series B, 1,000 shares authorized; 880 issued
and outstanding at June 30, 1999, 190 pro
forma and pro forma, as adjusted............ 9 2 2
Series C, 750 shares authorized; 750 issued and
outstanding at June 30, 1999, pro forma and
pro forma, as adjusted...................... 7 7 7
Series D, 2,000 shares authorized; 2,000 issued
and outstanding at June 30, 1999, pro forma
and pro forma, as adjusted.................. 20 20 20
</TABLE>

16
<PAGE> 19

<TABLE>
<CAPTION>
PRO FORMA,
AS
ACTUAL PRO FORMA(2) ADJUSTED(3)
------------ ------------ ------------
<S> <C> <C> <C>
Series E, 3,000 shares authorized; none issued
and outstanding at June 30, 1999; 3,000
issued and outstanding pro forma and pro
forma, as adjusted(1)....................... -- 30 30
Common stock, $.01 par value, 50,000,000 shares
authorized; 8,576,955 shares issued and
outstanding at June 30, 1999; 8,928,513 issued
and outstanding pro forma and 11,850,909 issued
and outstanding pro forma, as adjusted........... 85,769 89,285 118,509
Additional paid-in capital....................... 46,458,881 49,805,246 53,626,022
Deferred stock compensation...................... (55,068) (55,068) (55,068)
Preferred stock discount......................... (404,334) (933,746) (933,746)
Accumulated other comprehensive loss............. (487,499) (487,499) (487,499)
Accumulated deficit.............................. (39,467,325) (39,467,325) (39,467,325)
------------ ------------ ------------
$ 6,130,461 $ 8,950,952 $ 12,800,952
============ ============ ============
</TABLE>

- ---------------
(1) Shares of Series E Convertible Preferred Stock were sold on July 30, 1999
resulting in net proceeds of $2,820,000.

(2) Includes net proceeds of $2,820,000 from the sale of convertible preferred
stock, plus $491 from the exercise of stock options.

(3) Gives effect to the issuance and sale of 2,922,396 shares of Common Stock
and the Warrants under the Purchase Agreement, resulting in net proceeds of
$3,850,000.

EFFECT ON BOOK VALUE PER SHARE

Set forth below is information concerning the Company's net tangible book
value, net tangible book value per share of Common Stock, net tangible book
value per share of fully-diluted Common Stock and shares of Common Stock and
fully-diluted Common Stock outstanding (i) at June 30, 1999, (ii) pro forma at
June 30, 1999, after giving effect to equity transactions consummated by the
Company through September 22, 1999, (iii) pro forma as adjusted for the proposed
sale of 2,922,396 shares of Common Stock and the Warrants for net proceeds of
$3,850,000 and (iv) pro forma as adjusted for the exercise of the Warrants.

<TABLE>
<CAPTION>
PRO FORMA
ADJUSTED FOR PRO FORMA
SALE OF ADJUSTED FOR
SHARES AND EXERCISE OF
ACTUAL PRO FORMA WARRANTS WARRANTS
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net tangible book value of Common
Stock(1)............................. $3,535,003 $6,355,494 $10,205,494 $20,633,240
Net tangible book value per share of
Common Stock......................... $ 0.41 $ 0.71 $ 0.86 $ 0.94
Net tangible book value per share of
fully-diluted Common Stock........... $ 0.21 $ 0.35 $ 0.31 $ 0.63
Shares of Common Stock
outstanding(2)(4).................... 8,576,955 8,928,513 11,850,909 22,008,909
Fully-diluted Common Stock
outstanding(2),(3)................... 17,109,571 18,220,608 32,700,990 32,700,990
</TABLE>

- ---------------
(1) Excludes intangible assets aggregating $2,595,458 at June 30, 1999.

(2) Pro forma, Pro forma Adjusted for Sale of Shares and Warrants and Pro forma
Adjusted for Exercise of Warrants include assumed conversion prices per
share to calculate the number of shares of Common

17
<PAGE> 20

Stock issuable to Convertible Preferred Stockholders upon future conversion
of their shares. The number of shares that may be acquired upon conversion
of the convertible preferred stock has been computed using the practical
conversion price for the remainder of Series B and Series C ($1.03), after
giving effect to antidilution adjustments resulting from the proposed Sale,
and an assumed conversion price of $3.00 per share for Series D and Series
E.

(3) Fully-diluted Common Stock assumes the exercise of all outstanding warrants
and conversion of Convertible Preferred Stock. Where applicable,
anti-dilution provisions associated with applicable warrants have been
considered in calculating outstanding warrants.

(4) Assumes that Warrants to purchase 10,158,000 shares of Common Stock are
issued. This calculation is based upon the assumed conversion prices for the
preferred stock set forth in note 2 above, including an assumed conversion
price of $3.00 per share for Series D and Series E. The actual number of
Warrants to be issued to Purchasers at closing is that number of Warrants
which, together with the Shares, would give the Purchasers 40% of the fully
diluted Common Stock. The total number of Warrants to be issued to the
Purchasers will be determined at closing, assuming that all outstanding
convertible securities were converted and all outstanding warrants and stock
options were exercised as of that date, at the conversion or exercise price
then in effect, after giving effect to antidilution adjustments resulting
from the Sale. If at the time the number of Warrants is determined the
conversion price for the Series D and Series E preferred stock is less than
the assumed conversion price of $3.00 used in the table, the number of
Warrants to be issued to the Purchasers will increase. If at the time the
number of Warrants is determined the conversion price for the Series D and
Series E preferred stock is:

- $2.00 per share, instead of $3.00 per share, Purchasers would receive a
total of 10,827,000 Warrants, since holders of the Series D and Series E
preferred stock could acquire an additional 833,333 shares of Common
Stock and, as a result of further antidilution adjustments, holders of
certain outstanding warrants could acquire an additional 169,201 shares
of Common Stock.

- $1.00 per share, instead of $3.00 per share, Purchasers would receive a
total of 12,844,000 Warrants, since holders of the Series D and Series E
preferred stock could acquire an additional 2,524,316 shares of Common
Stock and, as a result of further antidilution adjustments, holders of
certain outstanding warrants could acquire an additional 502,196 shares
of Common Stock.

For information concerning the number of shares of Common Stock that the
holders of shares of Series D and Series E preferred stock may acquire upon
conversion at assumed conversion prices of $3.00, $2.00 and $1.00, see
"Proposal to Approve Sale of Shares and Warrants -- Preferred Stock
Financings."

DILUTION

Completion of the Sale will substantially reduce the current stockholders'
percentage ownership in the Company and will allow the Purchasers to designate
three of the five members of the Board of Directors. In addition, if the
Purchasers increase their voting percentage above 50% of the outstanding
securities of the Company, they will be able to effect certain transactions,
including mergers, consolidations and sales of substantially all of the assets
of the Company, without the consent of any of the Company's minority
stockholders. Following consummation of the Sale, the Purchasers also will be
able to effect a change in control of the Company or to prevent such a change in
control. Furthermore, if the Purchasers were to sell a substantial portion of
their Common Stock, whether pursuant to Rule 144 under the Securities Act,
registration under the Securities Act or otherwise, such sale could adversely
affect the market price of the Common Stock.

18
<PAGE> 21

The table below indicates certain dilutive effects of the Sale.

<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
---------- ----------
<S> <C> <C>
Shares outstanding at September 22, 1999.................... 8,928,513 27.3%
Shares issuable on conversion of convertible preferred
stock(1).................................................. 2,582,350 7.9%
Shares issuable upon exercise of warrants owned by IBM(2)... 2,274,066 7.0%
Shares issuable upon exercise of other warrants(3).......... 4,511,095 13.8%
Shares issuable upon exercise of stock options(4)........... 1,324,570 4.1%
Shares and Warrants to be issued to the Purchasers
Shares.................................................... 2,922,396 8.9%
Warrants(5)............................................... 10,158,000 31.1%
---------- -----
Subtotal............................................... 13,080,396 40.0%
---------- -----
Total....................................................... 32,700,990 100.0%
========== =====
</TABLE>

- ---------------
(1) The number of shares that may be acquired upon conversion of the convertible
preferred stock has been computed using the practical conversion price for
the remainder of Series B and Series C ($1.03), after giving effect to
antidilution adjustments resulting from the proposed Sale, and an assumed
conversion price of $3.00 per share for Series D and Series E.

(2) The exercise prices of these warrants, which range from $0.01 to $0.07 per
share, are not subject to adjustment as a result of the Sale.

(3) These warrants are primarily underwriter and other financing related
warrants. The exercise price and number of shares purchased upon exercise of
these warrants have been adjusted for the sale of the Shares and Warrants in
accordance with the antidilution provisions of these warrants. These
provisions require adjustments if shares of Common Stock or rights to
acquire Common Stock are issued at less than both the exercise price of
these warrants and the market price of the Common Stock on the date the
shares or rights are issued. As adjusted for the Sale, the exercise prices
of these warrants range from $1.60 to $4.05 per share. After the Sale, all
but 153,387 of the warrants will have exercise prices in excess of $3.00 per
share. As adjusted for the Sale, the Company's publicly-traded warrants to
purchase 3,647,173 shares will have an exercise price of $3.14 per share.

(4) These are options for shares issuable under stock option plans. The exercise
prices of these options, range from $0.07 to $8.62 per share, with the
exercise price of 640,611 of these options in excess of $3.00 per share. The
exercise prices of these options are not subject to adjustment as a result
of the Sale.

(5) This calculation is based upon the assumed conversion prices for the
preferred stock set forth in note 1 above, including an assumed conversion
price of $3.00 per share for Series D and Series E. Under the terms of the
Purchase Agreement, the Purchasers are to receive Shares and Warrants equal
to approximately 40% of the fully-diluted shares outstanding. The total
number of Warrants to be issued to the Purchasers will be determined at
closing, assuming that all outstanding convertible securities were converted
and all outstanding warrants and stock options were exercised as of that
date, at the conversion or exercise price then in effect, after giving
effect to antidilution adjustments resulting from the Sale. If at the time
the number of Warrants is determined the conversion price for the Series D
and Series E preferred stock is less than the assumed conversion price of
$3.00 used in the table, the number of Warrants to be issued to the
Purchasers will increase. If at the time the number of Warrants is
determined the conversion price for the Series D and Series E preferred
stock is:

- $2.00 per share, instead of $3.00 per share, Purchasers would receive
a total of 10,827,000 Warrants, since holders of the Series D and
Series E preferred stock could acquire an additional 833,333 shares of
Common Stock and, as a result of further antidilution adjustments,
holders of certain outstanding warrants could acquire an additional
169,201 shares of Common Stock.

- $1.00 per share, instead of $3.00 per share, Purchasers would receive
a total of 12,844,000 Warrants, since holders of the Series D and
Series E preferred stock could acquire an additional

19
<PAGE> 22

2,524,316 shares of Common Stock and, as a result of further
antidilution adjustments, holders of certain outstanding warrants
could acquire an additional 502,196 shares of Common Stock.

TAX CONSEQUENCES TO THE COMPANY

The Company has at December 31, 1998 a net operating loss carryover of
approximately $16,200,000 for federal income tax purposes which expires between
2005 and 2013, a net operating loss carryforward of approximately $5,700,000 for
state income tax purposes which expires through 2003, and a net operating loss
carryforward of approximately $1,500,000 for foreign income tax purposes. The
Company has at December 31, 1998 research and development credit carryovers of
approximately $294,000 and $448,000 for federal and state income tax purposes,
respectively.

As a result of stock sales a change of ownership (as defined in Section 382
of the Internal Revenue Code of 1986, as amended) has occurred. As a result of
this change, the Company's federal and state net operating loss carryforwards
generated through December 21, 1995 (approximately $14,300,000 and $2,600,000,
respectively) will be subject to a total annual limitation in the amount of
approximately $400,000.

As a result of the Sale, in combination with prior transfers of stock of
the Company, an additional change of ownership may occur which would further
limit the net operating loss carryforwards available for future utilization.

20
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis relates to the operations of
Integrated Surgical Systems, Inc. and does not include the operations of IMMI,
except for the results of its operations subsequent to its acquisition by the
Company on September 5, 1997, and should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1998 and
the unaudited financial statements for the six months ended June 30, 1999,
including the notes thereto, commencing on page F-1 of this Proxy Statement.

RESULTS OF OPERATIONS

Year Ended December 31, 1998 As Compared to Year Ended December 31, 1997

Net Sales. Net sales for the year ended December 31, 1998 increased by
approximately $1,212,000 or 25% to $6,146,000 compared to $4,934,000 for year
ended December 31, 1997. This increase in net sales is due to the increase in
the sale of ROBODOC Systems. During 1998, nine systems were sold and two were
leased compared to seven sold and one leased during 1997.

Cost of Sales. Cost of sales for 1998 was $3,413,000 or 56% of net sales
as compared to $2,183,000 or 44% of net sales for the prior year. The 12%
increase in costs as a percent of sales is primarily due to the Company granting
discounts to repeat customers and several customers who placed orders for
multiple systems. This accounted for 7% of the increase in cost as a percent of
sales. The remaining 5% increase is attributable to a number of factors, no
single item being significant. Some of these include freight, product sales mix,
obsolescence and warranty reserves. The costs of raw materials and direct labor
were only slightly higher in 1998 than 1997.

Selling, General and Administrative. Selling, general and administrative
expenses for 1998 increased by $2,515,000 to $6,216,000 compared to $3,701,000
for 1997. The staffing of the Company's European sales organization with
additional sales, administrative and training personnel caused 42% of this
increase. The acquisition of IMMI in September 1997, making 1998 the first full
year that the Company included expenses associated with IMMI, caused 29% of the
increase. Staffing to initiate sales and marketing of the Orthodoc and NeuroMate
in the United States and Japan caused selling, general and administrative
expense to increase 10%. The remaining 19% of the increase resulted from
increases in general and administrative expenses related to growth, and the
Company's move to larger facilities.

Research and Development. Expenses for research and development during
1998 increased by 115% to $6,603,000 from $3,064,000 during 1997. During 1998,
the Company elected to aggressively pursue the development of its DigiMatch
Single Surgery System proprietary pinless registration technology. This project
accounted for approximately 17% of the increased research and development
spending. This technology eliminates the need for a preliminary surgical
procedure to place pins in the patient's femur prior to the implant surgery and
at the time a CT image is taken of the patient's bone. Historically this was
done to effect an accurate correlation of the patient's CT image to the
patient's femur in the THA surgical procedure.

In addition, the Company determined that it was competitively appropriate
to expend more resources on the development implant base, thus providing its
customers with the largest offering of implants from which to select. Increased
implant development spending accounted for approximately 11% of the increase in
research and development spending.

During 1998, the Company amortized $839,000 of identified intangible assets
acquired in the IMMI transaction in 1997. This charge was $559,000 higher than
the amount recorded in 1997 and accounted for 16% of the increase in research
and development spending. Also, 1998 was the first full year in which research
and development costs were recorded for IMMI and this accounted for 21% of the
increase in research and development spending.

The remaining 35% increase in research and development spending is related
to the implementation of the quality control system to meet ISO 9000 standards
and various new product development efforts.

21
<PAGE> 24

At the time of the acquisition, the value of the in-process research and
development was comprised of ongoing projects relating to the design and
development of expanded capabilities to use the NeuroMate(TM) in other related
neurosurgical applications. The acquired in-process research and development was
valued at $332,000 by management of the Company with the assistance of an
independent appraiser. The value of the purchased in-process technology was
determined by estimating the projected discounted net cash flows related to such
products. The in-process technology projects primarily included the Optimate,
TMS Therapy and the Endoscope. The Optimate, which is based on the Neuromate, is
an in-process image-guided robot to be used in spinal surgeries. The robotic
device will be based on the Neuromate with the addition of new software,
surgical tools, and fixating devices specific to spinal surgery applications.
The TMS Therapy, another in-process device based on the NeuroMate, is a robot
used to position magnetic coils during the treatment of electrical brain
malperformances. More specifically, the robot will be used to treat patients
suffering from mood swings, headaches, epilepsy, and the early stages of
Parkinson's disease. The Endoscope, an in-process device based on the Neuromate,
is a robot used to position endoscopic devices during surgery. The robotic
device is based on the Neuromate with the addition of new software, fixtures,
and holding devices. This valuation was predicated on the determination that the
developmental projects at the time of acquisition were not technologically
feasible and had no future alternative use.

At the time of acquisition, the expected costs to complete the acquired
in-process technology was $2,750,000. The material risks associated with the
efforts required to develop the purchased in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its design
specifications, including functions, features and technical performance
requirements. The Company anticipated that the Opimate and TMS Therapy under
development using the acquired in-process technology would be released in 1999
and the Endoscope in 2000. The Optimate, TMS Therapy and Endoscope accounted for
36% and 3% of the anticipated revenue for IMMI in 1999 and 2000, respectively.
As of June 30, 1999, no revenues have been generated from the three projects as
the products have not yet been released in 1999. However, in connection with the
development of these products, anticipated expenditures for the associated
research and development have been lower than originally assumed.

The TMS Therapy and Endoscope projects have been deferred due to the
absence of development funding. The Optimate project has completed the first
development phase. In this phase the project demonstrated technical viability
and clinical interest. In connection with the second phase of the project, an
application has been submitted to the French government for grant funding.
Consideration for such grant funding is temporarily on hold pending the outcome
of the presently considered investor financing transaction.

If these projects fail to develop commercial products, based on the
acquired in-process technology, the sales and profitability of NeuroMate(TM)
related applications may be adversely affected in future periods.

Stock Compensation. During 1998, amounts expensed for stock compensation
decreased to $131,000 from $155,000 during 1997. Amounts decreased since there
were fewer shares of options that vested in 1998. Deferred compensation for the
non-vested portion is being amortized into expense over the vesting period of
the stock options, which generally range from three to four years. As of the end
of 1998, there remains an additional $86,000 subject to being expensed in future
years.

Interest Income and Expense. For 1998, interest income amounted to
$241,000 compared to $215,000 in 1997. The difference is the result of generally
higher average cash balances during the year. During the 1998 year, the Company
also made borrowings against a revolving line of credit, and had other interest
expenses which, in total, generated interest expense in the amount of $124,000.

Foreign Currency Gain (Loss). Gains incurred in connection with foreign
currency transactions amounted to $129,158 in 1998 as a result of exchange rates
that weakened the U.S. Dollar relative to European currencies. In 1997,
transaction losses were approximately $147,000.

Other Income and Expense. Other expense for 1998 amounted to $270,000
compared to other income of $32,000 for the same period in 1997. In June 1998
the Company and six other investors agreed to organize a Dutch company to be
known as Marbella High Care B.V. for the purpose of capitalizing a Spanish
company

22
<PAGE> 25

to be known as Marbella High Care S/A ("MBHC") to develop a surgical and
rehabilitation center in Marbella, Spain. As of December 31, 1998, the Company
owned approximately 23% of the outstanding shares of MBHC and accounts for its
investment in MBHC under the equity method. The Company's investment in MBHC,
including loans, was approximately $563,000 in 1998. For the year ended December
31, 1998, the Company recorded $317,000 of expense comprised of $142,000 of its
equity portion of MBHC's net loss and a valuation allowance of $175,000.

Preferred Stock Accretion. During 1998, the Company entered into a private
placement agreement whereby the Company's Series A Preferred Stock was placed
with two private investors. The terms of the preferred stock include a
Beneficial Conversion Feature. The value assigned to the Beneficial Conversion
Feature, as determined using the quoted market price of the Company's common
stock on the date the Series A Preferred Stock was sold, amounted to $616,000,
which represents a discount to the value of the Series A Preferred Stock (the
"Discount"). The Discount is being accreted using the straight-line method
through March 9, 1999. Approximately $376,000 of the Discount was accreted in
1998.

Net Loss. The net loss applicable to common stockholders for 1998
increased by 138% from $4,478,000 in 1997 to $10,644,000 in 1998. The increase
in the loss is due primarily to lower gross margins, higher operating expenses,
the write-off of the Company's pro-rata share of losses on its investment in
MBHC, and amounts attributable to the preferred stock accretion in connection
with the private placement in September of 1998.

Six Months Ended June 30, 1999 As Compared to Six Months Ended June 30, 1998

Net Sales. Net sales for the six months ended June 30, 1999 (the "1999
Interim Period") were approximately $2,916,000, largely attributable to the sale
of three ROBODOC systems recorded in the first quarter, as compared to six
months ended June 30, 1998 (the "1998 Interim Period") of approximately
$3,411,000, which included the sale of five ROBODOC systems. In addition to the
sale of three systems, a fourth system was sold to a customer subject to a lease
agreement, and a fifth system was installed at another site, but not recognized
as a sale since all Company obligations had not yet been concluded.

Results for the first six months of 1999 were lower than anticipated given
the strong order activity experienced in the fourth quarter of 1998 after the
introduction of the Company's proprietary pinless registration technology.
Moreover, early in the second quarter, the Company's competitor fostered
uncertainty among potential customers in response to the resignation of the
Chief Executive Officer on April 28, 1999. As a result, new orders and sales in
the second quarter were below expectation.

Cost of Sales. Cost of sales for the 1999 Interim Period was approximately
$1,552,000 (53% of net sales) as compared to the 1998 Interim Period of
approximately $1,601,000 (47% of net sales). The higher cost as a percent of
sales in the 1999 Interim Period is a result of lower unit selling prices
attributable to two customers purchasing more than one ROBODOC system.

Selling, General and Administrative. Selling, general and administrative
expenses for the 1999 Interim Period (approximately $3,072,000) decreased by
approximately $88,000, or 3% as compared to the 1998 Interim Period
(approximately $3,160,000). European marketing costs increased approximately
$100,000 with the addition of four employees in sales and increased
participation in medical conferences and visiting potential customer sites.

Research and Development. Research and development expenses for the 1999
Interim Period (approximately $2,826,000) decreased by approximately $529,000,
or approximately 16%, as compared to the 1998 Interim Period (approximately
$3,355,000). Approximately 50% of the decrease in research and development
expense is attributable to efforts in 1998 to implement the quality system to
meet ISO 9000 standards not required in the 1999 Interim Period. Management to
reduce spending to desired cash flow initiated the remaining decrease. Lower
priority/return projects were delayed.

23
<PAGE> 26

Stock Compensation. Stock compensation expense during the 1999 Interim
Period was $31,000, $5,000 lower than the 1998 Interim Period ($36,000). The
Company charged to operations in 1996 deferred stock compensation relating to
stock options granted during 1996 with exercise prices less than the estimated
fair value of the Company's Common Stock, as determined by an independent
valuation analysis, on the date of grant. Deferred compensation for the
non-vested portion is being amortized into expense over the vesting period of
the stock options, which generally range from three to five years. Stock
compensation expense in the 1999 and 1998 Interim Periods represents the
additional vesting which occurred in the first six months of 1999 and 1998.

Interest Income. Interest income for the 1999 Interim Period
(approximately $140,000) decreased by approximately $26,000, or 16%, as compared
to the 1998 Interim Period (approximately $166,000), primarily due to lower
average cash balances during the 1999 Interim Period.

Other Income and Expense. Other expense for the 1999 Interim Period was
approximately $281,000 compared to income of approximately $70,000 in the 1998
Interim Period. The increase in expense ($351,000) is primarily attributable to
an exchange rate loss associated with a weaker Dutch Guilder against the U.S.
dollar in the 1999 Interim Period. The Company does not currently hedge foreign
currency transactions against the U.S. dollar to minimize exchange rate gains or
losses. This activity is being considered.

Net Loss. The net loss for the 1999 Interim Period (approximately
$4,736,000) increased by approximately $205,000, or approximately 5%, as
compared to the net loss for the 1998 Interim Period (approximately $4,531,000).

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's expenses have exceeded net sales and the
accumulated net loss at June 30, 1999 was $39.5 million. Operations have been
funded primarily from the issuance of debt and the sale of equity securities
aggregating approximately $36.6 million. In addition, the Company was the
beneficiary of proceeds from a $3 million key-man life insurance policy in 1993
upon the death of one of its executives.

The Company used cash from operating activities of approximately $4,438,000
and $8,673,000 in 1997 and 1998, respectively. Net cash used for operations in
each of these periods resulted primarily from the net loss. Cash used for
operations in 1997 reflected an increase in accounts receivable and inventories.
Cash used in operations in 1998 was approximately $8,673,000 primarily from the
net loss of approximately $10,268,000 reduced by approximately $2,126,000 for
non-cash items. Non-cash items include primarily, depreciation of $580,000,
amortization of intangible assets of $839,000 and an expense recording of
$317,000 relating to the Company's equity percentage of net losses incurred by
Marbella High Care. Operating assets and liabilities increased cash usage
approximately $531,000 primarily due to an increase in accounts receivable of
$479,000, an increase in inventory of $1,110,000 and an increase in customer
deposits of $758,000. The Company is eligible to receive reimbursement for 49%
of its qualified expenditures under the terms of a grant from the National
Institute for Standards & Technology. The Company received reimbursements from
this program of approximately $317,000 and $514,000 for 1997 and 1998,
respectively.

The Company used cash in investing activities of approximately $924,000 and
$4,259,000 in 1997 and 1998, respectively. The Company's investing activities
have consisted primarily of expenditures for property and equipment that totaled
approximately $377,000 and $1,746,000 in 1997 and 1998, respectively,
investments in sales-type leases of approximately $453,000 in 1997 and payments
of $119,000 in connection with the purchase of IMMI in 1997. In 1998, the
Company also invested $2,024,000 in marketable securities and $563,000 in the
MBHC. There are presently no significant equipment or plant expenditures planned
that would adversely impact liquidity.

Cash provided by financing activities from inception through 1998 is
comprised principally of the net cash proceeds from the sale of a convertible
note in the principal amount of $3,000,000, the sale of convertible preferred
stock and warrants for $14,676,000, the sale of Common Stock and warrants for
approximately $6,137,000 resulting from the Company's initial public offering in
November 1996, approximately $8,440,000

24
<PAGE> 27

from the Company's European offering of Common Stock in November 1997, and the
sale of convertible preferred stock and warrants for $3,300,400 in September
1998. As part of the recapitalization of the Company in December 1995, the
entire $3,000,000 principal amount of the convertible note, together with
accrued interest thereon of approximately $1,224,000, was converted into a
warrant to purchase Common Stock. A total of $11,734,000 and $2,942,000 of
preferred stock and warrants to purchase preferred stock was converted into
Common Stock and warrants to purchase Common Stock in December 1995 and November
1996, respectively. In 1998, the Company also established a $1.5 million
revolving credit facility with a bank. During 1999, the Company repaid the
amount due under this line of credit and terminated the agreement. The Company
has an additional revolving line of credit with Societe Generale Bank in Lyon,
France, that requires quarterly payment of approximately $26,000 per quarter.
The revolving line of credit was established in July 1996 for five years with
interest accruing at 7.15% per annum. The amount available decreases quarterly
by 5% of the original amount beginning October 1996. The loan balance as of June
30, 1999 was approximately $160,000.

The Company received an interest free loan with a balance of $143,200 at
December 31, 1998 from the French agency Agence Nationale de Valorisation de la
Recherches, which is a French national agency established to aid research and
development projects. In the case of failure of the project, the grant
organization may decide to forgive all or part of the repayments. If the Company
sells either a license for the related technology, the prototype developed, or
articles manufactured specifically for the research project, 50% of the revenue
must be paid to the grant organization in the subsequent year, up to the balance
of the loan amount outstanding. Accordingly to the contract, any such payments
would be considered to be an advance repayment of the loan. The Company has not
made any sales of this type through December 31, 1998.

The Company's use of cash in operating activities of approximately
$1,498,000 in the 1999 Interim Period decreased by approximately $4,124,000 as
compared to cash usage due to operating activities in the 1998 Interim Period of
approximately $5,622,000. The reduced operating cash usage in the 1999 Interim
Period was primarily a result of an increase in accounts payable of
approximately $1,299,000, an increase in customer deposits of approximately
$649,000, a reduction in accounts receivable of approximately $993,000 and an
increase in inventories of approximately $885,000.

The Company's proceeds from investing activities of approximately
$1,594,000 in the 1999 Interim Period increased by approximately $2,429,000 as
compared to 1998 Interim Period of approximately $835,000. The investment cash
proceeds in the 1999 Interim Period was primarily due to liquidating short term
investments to retire loans. There are presently no significant equipment or
plant expenditures planned that would adversely impact liquidity.

Cash provided by financing activities in the 1999 Interim Period was
approximately $2,677,000 and increased by approximately $2,704,000 as compared
to the financing activities during the 1998 Interim Period. In 1999 the Company
received aggregate net proceeds of approximately $3,400,000 from the sale of
convertible preferred stock and warrants (see Note C to the unaudited
consolidated financial statements).

The Company's business is not inherently seasonal. However, because the
sales price of the Company's products are significant, the timing of customer
orders can cause revenue fluctuations from period to period which may give the
appearance of seasonality.

The Company's cash position since June 30, 1999 has been enhanced with net
proceeds of approximately $2.8 million from the sale in July 1999 of Series E
Convertible Preferred Stock and warrants. The Company

25
<PAGE> 28

believes, based upon its current business plan and existing cash equivalents,
that it has adequate capital to satisfy its immediate working capital needs.
However, there is no assurance that revenues from operations will be adequate in
the short term to fully execute the Company's business plan, or that debt or
future financing, if needed, will be available on terms favorable to the
Company.

YEAR 2000 COMPLIANCE

The Company uses a wide variety of commercially available computers and
computer software in the normal course of business that are generally Y2K
compliant. The Company has potential Y2K exposure in two areas. First, the
Company's accounting and manufacturing system is not currently Y2K compliant and
could cause some disruption of business, if not upgraded by the end of 1999.
Secondly, the Company's products are computer controlled, however they are not
highly date sensitive, which minimizes the impact of any Y2K issues identified.

The Company is in the process of upgrading its accounting and manufacturing
computer system and plans to complete the upgrade by the beginning of the fourth
quarter of 1999. The Company has completed initial investigations of its
products and concluded that there is minimal risk of system failure due to the
Y2K problem.

Potential exposure in other areas is minimal. Any Y2K problems with the
Company's network or software used for research and development and engineering
could adversely affect research and development and engineering costs, but would
not immediately impact the ability to continue operations. Such issues could
also be quickly resolved with commercially available products. Many of the
Company's major product components have relatively long lead times. Temporary
interruptions in the Company's supplies caused by any year 2000 issues would not
significantly impact the Company's manufacturing schedule, or its ability to
service customers. As a contingency, the Company plans to identify readily
available alternative vendors for key components and use current inventory
stocks as a buffer in case of a vendor related Year 2000 problem. In general,
the Company has determined that there is a minimal exposure to year 2000
problems through third parties.

The Company estimates it will need to spend less than $100,000 to become
year 2000 compliant. The majority of this cost relates to upgrading or replacing
the Company's accounting and manufacturing system. Expenses include the testing
conducted by the Quality Department, Engineering Department involvement in
testing and de-bugging, and the Service Department upgrades to customer
equipment if any such service is required.

In the worst case scenarios, the Company believes that it would have
minimal business interruption due to any foreseeable Y2K problems. In connection
with the Company's accounting and manufacturing system, the Company's
contingency plan is to operate with manual accounting and manufacturing systems,
augmented by available third party Y2K compliant software, until planned
upgrades become operational. Management believes alternate vendors, and off the
shelf solutions will be available to solve any of the Company's undetected
problems. In addition, the Company is small enough to allow it to function with
manual operating procedures for short periods of time.

Y2K project cost is based on management's best estimate and actual results
could differ from those anticipated. If the Company or its vendors are unable to
resolve the Y2K issues in a timely manner, or if there are significant
undetected Y2K issues, such matters could have a material impact on the
Company's results of operations. However, the Company believes the necessary
modifications and replacement of computer systems will be completed in 1999 and,
as a result, the Y2K issue is not expected to pose significant operational or
financial problems for the Company.

26
<PAGE> 29

EMPLOYEES

Employees as of June 30, 1999 increased by four compared to June 30, 1998:

<TABLE>
<CAPTION>
PERIOD ENDING
JUNE 30TH
--------------
1999 1998
----- -----
<S> <C> <C>
General and Administrative.................................. 11 10
Sales and Marketing......................................... 14 10
Regulatory & Quality........................................ 7 5
Research & Development...................................... 45 48
Manufacturing............................................... 6 6
-- --
Total Employees................................... 83 79
</TABLE>

27
<PAGE> 30

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock at September 22, 1999 (except
as otherwise noted) by (i) each stockholder known by the Company to be a
beneficial owner of more than five percent of the outstanding Common Stock, (ii)
each director of the Company, (iii) each executive officer of the Company listed
in the Summary Compensation Table and (iv) all directors and officers as a
group.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL COMMON STOCK
NAME OWNERSHIP(1) BENEFICIALLY OWNED(2)
- ---- ------------ ---------------------
<S> <C> <C>
International Business Machines Corporation
Old Orchard Road,
Armonk, N.Y. 10504....................................... 2,274,066(3) 20.30%
EJ Financial Investments V, L.P.
225 East Deer Path Road, Suite 250
Lake Forest, IL 60045.................................... 1,039,792 11.65%
Manfred Schmitt
c/o Spark 1st Vision GmbH & Co. KG
Lindenstabe 5
60325 Frankfurt, Germany................................. 504,200(4) 5.04%
Ramesh C. Trivedi(5)....................................... 367,109(6) 4.18%
John N. Kapoor(7).......................................... 1,039,792(8) 11.65%
James C. McGroddy(9)....................................... 51,101(10) *
Paul A.H. Pankow(11)....................................... 9,617(12) *
Patrick G. Hays(13)........................................ 5,615(14) *
Gerald D. Knudson(15)...................................... 5,615(14) *
Mark Winn(5)............................................... 18,188(16)
All directors and officers as a group (7 persons).......... 1,499,170 16.03%
</TABLE>

- ---------------
* Less than one percent.

(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community property
laws, where applicable.

(2) For purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on September 22, 1999, any security
which such person or group of persons has the right to acquire within 60
days after such date is deemed to be outstanding for the purpose of
computing the percentage ownership for such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.

(3) Includes warrants to purchase 2,206,479 shares of Common Stock at an
exercise price of $0.01 per share exercisable until December 31, 2005, and
warrants to purchase 67,587 shares of Common Stock at an exercise price of
$0.07 per share exercisable until December 31, 2000, which warrants are
presently exercisable.

(4) This information is as of August 20, 1999 and includes warrants to purchase
104,200 shares of Common Stock.

(5) Address is c/o the Company, 1850 Research Park, Davis, California
95616-4884.

(6) Includes 7,000 shares owned by Dr. Trivedi and 362,242 shares that he may
acquire upon exercise of stock options exercisable within 60
days -- 316,907 shares at an exercise price of $0.07 per share and 45,335
shares at an exercise price of $3.00 per share. Dr. Trivedi may acquire an
additional 74,665 shares upon exercise of stock options that become
exercisable over the remaining term of the options at an exercise price of
$3.00 per share.

(7) Address is c/o EJ Financial Enterprises, 225 E. Deer Path Road, Suite 250,
Lake Forest, Illinois 60045.

28
<PAGE> 31

(8) Represents shares of Common Stock owned by EJ Financial Investments V,
L.P., a limited partnership of which Mr. Kapoor is the managing general
partner. Mr. Kapoor disclaims beneficial ownership of such shares.

(9) Address is 200 Business Park Drive, Armonk, New York 10504.

(10) Includes 26,000 shares owned by Dr. McGroddy, 1,000 shares beneficially
owned by his daughter, and 24,101 shares that he may acquire upon exercise
of stock options exercisable within 60 days -- 19,594 shares at an exercise
price of $5.00 per share, 1,007 shares at an exercise price of $5.625 and
3,500 shares at an exercise price of $3.9375. Dr. McGroddy may acquire an
additional 13,065 shares upon exercise of stock options that become
exercisable over the remaining term of the options at exercise prices
ranging from $1.5625 to $5.625.

(11) Address is 7840 East Lake Carlos Drive N.E., Carlos, Minnesota 56319.

(12) Represents shares that Mr. Pankow may acquire upon exercise of stock
options exercisable within 60 days -- 2,704 shares at an exercise price of
$2.07 per share, 1,007 shares at an exercise price of $5.625 per share,
2,406 shares at an exercise price of $5.00 per share, and 3,500 shares at
an exercise price of $3.9375 per share. Mr. Pankow may acquire an
additional 5,253 shares upon exercise of stock options that become
exercisable over the remaining term of the options at exercise prices
ranging from $1.5625 to $5.625 per share.

(13) Address is c/o Blue Cross/Blue Shield Association, 225 North Michigan, 9th
Floor, Chicago, Illinois 60601-7680.

(14) Represents shares that he may acquire upon exercise of options exercisable
within 60 days -- 2,115 shares at an exercise price of $5.625 per share and
3,500 shares at an exercise price of $3.9375. He may acquire an additional
4,885 shares issuable upon exercise of stock options that become
exercisable over the remaining term of the options at exercise prices
ranging from $1.5625 of $5.625 per share.

(15) Address is 226 Castellane Drive, Greer, South Carolina 29650.

(16) Includes 12,188 shares that Mr. Winn may acquire upon exercise of options
exercisable within 60 days at an exercise price of $3.00. Does not include
32,812 shares that Mr. Winn may acquire upon exercise of options not
exercisable within 60 days at an exercise price of $3.00 per share.

29
<PAGE> 32

GENERAL INFORMATION

INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors has two standing committees, an Audit Committee and
a Compensation Committee.

The Audit Committee is composed of Dr. Kapoor (Chairman), Mr. Hays and Mr.
Pankow. The duties of the Audit Committee include recommending the engagement of
independent auditors, reviewing and considering actions of management in matters
relating to audit functions, reviewing with independent auditors the scope and
results of its audit engagement, reviewing reports from various regulatory
authorities, reviewing the system of internal controls and procedures of the
Company, and reviewing the effectiveness of procedures intended to prevent
violations of law and regulations. The Audit Committee held one meeting in 1998.

The Company's Compensation Committee is composed of Dr. McGroddy
(Chairman), Dr. Kapoor and Mr. Knudson. The duties of this Committee are to
recommend to the Board remuneration for officers of the Company, to determine
the number and issuance of options pursuant to the Company's stock option plans
and to recommend the establishment of and to monitor a compensation and
incentive program for all executives of the Company. The Compensation Committee
held five meetings in 1998.

The Board of Directors held seven meetings in 1998. All of the Directors
attended at least 75% of the total number of Board meetings and meetings of
committees on which they served during the period they served thereon in 1998.

The Company pays independent Directors $7,500 per annum, plus $500 for each
Board of Directors meeting attended in person and $250 for each Board of
Directors meeting attended by telephone. Members who serve on either the Audit
or Compensation Committees are paid $300 for each meeting attended in person and
$150 for each meeting attended by telephone. Committee chairmen also are paid
$500 per annum. Independent Directors (other than Dr. Kapoor) also receive
annually ten year non-qualified stock options to purchase 3,500 shares of the
Company's Common Stock at an exercise price equal to the fair market value of
the Common Stock on the date of grant.

30
<PAGE> 33

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each other executive officer
of the Company whose salary and bonus exceeded $100,000 for the year ended
December 31, 1998.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
- --------------------------- ---- -------- ------------ ------------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi................................ 1998 $279,840 $42,501 120,000
Chief Executive Officer and President 1997 $264,000 $50,400 20,000
1996 $264,000 $50,000 316,907
Mark W. Winn..................................... 1998 $118,333 $ -- --
Chief Financial Officer 1997(1) $ 38,333 $ 8,316 45,000
</TABLE>

- ---------------
(1) Mr. Winn commenced employment with the Company on September 2, 1997.

STOCK OPTIONS

The following table contains information concerning the grant of stock
options under the Company's 1998 Stock Option Plan to Dr. Trivedi and Mr. Winn
(collectively, the "Named Executive Officers") during the fiscal year ended
December 31, 1998.

OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE
- ---- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Ramesh C. Trivedi.............................. 120,000 16.6% $3.00 8/27/08
Mark W. Winn................................... 45,000 6.2% $3.00 8/27/08
</TABLE>

- ---------------
(1) Stock options are granted at the discretion of the Compensation Committee of
the Company's Board of Directors. Stock options have a 10-year term and vest
periodically over a period not to exceed five years.

(2) The Compensation Committee of the Company's Board of Directors may elect to
reduce the exercise price of any option to the current fair market value of
the Common Stock if the value of the Common Stock has declined from the date
of grant.

31
<PAGE> 34

\ The following table summarizes for each of the Named Executive Officers the
total number of unexercised options, if any, held at December 31, 1998, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 1998. The value of the unexercised, in-the-money options at December 31,
1998, is the difference between their exercise or base price and the value of
the underlying Common Stock on December 31, 1998. The closing sale price of the
Common Stock on The Nasdaq SmallCap Market on December 31, 1998 was $3.125 per
share.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY END OPTION VALUES

<TABLE>
<CAPTION>
SHARES ACQUIRED NUMBER OF SECURITIES
UPON EXERCISE OF UNDERLYING VALUE OF UNEXERCISED
OPTIONS DURING FISCAL UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
1998 AT DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- ---------------------------- ----------------------------
VALUE
NAME NUMBER REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ramesh C. Trivedi...... None None 334,510 102,397 $987,754(1) $12,800(2)
Mark W. Winn........... None None 0 45,000 0(3) $ 5,625(3)
</TABLE>

- ---------------

(1) Represents value of options to purchase 316,907 shares at an exercise price
of $0.07 per share and options to purchase 17,603 shares at an exercise
price of $3.00 per share.

(2) Represents value of options to purchase 102,397 shares at an exercise price
of $3.00 per share.

(3) Represents value of options to purchase 45,000 shares at an exercise price
of $3.00 per share.

REPRICING OF OPTIONS

<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF OPTION TERM
UNDERLYING STOCK AT EXERCISE PRICE OF REMAINING
REPRICE/ OPTIONS TIME OF STOCK AT TIME OF NEW AT DATE OF
REGRANT REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---- -------- ----------- ------------ ----------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ramesh C. Trivedi...... 8/28/98 120,000 $3.00 20,000 @ $6.13 $3.00 8 yrs. 7 mos.
100,000 @ $4.75 9 yrs. 6 mos.
Mark W. Winn........... 7/28/98 45,000 $3.00 25,000 @ $8.25 $3.00 9 yrs. 10 mos.
20,000 @ $4.875 9 yrs. 8 mos.
</TABLE>

The Compensation Committee of the Board of Directors approved the
replacement of these options to Dr. Trivedi and Mr. Winn, and options to other
employees of the Company, at an exercise price of $3.00 per share, having
concluded that the principal purpose of the Company's stock option program
(i.e., to provide an equity incentive to employees to remain in the employment
of the Company and to work diligently in its best interests) would not be
achieved for those employees holding options exercisable above the market price
of the Common Stock.

CERTAIN TRANSACTIONS

The Company, James C. McGroddy, John N. Kapoor, Gerald D. Knudson, Manfred
Schmitt and M.Y. Dogmoch are equity investors in, and have made loans to, a
Dutch company for investment in, and to finance the operations of, the Marbella
clinic. Messrs. McGroddy, Kapoor and Knudson are directors of the Company. The
equity interest of each investor was acquired for a nominal amount. Each of the
investors agreed to

32
<PAGE> 35

provide financing in the form of loans in proportion to their equity interests.
As of June 30, 1999, the equity interest and loans of the Company and these
other investors in the Marbella clinic was as follows:

<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------
AMOUNT OF
NAME OF INVESTOR IN THE MARBELLA CLINIC EQUITY INTEREST LOANS*
- ---------------------------------------------------------------------------------
Company.................................... 23.21% $ 518,838
- ---------------------------------------------------------------------------------
James C. McGroddy.......................... 8.70% 194,553
- ---------------------------------------------------------------------------------
John N. Kapoor............................. 8.70% 194,553
- ---------------------------------------------------------------------------------
Gerald Knudson............................. 1.91% 68,866
- ---------------------------------------------------------------------------------
Manfred Schmitt............................ 28.25% 631,786
- ---------------------------------------------------------------------------------
M.Y. Dogmoch............................... 11.86% 264,437
- ---------------------------------------------------------------------------------
Others..................................... 17.37% 236,919
- ---------------------------------------------------------------------------------
Total...................................... 100.00% 2,105,952
- ---------------------------------------------------------------------------------
</TABLE>

- ---------------
* The amount of these loans has been translated into U.S. dollars from Euros at
an exchange rate of 1 Euro = $1.0313, the representative exchange rate as of
June 30, 1999.

The Board of Directors has accelerated the vesting of options granted to James
C. McGroddy, Paul A.H. Pankow, Patrick G. Hays and Gerald D. Knudson, effective
at the closing, and has amended all of their options so they do not terminate as
a result of their resignation from the Board in connection with the closing, but
continue for the remainder of the term specified in their options.

The following table sets forth information concerning stock granted to the
independent Directors.

<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
UNDERLYING UNVESTED EXERCISE PRICE EXPIRATION
NAME OPTIONS OPTIONS PER SHARE DATE
- ---------------------------------------------------------------------------------------------------------------
James C. McGroddy................. 25,000 7,812 $5.00 1/24/07
3,500 1,094 5.00 1/24/07
1,666 659 5.625 5/14/07
3,500 0 3.9375 1/23/08
3,500 3,500 1.5625 4/27/09
- ---------------------------------------------------------------------------------------------------------------
Paul A.H. Pankow.................. 2,704 0 2.07 7/26/06
3,500 1,094 5.00 1/24/07
1,666 659 5.625 5/14/07
3,500 0 3.9375 1/23/08
3,500 3,500 1.5625 4/27/09
- ---------------------------------------------------------------------------------------------------------------
Gerald D. Knudson................. 3,500 1,385 5.625 5/14/07
3,500 0 3.9375 1/23/08
3,500 3,500 1.5625 4/27/09
- ---------------------------------------------------------------------------------------------------------------
Patrick G. Hays................... 3,500 1,385 5.625 5/14/07
3,500 0 3.9375 1/23/08
3,500 3,500 1.5625 4/27/09
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

The financial benefit of the amended options to these directors, estimated at
approximately $15,000 in the aggregate based upon the market price of the Common
Stock on September 28, 1999, will be determined

33
<PAGE> 36

based upon the market price of the Common Stock on the date of the Sale compared
to the exercise prices of the amended options.

The Company plans to enter into a distribution agreement with a German
company of which Manfred Schmitt is the principal owner, as a condition of the
Sale. As a result of open market purchases of Common Stock and warrants
subsequent to the public announcement of the letter of intent concerning the
Sale, as of August 20, 1999, Mr. Schmitt beneficially owned slightly more than
five percent of the Common Stock. See "Proposal to Approve Sale of Shares and
Warrants -- Distribution Agreement" for a summary of the distribution agreement
and "Stock Ownership of Certain Beneficial Owners and Management" for
information concerning Mr. Schmitt's ownership of the Company's Common Stock.
The Company believes that the terms of the distribution agreement are as fair to
the Company as those that could have been obtained from an unaffiliated party.

INDEPENDENT AUDITORS

Representatives of Ernst & Young LLP, the Company's independent auditors,
are expected to be present at the Special Meeting to respond to appropriate
questions from stockholders and to make a statement if they desire to do so.
Ernst & Young LLP has audited the Company's financial statements since the
fiscal year ended December 31, 1991. They have no financial interest, either
direct or indirect, in the Company.

OTHER MATTERS

The Board of Directors is not aware of any business to be presented at the
Special Meeting except the proposed Sale described in this Proxy Statement.
Unless otherwise directed, all shares represented by Board of Directors' proxies
will be voted in favor of the proposed Sale. If any other matters come before
the Special Meeting, the persons named in the accompanying Proxy will vote on
those matters according to their best judgment.

By Order of the Board of Directors

Mark W. Winn, Secretary

Davis, California

October 5, 1999

34
<PAGE> 37

INTEGRATED SURGICAL SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheet at December 31, 1998............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1998.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998................................ F-6
Notes to Consolidated Financial Statements.................. F-7

UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at June 30, 1999................. F-21
Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998.............................. F-22
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998.............................. F-23
Notes to Consolidated Financial Statements for the six
months ended June 30, 1999................................ F-24
</TABLE>

F-1
<PAGE> 38

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Integrated Surgical Systems, Inc.

We have audited the accompanying consolidated balance sheet of Integrated
Surgical Systems, Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Surgical Systems, Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Sacramento, California
February 12, 1999

F-2
<PAGE> 39

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1998

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 223,581
Short-term investments.................................... 2,024,278
Accounts receivable....................................... 1,905,138
Inventory................................................. 3,005,658
Other current assets...................................... 464,421
------------
Total current assets........................................ 7,623,076
Net property and equipment.................................. 1,350,839
Leased equipment, net....................................... 641,411
Long-term net investment in sales-type leases............... 262,334
Intangible assets, net...................................... 3,014,978
Other assets................................................ 272,532
------------
$ 13,165,170
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,475,754
Value added taxes payable................................. 347,584
Accrued payroll and related expenses...................... 471,278
Customer deposits......................................... 896,276
Accrued product retrofit costs............................ 135,348
Current portion of bank loans............................. 897,021
Other current liabilities................................. 732,594
------------
Total current liabilities................................... 4,955,855
Bank loans, long term....................................... 7,505
Note payable................................................ 143,200
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Convertible preferred stock, $0.01 par value, 1,000,000
shares authorized, 3,520 shares issued and outstanding
($3,520,000 aggregate liquidation value)............... 35
Common stock, $0.01 par value, 15,000,000 shares
authorized; 5,650,400 shares issued and outstanding.... 56,504
Additional paid-in capital................................ 42,343,287
Deferred stock compensation............................... (85,638)
Preferred stock discount.................................. (239,736)
Accumulated other comprehensive income.................... 207,216
Accumulated deficit....................................... (34,223,058)
------------
Total stockholders' equity.................................. 8,058,610
------------
$ 13,165,170
============
</TABLE>

See accompanying notes.
F-3
<PAGE> 40

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net sales................................................... $ 4,933,824 $ 6,146,434
Cost of sales............................................... 2,182,842 3,413,221
----------- ------------
2,750,982 2,733,213
Operating expenses:
Selling, general and administrative....................... 3,701,264 6,216,240
Research and development.................................. 3,063,925 6,602,550
Stock compensation........................................ 155,474 131,352
In-process research and development acquired.............. 331,668 --
----------- ------------
7,252,331 12,950,142
Other income (expense):
Interest income........................................... 214,913 240,959
Interest expense.......................................... (26,495) (124,095)
Foreign currency gain (loss).............................. (147,390) 129,158
Loss realized on equity investment in Marbella High Care
B.V.................................................... -- (317,000)
Other, net................................................ 32,028 47,263
----------- ------------
Loss before provision for income taxes...................... (4,428,293) (10,240,644)
Provision for income taxes.................................. 49,811 27,235
----------- ------------
Net loss.................................................... (4,478,104) (10,267,879)
Preferred stock accretion................................... -- (376,264)
----------- ------------
Net loss applicable to common stockholders.................. $(4,478,104) $(10,644,143)
=========== ============
Basic and diluted net loss per share........................ $ (1.20) $ (1.91)
=========== ============
Shares used in computing basic net loss per share........... 3,737,318 5,584,639
=========== ============
</TABLE>

See accompanying notes.
F-4
<PAGE> 41

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED PREFERRED OTHER
--------------- ------------------- PAID-IN STOCK STOCK COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DISCOUNT INCOME
------ ------ --------- ------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... -- $-- 3,361,161 $33,611 $25,807,264 $(426,417) $ -- $ 8,657
Exercise of stock options.... -- -- 18,374 184 18,416 -- -- --
Issuance of stock options to
consultant................. -- -- -- -- 23,270 -- -- --
Issuance of warrants to
consultant................. -- -- -- -- 65,625 -- -- --
Acquisition of IMMI.......... -- -- 619,355 6,194 3,883,356 -- -- --
Issuance of common stock to
consultant................. -- -- 4,500 45 28,215 -- -- --
Sale of common stock, net of
offering expenses.......... -- -- 1,500,000 15,000 8,425,103 -- -- --
Stock compensation expense... -- -- -- -- (31,413) 186,887 -- --
Comprehensive loss:
Net loss................... -- -- -- -- -- -- -- --
Foreign currency
translation
adjustments.............. -- -- -- -- -- -- -- 17,615
Comprehensive loss........... -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1997... -- -- 5,503,390 55,034 38,219,836 (239,530) -- 26,272
Exercise of stock options.... -- -- 142,010 1,420 14,313 -- -- --
Issuance of stock options to
consultant................. -- -- -- -- 208,386 -- -- --
Sale of common stock
warrants................... -- -- -- -- 6,930 -- -- --
Sale of convertible preferred
stock and warrants, net of
offering expenses.......... 3,520 35 5,000 50 3,300,362 -- -- --
Stock compensation expense... -- -- -- -- (22,540) 153,892 -- --
Preferred stock discount..... -- -- -- -- 616,000 -- (616,000) --
Preferred stock accretion.... -- -- -- -- -- -- 376,264
Comprehensive loss:
Net loss................... -- -- -- -- -- -- -- --
Unrealized gains of
securities............... -- -- -- -- -- -- -- 50,626
Foreign currency
translation
adjustments.............. -- -- -- -- -- -- -- 130,318
Comprehensive loss........... -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
Balance at December 31, 1998... 3,520 $35 5,650,400 $56,504 $42,343,287 $ (85,638) $ (239,736) $207,216
===============================================================================================

TOTAL
ACCUMULATED STOCKHOLDERS
DEFICIT EQUITY
------------ ------------
<S> <C> <C>
Balance at December 31, 1996... $(19,100,811) $ 6,322,304
Exercise of stock options.... -- 18,600
Issuance of stock options to
consultant................. -- 23,270
Issuance of warrants to
consultant................. -- 65,625
Acquisition of IMMI.......... -- 3,889,550
Issuance of common stock to
consultant................. -- 28,260
Sale of common stock, net of
offering expenses.......... -- 8,440,103
Stock compensation expense... -- 155,474
Comprehensive loss:
Net loss................... (4,478,104) (4,478,104)
Foreign currency
translation
adjustments.............. -- 17,615
------------
Comprehensive loss........... -- (4,460,489)
------------
Balance at December 31, 1997... (23,578,915) 14,482,697
Exercise of stock options.... -- 15,733
Issuance of stock options to
consultant................. -- 208,386
Sale of common stock
warrants................... -- 6,930
Sale of convertible preferred
stock and warrants, net of
offering expenses.......... -- 3,300,447
Stock compensation expense... -- 131,352
Preferred stock discount..... -- --
Preferred stock accretion.... (376,264) --
Comprehensive loss:
Net loss................... (10,267,879) (10,267,879)
Unrealized gains of
securities............... -- 50,626
Foreign currency
translation
adjustments.............. -- 130,318
------------
Comprehensive loss........... -- (10,086,935)
------------
Balance at December 31, 1998... $(34,223,058) $ 8,058,610
</TABLE>

See accompanying notes.
F-5
<PAGE> 42

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(4,478,104) $(10,267,879)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 228,788 579,666
In-process research and development acquired.............. 331,678 --
Amortization of intangible assets......................... 279,680 839,040
Stock compensation........................................ 155,474 131,352
Issuance of stock options to consultant................... 23,270 208,386
Unrealized gain on short-term investments................. -- 50,626
Equity in net loss of Marbella High Care B.V. ............ -- 317,000
Changes in operating assets and liabilities:
Accounts receivable..................................... (809,338) (478,596)
Inventory............................................... (894,739) (1,110,320)
Other current assets.................................... (155,998) 9,188
Accounts payable........................................ 532,121 65,539
Value added taxes payable............................... 160,809 (91,098)
Accrued payroll and related expenses.................... 126,997 54,655
Customer deposits....................................... 13,672 757,604
Other current liabilities............................... 46,592 262,217
Note payable............................................ 778 (203)
----------- ------------
Net cash used in operating activities....................... (4,438,320) (8,672,823)
Cash flows from investing activities:
Purchase of short-term investments........................ -- (2,024,278)
Investment in Marbella High Care B.V. .................... -- (563,273)
Investment in sales-type lease............................ (453,250) --
Principal payments received on sales-type lease........... 19,967 88,425
Purchases of property and equipment....................... (376,573) (1,746,127)
Payments in connection with purchase of subsidiary, net of
cash acquired........................................... (118,880) --
Decrease (increase) in other assets....................... 4,446 (12,868)
----------- ------------
Net cash used in investing activities....................... (924,290) (4,258,121)
Cash flows from financing activities:
Proceeds from bank loans.................................. 71,422 678,447
Payments on bank loans.................................... (94,421) (69,138)
Proceeds from sale of preferred stock and warrants........ -- 3,300,447
Net proceeds from sale of common stock and warrants....... 8,440,103 6,930
Proceeds from exercise of stock options................... 18,600 15,733
----------- ------------
Net cash provided by financing activities................... 8,435,704 3,932,419
Effect of exchange rate changes on cash and cash
equivalents............................................... 17,615 130,318
----------- ------------
Net increase (decrease) in cash and cash equivalents........ 3,090,709 (8,868,207)
Cash and cash equivalents at beginning of year.............. 6,001,079 9,091,788
----------- ------------
Cash and cash equivalents at end of year.................... $ 9,091,788 $ 223,581
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 25,392 $ 118,925
</TABLE>

See accompanying notes.
F-6
<PAGE> 43

INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. DESCRIPTION OF BUSINESS

Integrated Surgical Systems, Inc. (the "Company") was incorporated on
October 1, 1990 in Delaware. The Company develops, manufactures, markets and
services computer-controlled, image-directed robotic products for surgical
applications. The Company's principal product is the ROBODOC(R) Surgical
Assistant System (ROBODOC(R)), which is designed for orthopedic applications.
ROBODOC(R) is currently marketed in Europe.

On September 5, 1997, the Company acquired all of Innovative Medical
Machines International, S.A.'s ("IMMI") issued and outstanding capital stock,
stock warrants and convertible debt in a transaction accounted for as a purchase
(Note 3). IMMI develops, manufactures and markets image guided robotic devices
for surgical applications. Its principal product is the NeuroMate(R), a computer
controlled surgical robot supporting neurosurgical procedures.

On June 1, 1994, the Company acquired all shares of Gasfabriek Thijssen
Holding BV (later renamed Integrated Surgical Systems BV), a non-operating
Netherlands corporation, for approximately $4,000. The acquisition was accounted
for as a purchase. Integrated Surgical Systems BV purchases and licenses
products and technology from Integrated Surgical Systems, Inc. for distribution
in Europe and other markets.

2. SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION

The financial position and results of operations of IMMI and Integrated
Surgical Systems BV are measured using their respective local currencies. The
subsidiary balance sheet accounts are translated at the year-end exchange rate
and statement of operations amounts are translated at the average exchange rate
for the period. Translation adjustments are recorded as a separate component of
stockholders' equity. Foreign currency transaction gain (loss) was ($147,390)
and $129,158 during the years ended December 31, 1997 and December 31, 1998,
respectively.

REVENUE RECOGNITION

Revenues from sales without significant Company obligations beyond delivery
are recognized upon delivery of the products. Revenues pursuant to agreements
which include significant Company obligations beyond delivery are deferred until
the Company's remaining obligations are insignificant. Revenues are recognized
net of any deferrals for estimated future liabilities under contractual product
warranty provisions. Estimated future product retrofit costs for ROBODOC(R) sold
for clinical trials have been accrued in the accompanying financial statements.
Future retrofit costs are those expected to be required to update ROBODOC(R) to
the equivalent level of performance expected to be approved by the Food and Drug
Administration ("FDA").

RESEARCH AND DEVELOPMENT

Software development costs incurred subsequent to the determination of the
product's technological feasibility and prior to the product's general release
to customers are not material to the Company's financial position or results of
operations, and have been charged to research and development expense in the

F-7
<PAGE> 44
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accompanying consolidated statements of operations. Grants received from third
parties for research and development activities are recorded as reductions of
expense over the term of the agreement as the related activities are conducted.
Research and development costs are expensed as incurred.

CONCENTRATION OF CREDIT RISK

The Company sells its products to companies in the healthcare industry and
performs periodic credit evaluations of its customers and generally does not
require collateral. The Company believes that adequate provision for
uncollectible accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at four
financial institutions.

FINANCIAL STATEMENT ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company invests its excess cash in various investment grade,
interest-bearing securities. As of December 31, 1998, cash equivalents and
short-term investments consisted of money market mutual funds, U.S. Treasury
Strips and a certificate of deposit. The Company has not experienced any losses
on such investments.

Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. At December 31, 1998, the Company's entire portfolio of investments is
classified as available-for-sale. These securities are stated at fair market
value, determined based on quoted market prices, with the unrealized gains and
losses reported in a separate component of stockholders' equity.

The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity,
over the estimated life of the security. Such amortization is included in
interest income. Realized gains and losses were not material in any year
presented. The cost of securities sold is based on the specific identification
method.

For purposes of reporting cash flows, the Company considers highly liquid
investments with original maturities of three months or less as cash
equivalents.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying values of the bank loans approximate their fair values as of
December 31, 1998, based on current incremental borrowing rates for similar
types of borrowing arrangements.

Active markets for the Company's other financial instruments that are
subject to the fair value disclosure requirements of Statement of Financial
Accounting Standards No. 107, which consist of long-term lease receivables and
notes payable, do not exist and there are no quoted market prices for these
assets and liabilities. Accordingly, it is not practicable to estimate the fair
values of such financial instruments because of the limited information
available to the Company and because of the significance of the cost to obtain
independent appraisals for this purpose.

F-8
<PAGE> 45
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

The Company continually evaluates the value and future benefits of its
intangible assets. The Company assesses recoverability from future operations
using cash flows and income from operations of the related acquired business as
measures. Under this approach, the carrying value would be reduced if it becomes
probable that the Company's best estimate for expected future cash flows of the
related business would be less than the carrying amount of the related
intangible assets. There have been no adjustments to the carrying amounts of
intangible assets resulting from these evaluations as of December 31, 1998.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of 3 to 5 years, or the
lease term, whichever is shorter.

NET INVESTMENT IN SALES-TYPE LEASES

The net investment in sales-type leases consists of the following at
December 31, 1998:

<TABLE>
<S> <C>
Total minimum lease payments receivable..................... $388,904
Less unearned interest...................................... (38,828)
--------
Net investment in sales type leases......................... 350,076
Less current portion........................................ (87,742)
--------
Long-term net investment in sales-type leases............... $262,334
========
</TABLE>

The following represents future minimum lease payments to be received by
the Company under its net investment in sales-type leases as of December 31,
1998:

OPERATING LEASES

The Company leases certain of its ROBODOC systems to customers under
cancelable operating leases. The typical lease period is 5 years and certain of
the leases contain purchase options. The cost of equipment under operating
leases as of December 31, 1998 was $733,781 and the related accumulated
amortization thereon was $92,370.

INVENTORY

Inventory is recorded at the lower of cost (first-in, first-out method) or
market and consists of materials and supplies used in the manufacture and
service support of the ROBODOC(R) and NeuroMate(TM) Systems. Inventory consists
of the following at December 31, 1998:

<TABLE>
<S> <C>
Raw materials............................................... $1,057,141
Work-in process............................................. 763,624
Finished goods.............................................. 1,184,893
----------
$3,005,658
==========
</TABLE>

F-9
<PAGE> 46
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 1998 consisted of the following:

<TABLE>
<S> <C>
Accrued warranty expenses............................... $209,247
Accrued liability for property and equipment............ 173,136
Accrued taxes payable................................... 68,902
Other accrued U.S. expenses............................. 227,998
Other accrued European expenses......................... 53,311
--------
$732,594
========
</TABLE>

STOCK-BASED COMPENSATION

As permitted under the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock.

INCOME TAXES

The liability method is used to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
scheduled to be in effect when the differences are expected to reverse.

NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented on the
basis set forth in Statement 128 (Note 10).

SIGNIFICANT CUSTOMERS AND FOREIGN SALES

The Company recognized approximately 86% of its revenues from seven
customers, each representing at least 10% of the Company's total revenue, during
the year ended December 31, 1997 and 64% of its revenue from five customers each
representing at least 14% of the Company's total revenue, during the year ended
December 31, 1998. Foreign sales were approximately $6,005,000 in 1998 with 65%
of sales in Germany, 21% in Spain and the remaining 15% in Austria and France.
Foreign sales were approximately $4,919,000 in 1997 with 74% of sales in Germany
and 26% in Austria.

NEW ACCOUNTING PRONOUNCEMENTS

F-10
<PAGE> 47
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.

In June 1998, the Financial Accounting Standards Board issued Statement
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.

RECLASSIFICATIONS

Certain amounts reported in prior years financial statements have been
reclassified to conform with the 1998 presentation.

3. ACQUISITION OF IMMI

Effective September 5, 1997, ISS acquired all of IMMI's issued and
outstanding capital stock, stock warrants and convertible debt in a transaction
accounted for as a purchase. The purchase price included 619,355 shares of ISS
common stock with a fair market value of approximately $3.9 million and
liabilities assumed and acquisition costs of approximately $1.1 million. The
purchase agreement places certain restrictions on the future sale of the ISS
stock issued in connection with the purchase for a period of eighteen months.

The purchase price consists of the following:

<TABLE>
<S> <C>
619,355 shares of ISS common stock.......................... $3,889,549
Liabilities assumed......................................... 883,044
Acquisition costs........................................... 266,085
----------
$5,038,678
==========
</TABLE>

The Company retained independent valuation professionals to assist in the
values to be assigned to the individual assets acquired including the
intangibles and in-process research and development. A summary of the allocation
of purchase price is as follows:

<TABLE>
<S> <C>
Tangible assets acquired.................................... $ 573,302
Identified intangible assets................................ 4,133,698
In-process research and development......................... 331,678
----------
$5,038,678
==========
</TABLE>

Intangible assets consist primarily of developed technology relating to the
NeuroMate(R). Accumulated amortization on intangible assets was $1,118,720 as of
December 31, 1998. In the opinion of ISS and IMMI management, the developed
technology was completed and had alternative future uses. The estimated useful
lives are expected to range from 3 to 5 years. ISS management did not believe
that technological feasibility of the acquired in-process research and
development had been established. Further, ISS management believed the acquired
in-process research and development has no alternative future uses. Therefore,
the amount allocated to in-process research and development was required to be
immediately expensed under generally accepted accounting principles. The
valuation of the acquired research and development and of the other individual
assets was that of management.

F-11
<PAGE> 48
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents unaudited proforma statement of operations
information as if the acquisition of IMMI occurred on January 1, 1997.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Revenue............................................... $ 5,554,000
===========
Net loss.............................................. $(5,394,000)
===========
Basic net loss per share.............................. $ (1.24)
===========
</TABLE>

The above proforma information is presented for illustrative purposes only
and may not be indicative of the results that would have been obtained had the
transaction actually occurred on January 1, 1997, nor is it necessarily
indicative of future combined results of operations.

4. SHORT-TERM INVESTMENTS

Marketable debt securities are classified as available for sale and consist
of 1,849,000 shares of U.S. Treasury Strips. The shares have an original cost of
$1,767,773 on August 11, 1998 and a fair market value of $1,818,399 at December
31, 1998. The shares mature on May 15, 1999. The shares noted above have been
pledged as collateral for the line of credit with a bank (Note 7). The net
unrealized holding gain as of December 31, 1998 of $50,626 has been included as
a separate component of stockholders' equity.

Additionally, the Company purchased a 1-year certificate of deposit in June
1998 having an original cost of $200,000 and a fair market value of $205,879 on
December 31, 1998. The certificate of deposit is collateral under a letter of
credit to the benefit of the lessor of the Company's U.S. facility. The letter
of credit expires on June 30, 1999.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1998:

<TABLE>
<S> <C>
ROBODOC and NeuroMate System equipment...................... $ 1,039,261
Other equipment............................................. 1,677,695
Furniture and fixtures...................................... 291,798
Leasehold improvements...................................... 49,448
-----------
3,058,202
Less accumulated depreciation............................... (1,707,363)
-----------
$ 1,350,839
===========
</TABLE>

6. INVESTMENT IN MARBELLA HIGH CARE B.V.

Other assets consist primarily of the Company's investment in and advances
to Marbella High Care B.V. ("MBHC"). As of December 31, 1998, the Company owned
22% of the outstanding shares of MBHC and accounts for its investment under the
equity method. The Company's gross investment in MBHC, including loans, was
approximately $563,000 in 1998. For the year ended December 31, 1998, the
Company recorded $317,000 of expense comprised of $142,000 for its portion of
MBHC's net loss and a valuation allowance of $175,000 relating to its advances
in MBHC for the period.

F-12
<PAGE> 49
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. BANK LOANS AND NOTE PAYABLE

Bank loans consist of the following at December 31, 1998:

<TABLE>
<S> <C>
Revolving line of credit established in June 1998 with an
available amount of $1.5 million at December 31, 1998,
with interest accruing at prime plus .75% per annum
(aggregating 8.5% as of December 31, 1998) and expiring on
June 15, 1999............................................. $678,447
Revolving line of credit established in July 1996 for five
years with an available amount of $196,900 at December 31,
1998, with interest accruing at 7.15% per annum. The
amount available decreases quarterly by 5% of the original
amount beginning October 1996............................. 196,900
Bank term loan with monthly principal and interest payments
of approximately $1,762 over three years from May 1997,
with interest accruing at 5.75% per annum................. 29,179
--------
904,526
Less current portion........................................ 897,021
--------
Long-term bank loans........................................ $ 7,505
========
</TABLE>

The $1.5 million revolving line of credit is secured by a security interest
in the Company's marketable securities with a carrying value of $1,818,399 at
December 31, 1998. The Company is required to maintain sufficient collateral
equal to or greater than the credit limit, plus $100,000.

The bank term loan is secured by substantially all of IMMI's tangible
assets (with a net book value of approximately $1,804,000 at December 31, 1998)
and is guaranteed by the Company.

The Company received an interest free loan with a balance of $143,200 at
December 31, 1998 from a grant organization for the development of a new system.
In the case of failure of the project, the grant organization may decide to
forgive all or part of the repayments. If the Company sells either a license for
the related technology, the prototype developed, or articles manufactured
specifically for the research project, 50% of the revenue must be paid to the
grant organization in the subsequent year, up to the balance of the loan amount
outstanding. According to the contract, any such payments would be considered to
be an advance repayment of the loan. The Company has not made any sales of this
type through December 31, 1998.

8. STOCKHOLDERS' EQUITY

COMMON STOCK

As of December 31, 1998 the Company has reserved a total of 8,333,782
shares of common stock pursuant to Series A Convertible Preferred Stock,
warrants and options outstanding and reserved for future issuance.

INITIAL PUBLIC OFFERING

In November 1996, the Company sold in its initial public offering, a total
of 1,525,000 shares of common stock at $5.00 per share and 1,753,750 warrants at
$0.10 per warrant. In addition, the Company sold to its underwriter warrants to
purchase an additional 305,000 shares for total consideration of $10.00. The net
proceeds after underwriters' commissions and fees and other costs associated
with the offering were approximately $6,137,000.

Each warrant entitles the holder to purchase one share of common stock at
an exercise price of $6.00 per share, subject to adjustment in certain events,
at any time during the period commencing November 20, 1997, and thereafter for a
period of four years. The warrants are subject to redemption by the Company at
$0.10 per warrant at any time during the exercise period on not less than 30
days prior written notice to the holders of

F-13
<PAGE> 50
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the warrants provided certain criteria regarding the price performance of the
Company's common stock are met.

EUROPEAN OFFERING

On November 20, 1997, the Company sold 1,500,000 shares of Common Stock at
approximately $7.00 per share in an offering to European investors (the
"European Offering"). In addition, the Company sold to its underwriters in the
European Offering warrants to purchase an additional 150,000 shares for nominal
consideration. The net proceeds of the European Offering were approximately
$8,440,000.

Each of the warrants issued to the European Offering underwriters entitles
the holder to purchase one share of common stock at an exercise price of $8.26
per share at any time during the period commencing November 21, 1998, and
thereafter for a period of four years.

CONVERTIBLE PREFERRED STOCK

As part of a Stock Purchase Agreement in December 1995 the Company sold a
warrant for $1,333,333 to purchase 1,386,390 shares of Series D Preferred Stock
at $0.01 per share, and in February 1996 sold a warrant for $666,667 to purchase
693,194 shares of Series D Preferred Stock at $0.01 per share. On October 29,
1997, the Company and IBM executed an amendment to the Stock Purchase Agreement
pursuant to which the Company and IBM agreed that these combined warrants to
purchase 2,079,584 shares of Series D Preferred Stock would be exercisable only
for 2,079,584 shares of Common Stock at $0.01 per share. The warrants expire on
December 31, 2005 and have not been exercised as of December 31, 1998. Also on
October 29, 1997, the Company delivered to CA IB Investmentbank AG ("CA IB") an
agreement not to issue any shares of Common Stock, or any warrants, options or
other rights to subscribe for or purchase shares of Series D Preferred Stock, or
any other securities convertible into or exercisable or exchangeable for, Series
D Preferred Stock, without the consent of CA IB. In addition, the Company's
management caused the Board of Directors to present a resolution at the annual
meeting of the Company's stockholders to amend the Company's Restated
Certificate of Incorporation to eliminate the Series D Preferred Stock
therefrom. On April 28, 1998 elimination of Series D Preferred Stock was adopted
by the Company's stockholders.

In November 1996, the Board of Directors amended, and the stockholders
subsequently approved, the Company's Articles of Incorporation to authorize
1,000,000 shares of undesignated preferred stock. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and designation of
any such series without any vote or action by the Company's stockholders.

In September 1998, the Company received net proceeds of $3,300,447 from the
sale of 3,520 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase 44,000 shares of common
stock ("Common Stock").

The Series A Preferred Stock is convertible into shares of Common Stock, at
the option of the holder, commencing December 9, 1998, subject to certain
limitations, discussed below. The number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock is equal to the quotient of (x) the
product of $1,000 (the stated value of each share of Series A Preferred Stock)
and the number of shares of Series A Preferred Stock to be converted and (y) 85%
of the lowest sale price of the Common Stock on the Nasdaq SmallCap Market
during the five trading days preceding the date of conversion (the "Market
Price"), but in no event more than $4.96 (the "Conversion Price"). As of
December 31, 1998, the number of common shares issuable upon conversion was
1,731,262.

Holders of Series A Preferred Stock may convert 25% of their shares
commencing December 9, 1998, 50% of their shares commencing January 8, 1999, 75%
of their shares commencing February 7, 1999 and 100%
F-14
<PAGE> 51
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of their shares commencing March 9, 1999. The Company may require holders to
convert all (but not less than all) of the Series A Preferred Stock at any time
after August 24, 2001, or buy out all outstanding shares, at the then Conversion
Price.

The value assigned to the beneficial conversion feature, as associated with
the Market Price as determined using the quoted market price of the Company's
common stock on the date the Series A Preferred Stock was sold, amounted to
$616,000, which represents a discount to the value of the Series A Preferred
Stock (the "Discount"). The Discount is being accreted using the straight-line
method through March 9, 1999. Approximately $376,000 of the Discount was
accreted in 1998.

Holders of Series A Preferred Stock are not entitled to dividends and have
no voting rights, unless required by law or with respect to certain matters
relating to the Series A Preferred Stock.

The Company may redeem the Series A Preferred Stock upon written notice to
the holders of the Series A Preferred Stock at any time after the earlier of
January 10, 1999 and the closing of a registered firm underwritten secondary
offering of equity securities, at a redemption price equal to the greater of
$1,500 per share and the Market Price of the Shares of Common Stock into which
such Series A Preferred Stock could have been converted on the date of the
notice of redemption.

The Warrants are exercisable at any time during the period commencing March
5, 1999 and ending March 5, 2002, at an exercise price of $4.31, subject to
adjustment. The Conversion Price and the number of shares of Common Stock
issuable upon conversion are subject to adjustment based upon certain future
events.

ISSUANCE OF STOCK AND STOCK WARRANTS

In September 1997, the Company issued 4,500 shares of Common Stock and
warrants to purchase 25,000 shares of Common Stock (with an aggregate estimated
fair value of $93,885) to Rickel & Associates, Inc. for services performed in
connection with the acquisition of IMMI. The warrants have an exercise price of
$7.50 per share and expire in September 2002.

In September 1998, the Company issued 5,000 shares of Common Stock (with an
aggregate estimated fair value of $20,625) to Trinity Capital Advisors, Inc. for
services performed in connection with the Series A Preferred Stock offering.

STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.

The Company established a stock option plan in 1991 (the "1991 Plan") and
on December 13, 1995, it established a new stock option plan (the "1995 Plan").
The Company adopted a third plan on April 28, 1998 (the "1998 Plan"). Certain
employees of the Company surrendered their options under the 1991 Plan in return
for new and additional options granted under the 1995 Plan. During the year
ended December 31, 1998, the Company reduced the exercise prices of certain
outstanding stock options with exercise prices ranging from $4.31 to $8.63
(377,752 options) to $3.00 per share which was the fair market value of common
stock as determined by the Company's Board of Directors on the date of
repricing. Officers, employees, directors and consultants to the Company may
participate in the Plans. Options granted under the Plans may be incentive stock
options or non-statutory stock options. 2,099,070 shares of the Company's common
stock have been reserved for issuance under the Plans. Options granted generally
have a term of ten years from the date of the grant. The exercise price of
incentive stock options granted under the Plans may not be less than 100% of the

F-15
<PAGE> 52
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair market value of the Company's common stock on the date of the grant. The
exercise price of non-statutory stock options granted under the Plans may not be
less than 85% of the fair market value of the Company's common stock on the date
of the grant. For a person who, at the time of the grant, owns stock
representing 10% of the voting power of all classes of Company stock, the
exercise price of the incentive stock options or the non-statutory stock options
granted under the Plans may not be less than 110% of the fair market value of
the common stock on the date of the grant.

Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1998, respectively: risk-free interest rates of 6.0%
and 5.0%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of 0.55 and 0.77; and an expected life of the
option of 4 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period. The Company's pro forma information follows:

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Pro forma net loss............................... $(4,624,429) $(10,997,076)
Pro forma basic net loss per share............... $ (1.24) $ (1.97)
</TABLE>

Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.

The following summarizes activity under the Plans for the years ended
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 (at $0.07 to $7.84
per share)........................................ 947,184 $0.42
Granted (at $5.00 to $8.88 per share)............. 354,334 6.60
Canceled (at $.07 to $8.25 per share)............. (79,771) 4.38
Exercised (at $.07 to $3.33 per share)............ (18,374) 1.01
---------
Outstanding at December 31, 1997 (at $0.07 to $8.88
per share)........................................ 1,203,373 1.97
Granted (at $2.84 to $6.06 per share)............. 724,252 3.23
Canceled (at $.07 to $8.88 per share)............. (456,356) 5.33
Exercised (at $.07 to $2.07 per share)............ (142,010) 0.11
---------
Outstanding at December 31, 1998 (at $0.07 to $8.88
per share)........................................ 1,329,259 $1.93
=========
</TABLE>

All options granted in 1997 and 1998 were granted with option prices equal
to the fair market value of the Company's stock on the grant date. The weighted
average exercise price of options granted in 1997 was $6.60 and the weighted
average grant date fair value of these options was $3.16.
F-16
<PAGE> 53
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average exercise price of options granted in 1998 with option
prices equal to the fair market value of the Company's stock on the grant date
was $3.23 and the weighted average grant date fair value of these options was
$1.47.

The following summarizes information related to options outstanding and
options exercisable at December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED REMAINING WEIGHTED
EXERCISE OPTIONS AVERAGE CONTRACTUAL LIFE OPTIONS AVERAGE
PRICE OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE EXERCISE PRICE
- ------------------ ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.07 696,348 $0.07 7.1 598,475 $0.07
$2.07 6,760 $2.07 7.5 4,084 $2.07
$2.84 - $3.00 374,502 $3.00 9.7 28,477 $3.00
$3.13 - $3.94 50,750 $3.67 9.7 -- --
$4.00 - $4.88 40,500 $4.71 9.4 -- --
$5.00 - $6.13 106,399 $5.35 8.1 50,220 $5.29
$7.00 - $8.88 54,000 $7.98 8.8 17,024 $7.98
--------- ----- --- ------- -----
1,329,259 $1.93 8.2 698,280 $0.77
========= ===== === ======= =====
</TABLE>

Of the options outstanding at December 31, 1998, options to purchase
698,280 shares of common stock were immediately exercisable at a
weighted-average exercise price of $0.77 per share. A total of 197 shares were
still available for grant under the 1995 Plan at December 31, 1998. A total of
421,248 shares were still available for grant under the 1998 Plan at December
31, 1998.

During the year ended December 31, 1996, the Company recorded deferred
stock compensation of $783,666 relating to stock options granted during the
period with exercise prices less than the estimated fair value of the Company's
common stock, as determined by an independent valuation analysis, on the date of
grant. The deferred stock compensation is being amortized into expense over the
vesting period of the stock options which generally range from 3 to 5 years.
Deferred compensation relating to stock options which vested immediately was
expensed on the date of grant. The Company recorded a reduction of $31,413 and
$22,540 in deferred stock compensation relating to canceled options in 1997 and
1998, respectively. Compensation expense of $155,474 and $131,352 was recorded
during the years ended December 31, 1997 and 1998, respectively, relating to
these options. The remaining $85,638 will be amortized into expense in future
periods.

9. INCOME TAXES

The income tax provisions for the years ended December 31, 1997 and 1998
are comprised of currently payable state franchise taxes and currently payable
foreign income taxes.

F-17
<PAGE> 54
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes as of
December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryover............................ $ 4,677,000 $ 5,842,000
Research and development................................ 223,000 285,000
Accrued product retrofit costs.......................... 21,000 54,000
Inventory............................................... 93,000 330,000
Depreciation............................................ 126,000 109,000
Stock compensation...................................... 220,000 256,000
Loss on investment...................................... -- 230,000
Deferred income......................................... -- 358,000
Other................................................... 158,000 248,000
----------- -----------
5,518,000 7,712,000
Less: Valuation allowance................................. (5,518,000) (7,712,000)
----------- -----------
Net deferred taxes........................................ $ -- $ --
=========== ===========
</TABLE>

The Company expects the carryforward amounts will not be utilized prior to
the expiration of the carryforward periods.

The principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Federal benefit expected at statutory rates............... $(1,506,000) $(3,481,777)
Net operating loss with no current benefit................ 1,506,000 3,481,777
Other taxes............................................... -- 14,000
Foreign income taxes...................................... 49,811 13,235
----------- -----------
$ 49,811 $ 27,235
=========== ===========
</TABLE>

The Company paid $914 and $800 for income and franchise taxes during the
years ended December 31, 1997 and 1998, respectively.

F-18
<PAGE> 55
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. NET LOSS PER SHARE INFORMATION

As of December 31, 1998, outstanding options to purchase 1,329,259 shares
of common stock (with exercise prices ranging from $0.07 to $8.88), outstanding
warrants to purchase 4,551,816 shares of common stock (with exercise prices from
$0.07 to $8.26) and 1,731,262 shares of common stock issuable upon conversion of
Series A Preferred Stock could potentially dilute basic earnings per share in
the future and have not been included in the computation of diluted net loss per
share because to do so would have been antidilutive for the periods presented.

11. COMMITMENTS

The Company leases its U.S. facility under a non-cancelable operating
lease. The lease is for a term of seven years and expires on June 2, 2005. The
lease provides for rent of $29,229 per month during the first year of the lease
(plus real estate taxes and assessments, utilities and maintenance), subject to
adjustment in subsequent years for cumulative increases in the cost of living
index, not to exceed 4% per year.

The Company leases its European facility under a non-cancelable operating
lease. The lease is for a term of eight years and expires on 2006. The lease
provides for rent of $7,197 per month.

Future payments under non-cancelable facility operating leases are
approximately as follows:

<TABLE>
<S> <C>
1999................................................... $ 422,000
2000................................................... 440,000
2001................................................... 450,000
2002................................................... 457,000
2003................................................... 465,000
Thereafter............................................. 424,000
----------
$2,658,000
==========
</TABLE>

Aggregate rental expense under these leases amounted to $135,000 and
$309,000 during the years ended December 31, 1997 and 1998, respectively.

Future minimum payments under non-cancelable equipment operating leases are
approximately as follows:

Rental expense for these non-cancelable equipment operating leases during
the years ended December 31, 1997 and 1998 was approximately $17,000 and
$41,000, respectively.

12. CONTINGENCIES

The Company has from time to time been notified of various claims
incidental to its business that are not the subject of pending litigation. While
the results of claims cannot be predicted with certainty, the Company believes
that the final outcome of all such matters will not have a materially adverse
effect on its consolidated financial position, results of operations or cash
flows.

F-19
<PAGE> 56
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. NIST GRANT

During 1994, the Company received notification it was awarded a $1,960,000
National Institute of Science and Technology ("NIST") grant from the U.S.
Department of Commerce ("USDC"). The grant is shared by the Company and two
strategic partners to fund approximately 49% of a $4 million joint development
project to adapt the ROBODOC System for use in hip revision surgery. The
development project and related NIST Grant began in 1995. The Company received
approximately $317,000 and $514,000 in proceeds under this grant during the
years ended December 31, 1997, and 1998, respectively.

14. ANVAR GRANT

During 1996, IMMI received notification it was awarded a $222,492 grant
from the French agency Agence Nationale de Valorisation de la Recherche
("ANVAR") which is a French national agency established to aid research and
development projects. The grant is to fund the clinical tests to be performed at
two university hospitals on the NeuroMate system over a period of fifteen months
commencing March 1997. IMMI received $173,595 in proceeds under this grant
during the year ended December 31, 1997. The grant income is being recognized
ratably over the project period.

15. EMPLOYEE STOCK PURCHASE PLAN

Shareholders approved and the Board of Directors adopted the Company's
Employee Stock Purchase Plan (the "Purchase Plan") at the annual Shareholders
meeting held April 28, 1998. The Purchase Plan provides all eligible employees
an opportunity to acquire a proprietary interest in the Company on a payroll
deduction or other compensation basis at a 15% discount. The Purchase Plan is
intended to qualify as an employee stock purchase plan under Section 423 of the
Code. The Purchase Plan covers an aggregate of 300,000 shares of the Company's
Common Stock. As of December 31, 1998, no offerings have been made to employees.

F-20
<PAGE> 57

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED)
-------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,353,075
Short-term investments.................................... 45,696
Accounts receivable....................................... 911,959
Inventory................................................. 3,890,201
Other current assets...................................... 407,798
------------
Total current assets........................................ 7,608,729
Property and equipment, net................................. 1,102,843
Leased equipment, net....................................... 595,316
Long-term net investment in sales type leases............... 582,087
Intangible assets, net...................................... 2,595,458
Other assets................................................ 272,314
------------
Total assets...................................... $ 12,756,747
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,775,190
Value-added taxes payable................................. 386,864
Accrued payroll and related expenses...................... 450,116
Customer deposits......................................... 1,544,990
Accrued product retrofit costs............................ 135,348
Current portion of bank loans............................. 159,573
Other current liabilities................................. 1,017,205
------------
Total current liabilities......................... 6,469,286
Note payable................................................ 157,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value 1,000,000
shares authorized; 3,730 shares issued and
outstanding............................................ 37
($3,730,000 aggregate liquidation value)
Common stock, $0.01 par value, 50,000,000 shares
authorized; 8,576,955 shares issued and outstanding.... 85,769
Additional paid-in capital................................ 46,458,881
Deferred stock compensation............................... (55,068)
Preferred stock discount.................................. (404,334)
Accumulated other comprehensive loss...................... (487,499)
Accumulated deficit....................................... (39,467,325)
------------
Total stockholder's equity........................ 6,130,461
------------
$ 12,756,747
============
</TABLE>

See notes to consolidated financial statements.
F-21
<PAGE> 58

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales............................. $ 629,236 $ 2,027,220 $ 2,915,959 $ 3,410,580
Cost of Sales......................... 446,238 978,110 1,551,617 1,600,883
----------- ----------- ----------- -----------
182,998 1,049,110 1,364,342 1,809,697
Operating expenses:
Selling, general and
administrative................... 1,495,357 1,782,831 3,071,972 3,160,472
Research and development............ 1,196,240 1,864,869 2,825,946 3,355,153
Stock compensation.................. 15,286 18,000 30,571 36,000
----------- ----------- ----------- -----------
2,706,883 3,665,700 5,928,489 6,551,625
Other income (expense):
Interest income..................... 103,088 65,528 140,216 165,636
Other............................... 6,718 80,126 (281,469) 69,806
----------- ----------- ----------- -----------
Loss before provision for income
taxes............................... (2,414,079) (2,470,936) (4,705,400) (4,506,486)
Provision for income taxes............ 15,565 15,145 30,259 24,196
----------- ----------- ----------- -----------
Net loss.............................. (2,429,644) (2,486,081) (4,735,659) (4,530,682)
Preferred stock accretion............. (263,969) -- (508,607) --
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders........................ $(2,693,613) $(2,486,081) $(5,244,266) $(4,530,682)
=========== =========== =========== ===========
Basic net loss per common share....... $ (0.40) $ (0.44) $ (0.84) $ (0.81)
Shares used in computing basic net
loss per-share...................... 6,713,469 5,608,976 6,220,227 5,568,467
</TABLE>

See notes to consolidated financial statements
F-22
<PAGE> 59

INTEGRATED SURGICAL SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(4,735,659) $(4,530,682)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 358,817 197,866
Amortization of intangible assets......................... 419,520 419,520
Gain on sale of short term investments.................... (50,626) --
Stock compensation........................................ 30,570 36,000
Issuance of stock options to consultants.................. 49,414 105,942
Changes in operating assets and liabilities...............
Accounts Receivable.................................... 993,179 (1,417,151)
Inventory.............................................. (884,543) (1,181,439)
Other current assets................................... 56,623 (121,523)
Accounts payable....................................... 1,299,435 (249,631)
Value added taxes payable.............................. 39,280 303,291
Accrued payroll and related expenses................... (21,162) 66,743
Customer deposits...................................... 648,714 387,651
Payable to subcontractors.............................. -- (38,656)
Other current liabilities.............................. 284,611 400,580
Note Payable........................................... 13,800 (605)
----------- -----------
Net cash used in operating activities....................... (1,498,027) (5,622,094)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short term investments.............................. 1,978,582 --
Net investments in sales type leases........................ (319,753) 50,717
Purchases of property and equipment......................... (64,726) (431,552)
(Increase) decrease in other assets......................... 218 (453,746)
----------- -----------
Net cash provided by (used in) investing activities......... 1,594,321 (834,581)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on bank loans...................................... (744,953) (43,644)
Net proceeds from sale of preferred stock and warrants...... 3,405,912 --
Proceeds from sale of common stock warrants................. -- 6,930
Proceeds from exercise of stock options..................... 16,330 9,874
----------- -----------
Net cash provided by (used in) financing activities......... 2,677,289 (26,840)
Effect of exchange rate changes on cash and cash
equivalents............................................... (644,089) 23,909
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 2,129,494 (6,459,606)
Cash and cash equivalents at beginning of period............ 223,581 9,091,788
----------- -----------
Cash and cash equivalents at end of period.................. $ 2,353,075 $ 2,632,182
=========== ===========
</TABLE>

See notes to consolidated financial statements.
F-23
<PAGE> 60

INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in Integrated Surgical Systems, Inc.'s annual
report on Form 10-KSB for the year ended December 31, 1998.

NOTE B -- INVENTORIES

The components of inventory consist of the following:

<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Raw Materials............................................... $1,325,052
Work in process............................................. 869,810
Finished goods.............................................. 1,695,339
----------
$3,890,201
==========
</TABLE>

NOTE C -- CONVERTIBLE PREFERRED STOCK

In June 1999, the Company received net proceeds of $707,455 from the sale
of 750 shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") and warrants ("Warrants") to purchase 9,375 shares of common stock
("Common Stock"), par value $.01 per share.

The Series C Preferred Stock is convertible (the "Beneficial Conversion
Feature") into shares of Common Stock, at the option of the holder, commencing
September 9, 1999, subject to certain limitations, discussed below. The number
of shares of Common Stock issuable upon conversion of the Series C Preferred
Stock is equal to the quotient of (x) the product of $1,000 (the stated value of
each share of Series C Preferred Stock) and the number of shares of Series C
Preferred Stock to be converted and (y) 85% of the lowest sale price of the
Common Stock on the Nasdaq SmallCap Market during the five trading days
preceding the date of conversion (the "Market Price"), but in no event more than
$2.4843 (the "Conversion Price").

Holders of Series C Preferred Stock may convert 25% of their shares
commencing September 9, 1999, 50% of their shares commencing October 9, 1999,
75% of their shares Commencing November 8, 1999 and 100% of their shares
commencing December 8, 1999. The Company may require holders to convert all (but
not less than all) of the Series C Preferred Stock at any time after June 10,
2002, or buy out all outstanding shares, at the then Conversion Price.

Holders of Series C Preferred Stock may convert 100% of their shares prior
to December 8, 1999 if the maximum conversion price of $2.4843 is exceeded on
the Nasdaq SmallCap Market. The maximum conversion price of $2.4843 was exceeded
on June 16, 1999 and 100% of the Series C Preferred Stock became eligible for
conversion.

The value assigned to the Beneficial Conversion Feature, as determined
using the quoted market price of the Company's common stock on the date the
Series C Preferred Stock was sold, amounted to $132,353, which represents a
discount to the value of the Series C Preferred Stock (the "Discount".) The
Discount is

F-24
<PAGE> 61
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

being accreted 100% in June 1999 due to 100% of the Series C Preferred Stock
becoming eligible for conversion on June 16, 1999.

In connection with the sale of the Series C Convertible Preferred Stock,
the Company agreed to reduce the exercise price on the 44,000 warrants issued to
the purchaser as part of the sale of its Series A Convertible Preferred Stock
from $3.59 to $2.00. The incremental fair value assigned as a result of the
reduction in exercise price of the Series A warrants amounted to $11,440 and has
been recorded as a dividend to the preferred shareholders.

Holders of Series C Preferred Stock are not entitled to dividends and have
no voting rights, unless required by law or with respect to certain matters
relating to the Series C Preferred Stock.

The Company may redeem the Series C Preferred Stock upon written notice to
the holders of the Series C Preferred Stock at any time after the earlier of
December 10, 1999 and the closing of a registered firm underwritten secondary
offering of equity securities, at a redemption price equal to the greater of
$1,500 per share and the Market Price of the Shares of Common Stock into which
such Series C Preferred Stock could have been converted on the date of the
notice of redemption.

The Warrants are exercisable at any time during the period commencing
December 10, 1999 and ending December 9, 2003, at an exercise price of $1.8301,
subject to adjustment. The Conversion Price and the number of shares of Common
Stock issuable upon conversion are subject to adjustment based upon certain
future events.

In June 1999, the Company received net proceeds of $1,844,960 from the sale
of 2,000 shares of Series D Convertible Preferred Stock ("Series D Preferred
Stock") and warrants ("Warrants") to purchase 25,000 shares of common stock
("Common Stock"), par value $.01 per share.

The Series D Preferred Stock is convertible (the "Beneficial Conversion
Feature") into shares of Common Stock, at the option of the holder, commencing
September 29, 1999, subject to certain limitations, discussed below. The number
of shares of Common Stock issuable upon conversion of the Series D Preferred
Stock is equal to the quotient of (x) the product of $1,000 (the stated value of
each share of Series D Preferred Stock) and the number of shares of Series D
Preferred Stock to be converted and (y) 85% of the lowest sale price of the
Common Stock on the Nasdaq SmallCap Market during the five trading days
preceding the date of conversion (the "Market Price"), but in no event more than
$3.9375 (the "Conversion Price").

Holders of Series D Preferred Stock may convert 25% of their shares
commencing September 29, 1999, 50% of their shares commencing October 29, 1999,
75% of their shares. Commencing November 28, 1999 and 100% of their shares
commencing December 28, 1999. The Company may require holders to convert all
(but not less than all) of the Series D Preferred Stock at any time after June
30, 2002, or buy out all outstanding shares, at the then Conversion Price.

The value assigned to the Beneficial Conversion Feature, as determined
using the quoted market price of the Company's common stock on the date the
Series D Preferred Stock was sold, amounted to $352,941, which represents a
discount to the value of the Series D Preferred Stock (the "Discount".) The
Discount is being accreted using the straight-line method through December 28,
1999.

Holders of Series D Preferred Stock may convert 100% of their shares prior
to December 28, 1999 if the maximum conversion price of $3.9375 is exceeded on
the Nasdaq SmallCap Market.

Holders of Series D Preferred Stock are not entitled to dividends and have
no voting rights, unless required by law or with respect to certain matters
relating to the Series D Preferred Stock.

The Company may redeem the Series D Preferred Stock upon written notice to
the holders of the Series D Preferred Stock at any time after the earlier of
December 30, 1999 and the closing of a registered
F-25
<PAGE> 62
INTEGRATED SURGICAL SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

firm underwritten secondary offering of equity securities, at a redemption price
equal to the greater of $1,500 per share and the Market Price of the Shares of
Common Stock into which such Series D Preferred Stock could have been converted
on the date of the notice of redemption.

The Warrants are exercisable at any time during the period commencing
December 30, 1999 and ending December 29, 2003, at an exercise price of $2.9006,
subject to adjustment. The Conversion Price and the number of shares of Common
Stock issuable upon conversion are subject to adjustment based upon certain
future events.

NOTE D -- NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All net loss per share amounts have been presented on the
basis set forth in Statement 128.

As of June 30, 1999, outstanding options to purchase 1,325,170 shares of
Common Stock (with exercise prices ranging from $0.07 to $8.63) and outstanding
warrants to purchase 4,654,691 shares of Common Stock (with exercise prices
ranging from $0.01 to $8.26) could potentially dilute basic earnings per share
in the future and have not been included in the computation of diluted net loss
per share because to do so would have been antidilutive for the periods
presented.

NOTE E -- ACCUMULATED OTHER COMPREHENSIVE LOSS

As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
the foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement 130.

The following table sets forth the computation of comprehensive loss:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss.................................... $(2,429,644) $(2,486,081) $(4,735,659) $(4,530,682)
Other comprehensive income:
Unrealized gain on available for sale
securities................................ (65,309) -- (50,626) --
Foreign currency translation................ (311,961) (24,778) (644,089) 23,909
----------- ----------- ----------- -----------
Comprehensive loss.......................... $(2,806,914) $(2,510,859) $(5,430,374) $(4,506,773)
=========== =========== =========== ===========
</TABLE>

F-26
<PAGE> 63

APPENDIX I

INTEGRATED SURGICAL SYSTEMS, INC.

STOCK AND WARRANT PURCHASE AGREEMENT

THIS STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is entered into
as of October 1, 1999, by and among INTEGRATED SURGICAL SYSTEMS, INC., a
Delaware corporation (the "COMPANY") and each of those persons and entities,
severally and not jointly, whose names are set forth on the Schedule of
Purchasers attached hereto as Exhibit A (which persons and entities are
hereinafter collectively referred to as "PURCHASERS" and each individually as a
"PURCHASER").

RECITALS

WHEREAS, the Company has authorized the sale and issuance of an aggregate
of Two Million Nine Hundred Twenty Two Thousand Three Hundred Ninety Six
(2,922,396) shares of its Common Stock (the "SHARES"); and

WHEREAS, the Company has authorized the sale and issuance of warrants
(each, a "WARRANT" and collectively, the "WARRANTS") to purchase up to a number
of shares of its Common Stock such that the number of shares issuable upon
exercise of the Warrants, together with the Shares, equals forty percent (40%)
of the fully diluted shares of the Company (taking all convertible securities as
converted into Common Stock, and all warrants exercisable for the purchase of
Common Stock as exercised and such Common Stock purchased, as of the Closing
Date); and

WHEREAS, Purchasers desire to purchase the Shares and the Warrants on the
terms and conditions set forth herein; and

WHEREAS, the Company desires to issue and sell the Shares and the Warrants
to Purchasers on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:

1. Agreement to Sell and Purchase

1.1 Authorization of Shares and Warrants. On or prior to the Closing (as
defined in Section 2 below), the Company shall have authorized (a) the sale and
issuance to Purchasers of the Shares; (b) the sale and issuance to the
Purchasers of the Warrants, which shall be in substantially the form attached as
Exhibit B; and (c) the issuance of the shares of Common Stock to be issued to
the Purchasers upon exercise of the Warrants.

1.2 Sale and Purchase. Subject to the terms and conditions hereof, at the
Closing, the Company hereby agrees to issue and sell to each Purchaser,
severally and not jointly, and each Purchaser agrees to purchase from the
Company, severally and not jointly, the number of Shares and Warrants, at the
Aggregate Purchase Price, set forth opposite such Purchaser's name on Exhibit A.
Prior to issuance of the Warrants, if any, each Purchaser hereby agrees to pay
to the Company the Aggregate Purchase Price as set forth opposite such
Purchaser's name on the Exhibit A.

2. Closing; Delivery and Payment

2.1 Closing. The closing of the sale and purchase of the Shares and the
Warrants under this Agreement (the "CLOSING") shall take place at 10:00 a.m. on
the tenth (10th) business day following the day on which the stockholders of the
Company formally approve the issuance and sale of the Shares and the Warrants as
contemplated by this Agreement, at the offices of Cooley Godward LLP, 3000 El
Camino Real, Palo Alto, CA 94306 (the "SCHEDULED CLOSING DATE"), or at such
other time or place as the Company and Purchasers may mutually agree in writing
(the date on which the Closing actually occurs is hereinafter referred to as the
"CLOSING DATE").
<PAGE> 64

2.2 Purchasers' Deliveries. The parties acknowledge and agree that the
Purchasers have paid, and the Company has received, an advance payment on the
Aggregate Purchase Price (as shown Exhibit A) in the total amount of Four
Hundred Thousand United States Dollars (US$400,000). The Purchasers therefore
will pay to the Company, by delivery to the Company of check(s) or wire transfer
funds at the Closing, an aggregate amount equal to Three Million Six Hundred
Thousand United States Dollars (US$3,600,000) (the "REMAINING PURCHASE PRICE")
in full satisfaction of their payment obligations hereunder.

2.3 Company's Deliveries. At the Closing, the Company will deliver to
each Purchaser a certificate representing the number of Shares set forth
opposite such Purchaser's name on Exhibit A, and a Warrant representing the
right to purchase the number of shares of the Company's Common Stock set forth
opposite such Purchaser's name on Exhibit A.

3. Representations, Warranties and Covenants of the Company

Except as may be set forth on a Schedule of Exceptions delivered by the
Company to the Purchasers concurrently with the execution of this Agreement
specifically identifying the relevant Section hereof, the Company hereby
represents and warrants to each Purchaser as follows as of the date hereof and
as of the Closing Date, as to itself and each of its subsidiaries:

3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of the subsidiaries of the Company is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. The Company and each of its
subsidiaries has all requisite corporate power and authority to own and
operate their properties and assets, and, on the part of the Company, to
execute and deliver this Agreement and other instruments and documents as
may be associated with this Agreement, including the Registration and
Stockholder Rights Agreement in the form attached as Exhibit C
(collectively, the "RELATED AGREEMENTS"), to issue and sell the Shares and
the Warrants, and to carry out the provisions of this Agreement and the
Related Agreements and the Certificate of Incorporation of the Company, as
amended through the date of these representations and warranties, together
with all Certificates of Designation filed in connection therewith
(collectively, the "RESTATED CHARTER") and to carry on its business as
presently conducted and as presently proposed to be conducted. The Company
and each of its subsidiaries is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its properties
(both owned and leased) makes such qualification necessary, except for
those jurisdictions in which failure to do so would not have a material
adverse effect on the Company or its business.

3.2 Subsidiaries. The Company does not own or control any equity
security or other interest of any other corporation, limited partnership or
other business entity. The Company is not a participant in any joint
venture, partnership or similar arrangement.

3.3 Capitalization; Voting Rights. The authorized issued and
outstanding capital stock of the Company immediately prior to the Closing,
and the par value thereof, will be as set forth on Part 3.3 of the Schedule
of Exceptions, which shall also set forth the shares of the Company's
capital stock which are reserved for future issuance to employees pursuant
to the Company's 1998 Stock Option Plan. All issued and outstanding shares
of the Company's Common Stock and Preferred Stock (a) have been duly
authorized and validly issued, (b) are fully paid and nonassessable, and
(c) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. The rights, preferences, privileges
and restrictions of all shares of the Company's capital stock are as stated
in the Restated Charter. Other than the 391,182 shares reserved for
issuance under the Company's 1998 Stock Option Plan, and except as may be
granted pursuant to the Related Agreements, there are no outstanding
options, warrants, rights (including conversion or preemptive rights and
rights of first refusal), proxy or shareholder agreements, or agreements of
any kind for the purchase or acquisition from the Company of any of its
securities, except as set forth and described on Part 3.3 of the Schedule
of Exceptions. Of such reserved shares of Common Stock, (i) no shares have
been issued pursuant to restricted stock purchase agreements, (ii) options
to purchase 1,325,170 shares have been granted and are currently
outstanding,

2
<PAGE> 65

and (iii) 391,182 shares of Common Stock remain available for issuance to
officers, directors, employees and consultants pursuant to such Stock
Option Plan. When issued in compliance with the provisions of this
Agreement and the Restated Charter, the Shares will be validly issued,
fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Shares may be subject to
restrictions on transfer under state and/or federal securities laws as set
forth herein or as otherwise required by such laws at the time a transfer
is proposed. When issued at Closing, the number of shares issuable upon
exercise of the Warrants, together with the Shares, will equal forty
percent (40%) of the fully diluted shares of the Company (taking all
convertible securities as converted into Common Stock, and all warrants
exercisable for the purchase of Common Stock as exercised and such Common
Stock purchased, as of the Closing Date). Except as set forth on the
Schedule of Exceptions, no stock plan, stock purchase, stock option or
other agreement or understanding between the Company and any holder of any
equity securities or rights to purchase equity securities provides for
acceleration or other changes in the vesting provisions or other terms of
such agreement or understanding as the result of any merger, consolidated
sale of stock or assets, change in control or any other transaction(s) by
the Company. This representation and warranty is made with respect to the
Company only and not with respect to any subsidiary.

3.4 Authorization; Binding Obligations. All corporate action on the
part of the Company, its directors and its shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and
the Related Agreements by the Company and the performance of the Company's
obligations hereunder and thereunder, including the authorization, sale,
issuance and delivery of the Shares and Warrants and the reservation of the
equity securities issuable upon exercise of the Warrants has been taken or
will be taken prior to the Closing or, in respect of the Warrants and the
reservation of the equity securities issuable upon exercise of the
Warrants, prior to the issuance of the Warrants. This Agreement, the
Warrants and the Related Agreements, when executed and delivered by the
Company, will be valid and binding obligations of the Company enforceable
in accordance with their terms, subject to laws of general application
relating to bankruptcy, insolvency, the relief of debtors and, with respect
to rights to indemnity, subject to federal and state securities laws. The
Shares and the Warrants, when issued in compliance with the provisions of
this Agreement, will not violate any preemptive rights or rights of first
refusal, will be issued in compliance with all applicable federal and State
securities laws, and will be free of any liens or encumbrances, other than
any liens or encumbrances created by or imposed upon the holders through no
action of the Company; provided, however, that the Shares and the Warrants
may be subject to restrictions on transfer under State and/or federal
securities laws as set forth herein or as otherwise required by such laws
at the time the transfer is proposed. This representation and warranty is
made with respect to the Company only and not with respect to any
subsidiary.

3.5 Financial Statements. The Company has made available to each
Purchaser (a) its audited balance sheet as at December 31, 1998 and audited
statement of income and cash flows for the twelve months ending December
31, 1998 and (b) its unaudited balance sheet as at, and its unaudited
consolidated statement of operations and cash flows for the period
beginning on January 1, 1999 and ending on the last day of the third full
month before the month in which the Closing Date occurs (the "Statement
Date") (collectively, the "FINANCIAL STATEMENTS"), in each case reflecting
the operations and financial condition of the Company and each of its
subsidiaries. The Financial Statements, together with the notes thereto,
are complete and correct in all material respects, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated, except as disclosed
therein, and present fairly the financial condition and position of the
Company as of December 31, 1998 and the Statement Date; provided, however,
that the unaudited financial statements are subject to normal recurring
year-end audit adjustments (which are not expected to be material), and do
not contain all footnotes required under generally accepted accounting
principles.

3.6 Liabilities. The Company has no material liabilities and, to the
best of its knowledge, has no material contingent liabilities not disclosed
in the Financial Statements, except current liabilities incurred in the
ordinary course of business subsequent to the Statement Date which have not
been, either in any individual case or in the aggregate, materially
adverse.

3
<PAGE> 66

3.7 Agreements; Action.

(a) There are no oral or written agreements, proposed transactions or
understanding to which the Company considers itself bound, between the
Company and any of its officers, directors, affiliates or any affiliate
thereof.

(b) There are no agreements, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company is a
party or to its knowledge by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in
excess of $10,000 (other than obligations of, or payments to, the Company
arising from purchase or sale agreements entered into in the ordinary
course of business), or (ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to or from the Company
(other than licenses arising from the purchase of "off the shelf" or other
standard products), or (iii) provisions restricting the development,
manufacture or distribution of the Company's products or services, or (iv)
indemnification by the Company with respect to infringements of proprietary
rights (other than indemnification obligations arising from purchase or
sale or license agreements entered into in the ordinary course of
business).

(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or
series of its capital stock, other than as disclosed in its periodic
filings under the Securities Exchange Act of 1934; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other than with
respect to dividend obligations, distributions, indebtedness and other
obligations incurred in the ordinary course of business or as disclosed in
the Financial Statements) individually in excess of $10,000 or, in the case
of indebtedness and/or liabilities individually less than $10,000, in
excess of $25,000 in the aggregate, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.

(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same person or entity
(including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.

(e) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company, or a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of,
or (iii) regarding any other form of acquisition, liquidation, dissolution
or winding up of the Company.

3.8 Obligations to Related Parties. There are no obligations of the
Company to officers, directors, shareholders, or employees of the Company
other than (a) for payment of salary for services rendered, (b)
reimbursement for reasonable expenses incurred on behalf of the Company and
(c) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock
option plan approved by the Board of Directors of the Company). None of the
officers, directors or shareholders of the Company, or any members of their
immediate families, are indebted to the Company or have any direct or
indirect ownership interest in any firm or corporation with which the
Company is affiliated or with which the Company has a business
relationship, or any firm or corporation which competes with the Company,
except that officers, directors and/or shareholders of the Company may own
stock in publicly traded companies which may compete with the Company. No
officer, director or shareholder, or any member of their immediate
families, is, directly or indirectly, interested in any material contract
with the Company (other than such contracts as relate to any such person's
ownership of capital stock or other securities of the Company). Except as
may be disclosed in the Financial Statements, the Company is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.

4
<PAGE> 67

3.9 Changes. Since the Statement Date, there has not been to the
Company's knowledge:

(a) Any change in the assets, liabilities, financial condition or
operations of the Company from that reflected in the Financial
Statements, other than changes in the ordinary course of business, none
of which individually or in the aggregate has had or is expected to have
a material adverse effect on such assets, liabilities, financial
condition, operations or prospects of the Company;

(b) Any resignation or termination of any officer or key employee
of the Company; and the Company, to the best of its knowledge, does not
know of the impending resignation or termination of employment of any
such officer or key employee;

(c) Any material change, except in the ordinary course of business,
in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise;

(d) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, business
or prospects or financial condition of the Company;

(e) Any waiver by the Company of a valuable right or of a material
debt owed to it;

(f) Any direct or indirect loans made by the Company to any
shareholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business;

(g) Any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder;

(h) Any declaration or payment of any dividend or other
distribution of the assets of the Company;

(i) Any labor organization activity;

(j) Any debt, obligation or liability incurred, assumed or
guaranteed by the Company, except those for immaterial amounts and for
current liabilities incurred in the ordinary course of business;

(k) Any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;

(l) Any change in any material agreement to which the Company is a
party or by which it is bound which materially and adversely affects the
business, assets, liabilities, financial condition, operations or
prospects of the Company; or

(m) Any other event or condition of any character that, either
individually or cumulatively, has materially and adversely affected the
business, assets, liabilities, financial condition, operations or
prospects of the Company.

(n) Any arrangement or commitment by the Company to do any of the
acts described in subsection (a) through (m) above.

3.10 Title to Properties and Assets; Liens, Etc. The Company has
good and marketable title to its properties and assets, including the
properties and assets reflected in the most recent balance sheet included
in the Financial Statements, and good title to its leasehold estates, in
each case subject to no mortgage, pledge, lien, lease, encumbrance or
charge, other than (a) those resulting from taxes which have not yet become
delinquent, (b) minor liens and encumbrances which do not materially
detract from the value of the property subject thereto or materially impair
the operations of the Company, and (c) those that have otherwise arisen in
the ordinary course of business. All facilities, machinery, equipment,
fixtures, vehicles and other properties owned, leased or used by the
Company are in good operating condition and repair and are reasonably fit
and usable for the purposes for which they are being used. The Company is
in compliance with all material terms of each lease to which it is a party
or is otherwise bound.

3.11 Patents and Trademarks. The Company owns or possesses
sufficient legal rights to all patents, trademarks, service marks, trade
names, copyrights, trade secrets, licenses, information and other

5
<PAGE> 68

proprietary rights and processes necessary for its business as now
conducted and as presently proposed to be conducted, without any known
infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary
rights and processes of any other person or entity other than such licenses
or agreements arising from the purchase of "off the shelf" or standard
products. The Company has not received any communications alleging that the
Company has violated or, by conducting its business as presently proposed,
would violate any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other person
or entity. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any
nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their duties
to the Company or that would conflict with the Company's business as
presently proposed to be conducted. Neither the execution nor delivery of
this Agreement or the Related Agreements, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as presently proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions
of, or constitute a default under, any contract, covenant or instrument
under which any employee is now obligated. The Company does not believe it
is or will be necessary to utilize any inventions, trade secrets or
proprietary information of any of its employees made prior to their
employment by the Company, except for inventions, trade secrets or
proprietary information that have been assigned to the Company and which
are disclosed in the Schedule of Exceptions hereto.

3.12 Compliance with Other Instruments.

(a) The Company is not in material violation or default of any term of
its Restated Charter or Bylaws, or of any provision of any mortgage,
indenture, agreement, instrument or contract to which it is party or by
which it is bound or of any judgment, decree, order, writ. The execution,
delivery, and performance of and compliance with this Agreement and the
Related Agreements, the issuance and sale of the Shares and Warrants
pursuant hereto, and the issuance and sale of the Common Stock issuable
upon exercise of the Warrants, will not, with or without the passage of
time or giving of notice, result in any such material violation or default,
or be in conflict with any such term or provision, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization
or approval applicable to the Company, its business or operations or any of
its assets or properties.

(b) The Company has avoided every condition, and has not performed any
act, the occurrence of which would result in the Company's loss of any
right granted under any license, distribution agreement or other agreement
required to be disclosed on the Schedule of Exceptions.

3.13 Litigation. There is no action, suit, or proceeding pending, or
to the Company's knowledge currently threatened, or to the Company's
knowledge any investigation currently pending or threatened, against or
involving the Company that questions the validity of this Agreement or the
Related Agreements or the right of the Company to enter into any of such
agreements, or to consummate the transactions contemplated hereby or
thereby, or which might result, either individually or in the aggregate, in
any material adverse change in the assets, condition, affairs or prospects
of the Company, financially or otherwise, or any change in the current
equity ownership of the Company, nor is the Company aware that there is any
basis for any of the foregoing. The foregoing includes, without limitation,
actions pending or threatened (or any basis therefor known to the Company)
involving the prior employment of any of the Company's employees, their use
in connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending
or which the Company intends to initiate.

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3.14 Tax Returns and Payments. The Company has timely filed all tax
returns (federal, state and local) required to be filed by it. All taxes
shown to be due and payable on such returns, any assessments imposed, and
to the Company's knowledge all other taxes due and payable by the Company
on or before the Closing, have been paid or will be paid prior to the time
they become delinquent. The Company has not been advised (a) that any of
its returns, federal, state or other, have been or are being audited as of
the date hereof, or (b) of any deficiency in assessment or proposed
judgment to its federal, state or other taxes. The Company has no knowledge
of any liability of any tax to be imposed upon its properties or assets as
of the date of this Agreement that is not adequately provided for in the
Financial Statements.

3.15 Employees. The Company has no collective bargaining agreements
with any of its employees. There is no labor union organizing activity
pending or, to the Company's knowledge, threatened with respect to the
Company. Except as disclosed in the Schedule of Exceptions, no employee has
any agreement or contract, written or verbal, regarding his/her employment.
The Company is not a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement. To the Company's knowledge, no employee of
the Company, nor any consultant with whom the Company has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, the Company because of
the nature of the business to be conducted by the Company; and to the
Company's knowledge the continued employment by the Company of its present
employees, and the performance of the Company's contracts with its
independent contractors, will not result in any such violation. The Company
has not received any notice alleging that any such violation has occurred.
No employee of the Company has been granted the right to continued
employment by the Company or to any material compensation following
termination of employment with the Company. The Company is not aware that
any officer or key employee, or that any group of key employees, intends to
terminate his, her or their employment with the Company, nor does the
Company have a present intention to terminate the employment of any
officer, key employee or group of key employees.

3.16 Proprietary Information and Inventions Agreements. Each former
and current employee, officer and consultant of the Company has executed a
Proprietary Information and Inventions Agreement in the form(s) as
delivered to the Purchasers. No current employee, officer or consultant of
the Company has excluded works or inventions made prior to his or her
employment with the Company from his or her assignment of inventions
pursuant to such employee, officer or consultant's Proprietary Information
and Inventions Agreement.

3.17 Obligations of Management. Each officer of the Company is
currently devoting one hundred percent (100%) of his/her business time to
the conduct of the business of the Company. The Company is not aware that
any officer or key employee of the Company is planning to work less than
full time at the Company in the future. No officer or key employee is
currently working or, to the Company's knowledge, plans to work for a
competitive enterprise, whether or not such officer or key employee is or
will be compensated by such enterprise.

3.18 Registration Rights and Voting Rights.

(a) Except as set forth in the Registration and Stockholder Rights
Agreement or in Part 3.18 of the Schedule of Exceptions, the Company is
presently not under any obligation, and has not granted any rights, to
register (as defined in Section 1.1 of the Registration and Stockholder
Rights Agreement) any of the Company's presently outstanding securities or
any of its securities that may hereafter be issued.

(b) Except as may be set forth in Part 3.18 of the Schedule of
Exceptions, to the Company's knowledge, no shareholder of the Company has
entered into any agreement with respect to the voting of equity securities
of the Company.

3.19 Compliance with Laws; Permits. The Company is not in violation
of any applicable statute, rule, regulation, order or restriction of any
domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties
which violation

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would materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained and no registrations or declarations are required
to be filed in connection with the execution and delivery of this Agreement
and the issuance of the Shares or the Warrants, except such as has been
duly and validly obtained or filed, or with respect to any filings that
must be made after the Closing, as will be filed in a timely manner. The
Company has all franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it, the
lack of which could materially and adversely affect the business,
properties, prospects or financial condition of the Company and believes it
can obtain, without undue burden or expense, any similar authority for the
conduct of its business as planned to be conducted.

3.20 Environmental and Safety Laws. To its knowledge, the Company is
not in violation of any applicable statute, law or regulation relating to
the environment or occupational health and safety, and to its knowledge, no
material expenditures are or will be required in order to comply with any
such existing statute, law or regulation. No Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by the
Company or, to the Company's knowledge after reasonable investigation, by
any other person or entity on any property owned, leased or used by the
Company. For the purposes of the preceding sentence, "HAZARDOUS MATERIALS"
shall mean (a) materials which are listed or otherwise defined as
"hazardous" or "toxic" under any applicable local, state, federal and/or
foreign laws and regulations that govern the existence and/or remedy of
contamination on property, the protection of the environment from
contamination, the control of hazardous wastes, or other activities
involving hazardous substances, including building materials, or (b) any
petroleum products or nuclear materials.

3.21 Offering Valid. Assuming the accuracy of the representations
and warranties of the Purchasers contained in Section 4.2 hereof, the
offer, sale and issuance of the Shares and the Warrants will be exempt from
the registration requirements of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and will have been registered or qualified (or are
exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities laws.
Neither the Company nor any agent on its behalf has solicited or will
solicit any offers to sell or has offered to sell or will offer to sell all
or any part of the Shares to any person or persons so as to bring the sale
of such Shares by the Company within the registration provisions of the
Securities Act or any state securities laws.

3.22 Full Disclosure. The Company has made available to the
Purchasers all information requested by the Purchasers in connection with
their decision to purchase the Shares and the Warrants. Neither this
Agreement, the Exhibits hereto, nor the Related Agreements contain any
untrue statement of a material fact or, omit to state a material fact
necessary in order to make the statements contained herein or therein not
misleading. There are no facts which (individually or in the aggregate)
materially adversely affect the business, assets, liabilities, financial
condition, prospects or operations of the Company that have not been set
forth in the Agreement, the Exhibits hereto, the Related Agreements, the
periodic filings made by the Company under the Securities Exchange Act of
1934, or in other documents delivered to Purchasers or their attorneys or
agents in connection herewith.

3.23 Minute Books. The minute books of the Company made available to
the Purchasers contain a materially complete summary of all meetings of
directors and shareholders since the time of incorporation.

3.24 Real Property Holding Corporation. The Company is not a real
property holding corporation within the meaning of Code Section 897(c)(2)
and any regulations promulgated thereunder.

3.25 Insurance. The Company has fire and casualty insurance policies
with coverage customary for companies similarly situated to the Company.

4. Representations and Warranties of the Purchasers.

Each Purchaser hereby represents and warrants to the Company as follows,
with respect to such Purchaser and not with respect to any other Purchaser (such
representations and warranties do not lessen or

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<PAGE> 71

obviate the representations and warranties of the Company set forth in this
Agreement) as of the date hereof and the Closing Date:

4.1 Requisite Power and Authority. Purchaser has all necessary power
and authority under all applicable provisions of law to execute and deliver
this Agreement and the Related Agreements and to carry out their
provisions. All action on Purchaser's part required for the lawful
execution and delivery of this Agreement and the Related Agreements has
been or will be effectively taken prior to the Closing. Upon their
execution and delivery, this Agreement and the Related Agreements will be
valid and binding obligations of Purchaser, enforceable in accordance with
their terms, subject to laws of general application relating to bankruptcy,
insolvency, the relief of debtors and, with respect to rights to indemnity,
subject to federal and state securities laws.

4.2 Investment Representations. Purchaser understands that neither
the Shares nor the Warrants have been registered under the Securities Act.
Purchaser also understands that the Shares and the Warrants are being
offered and sold pursuant to an exemption from registration contained in
the Securities Act based in part upon each Purchaser's representations
contained in the Agreement. Purchaser hereby represents and warrants as
follows:

(a) Purchaser Bears Economic Risk. Purchaser has substantial
experience in evaluating and investing in private placement transactions
of securities in companies similar to the Company so that it is capable
of evaluating the merits and risks of its investment in the Company and
has the capacity to protect its own interests. Purchaser must bear the
economic risk of this investment indefinitely unless the Shares are
registered pursuant to the Securities Act, or an exemption from
registration is available. Purchaser understands that the Company has no
present intention of registering the Shares. Purchaser also understands
that there is no assurance that any exemption from registration under
the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the
Shares under the circumstances, in the amounts or at the times Purchaser
might propose.

(b) Acquisition for Own Account. Purchaser is acquiring the Shares
for Purchaser's own account for investment only, and not with a view
towards their distribution.

(c) Purchaser Can Protect Its Interest. Purchaser represents that
by reason of its, or of its management's, business or financial
experience, Purchaser has the capacity to protect its own interests in
connection with the transactions contemplated in this Agreement, and the
Related Agreements. Further, Purchaser is aware of no publication of any
advertisement in connection with the transactions contemplated in the
Agreement.

(d) Accredited Investor. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the
Securities Act.

(e) Company Information. Purchaser has received and read the
Financial Statements and has had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the
Company's operations and facilities. Purchaser has also had the
opportunity to ask questions of and receive answers from, the Company
and its management regarding the terms and conditions of this
investment.

(f) Rule 144. Purchaser acknowledges and agrees that the Shares
must be held indefinitely unless they are subsequently registered under
the Securities Act, an exemption from such registration is available, or
the resale of such Shares is permitted under Rule144 of the Securities
Act subject to the satisfaction of each of the conditions set forth
therein.

(g) Residence. If Purchaser is an individual, then Purchaser
resides in the location identified in the address of the Purchaser set
forth on Exhibit A; if Purchaser is a partnership, corporation, limited
liability company or other entity, then the office or offices of such
Purchaser in which its

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<PAGE> 72

investment decision was made is located at the address or addresses of
such Purchaser set forth on Exhibit A.

5. Conditions to Closing.

5.1 Conditions to Purchasers' Obligations at the Closing. Purchasers'
obligations to purchase the Shares and the Warrants at the Closing are subject
to the satisfaction, at or prior to the Closing Date, of the following
conditions:

(a) Representations and Warranties True; Performance of
Obligations. The representations and warranties made by the Company in
Section 3 hereof shall be true and correct as of the Closing Date with the
same force and effect as if they had been made as of the Closing Date,
except as may have been agreed to in writing by the Purchasers prior to the
Closing Date, and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to
the Closing.

(b) Legal Investment. On the Closing Date, the sale and issuance of
the Shares, and the proposed issuance of the Common Stock issuable upon
exercise of the Warrants, shall be legally permitted by all laws and
regulations to which Purchasers and the Company are subject.

(c) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the
Related Agreements (except for such as may be properly obtained subsequent
to the Closing).

(d) No Proceedings. Since the date of this Agreement, there shall not
have been commenced or threatened against the Purchasers, or against any
person affiliated with the Purchasers, any proceeding (a) involving any
challenge to, or seeking damages or other relief in connection with, any of
the transactions contemplated by this Agreement and the Related Agreements,
or (b) that may have the effect of preventing, delaying, making illegal or
otherwise interfering with any such transactions.

(e) Filing of Restated Charter. The Restated Charter shall have been
filed with the Secretary of State of the State of Delaware and shall
continue to be in full force and effect as of the Closing Date, and
certified copies thereof, in form and substance satisfactory to Purchasers'
counsel, shall have been delivered to Purchasers.

(f) Corporate Documents. The Company shall have delivered to
Purchasers or their counsel copies of all corporate documents of the
Company as Purchasers shall reasonably request.

(g) Reservation of Shares to be Issued Upon Exercise of Warrants. The
shares of the Company's Common Stock issuable upon exercise of the Warrants
shall have been duly authorized and reserved for issuance upon such
exercise.

(h) Material Adverse Change. There shall have been no material
adverse change in the business, condition, assets, liabilities, operations,
financial performance, net income or prospects (or in any aspect or portion
thereof) of the Company and its subsidiaries since the date of this
Agreement.

(i) Financial Statements. An officer's certificate attaching the
Financial Statements, and certifying their accuracy, completeness and
compliance in other respects with the representations and warranties
contained herein, shall have been delivered to the Purchasers at the time
of execution of this Agreement and a receipt therefor executed by
Purchasers.

(j) Compliance Certificate. The Company shall have delivered to
Purchasers a Compliance Certificate, executed by the President of the
Company, dated the Closing Date, to the effect that the conditions
specified in subsections (a), (c), (e), (g) and (h) of this Section 5.1
have been satisfied, and certifying, to the satisfaction of Purchasers and
their counsel, that the number of shares issuable upon exercise of the
Warrants, together with the Shares, equals forty percent (40%) of the fully
diluted shares of the Company (taking all convertible securities as
converted into Common Stock, and all warrants

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<PAGE> 73

exercisable for the purchase of Common Stock as exercised and such Common
Stock purchased, as of the Closing Date).

(k) Registration and Stockholder Rights Agreement. A Registration and
Stockholder Rights Agreement substantially in the form attached hereto as
Exhibit C shall have been executed and delivered by the parties hereto.

(l) Distribution Agreement. The Company shall have entered into that
certain Distribution Agreement between the Company and SPARK 1st Vision
GmbH & Co. K.G.

(m) Board of Directors. Upon the Closing, the authorized size of the
Board of Directors of the Company shall be five members and the Board shall
consist of Falah Al-Khadi, Bernd Herrmann, and Urs Wettstein, John N.
Kapoor and Dr. Ramesh C. Trivedi.

(n) Legal Opinion. The Purchasers shall have received from legal
counsel to the Company an opinion addressed to them, dated as of the
Closing Date, in form and substance satisfactory to Purchasers' counsel.

(o) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers and their special
counsel, and the Purchasers and their special counsel shall have received
all such counterpart originals or certified or other copies of such
documents as they may reasonably request.

5.2 Conditions to Obligations of the Company. The Company's obligation to
issue and sell the Shares and the Warrants at the Closing is subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:

(a) Representations and Warranties True. The representations and
warranties in Section 4 made by those Purchasers acquiring Shares and the
Warrants shall be true and correct at the date of the Closing, with the
same force and effect as if they had been made on and as of said date.

(b) Performance of Obligations. Such Purchasers shall have performed
and complied with all agreements and conditions herein required to be
performed or complied with by such Purchasers on or before the Closing.

(c) Filing of Restated Charter. The Restated Charter shall have been
filed with the Secretary of State of the State of Delaware and shall
continue to be in full force and effect as of the Closing Date.

(d) Registration and Stockholder Rights Agreement. A Registration and
Stockholder Rights Agreement substantially in the form attached hereto as
Exhibit C shall have been executed and delivered by the parties hereto.

(e) Distribution Agreement. The Company shall have entered into that
certain Distribution Agreement between the Company and SPARK 1st Vision
GmbH & Co. K.G.

(f) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the
Related Agreements, including but not limited to, any consents, permits or
approvals from the Securities and Exchange Commission necessary for the
consummation of the transactions contemplated herein or for any
precondition thereto (except for such as may be properly obtained
subsequent to the Closing).

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6. Termination.

6.1 This Agreement may be terminated prior to the Closing:

(a) by any Purchaser if (i) there is a material breach of any covenant
or obligation of the Company, or (ii) any Purchaser reasonably determines
that the timely satisfaction of any condition set forth in Section 5 has
become impossible or impractical (other than as a result of any failure on
the part of such Purchaser comply with or perform his or its covenants and
obligations under this Agreement);

(b) by any Purchaser at or after the Scheduled Closing Date if any
condition set forth in Section 5 has not been satisfied by the Scheduled
Closing Date; or

(c) by any Purchaser if the Closing has not taken place on or before
November 30, 1999 (other than as a result of any failure on the part of
such Purchaser to comply with or perform his or its covenants and
obligations under this Agreement).

6.2 Termination Procedures. If any Purchaser wishes to terminate this
Agreement pursuant to Section 6.1, the Purchaser shall deliver to the Company a
written notice stating that the Purchaser is terminating this Agreement and
setting forth a brief description of the basis on which the Purchaser is
terminating this Agreement.

6.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 6.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that no party shall be relieved of any obligation
or other liability arising from any breach by such party of any provision of
this Agreement.

6.4 Nonexclusivity of Termination Rights. The termination rights provided
in Section 6.1 shall not be deemed to be exclusive. Accordingly, the exercise by
any party of its right to terminate this Agreement pursuant to Section 6.1 shall
not be deemed to be an election of remedies and shall not be deemed to
prejudice, or to constitute or operate as a waiver of, any other right or remedy
that such party may be entitled to exercise (whether under this Agreement, under
any other contract, under any statute, rule or other legal requirement, at
common law, in equity or otherwise).

7. Miscellaneous.

7.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely in California.

7.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby for a period of two (2) years
following the Closing. All statements as to factual matters contained in any
certificate or other instrument delivered by or on behalf of the Company
pursuant hereto in connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the Company hereunder solely as
of the date of such certificate or instrument.

7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares or the Warrants from time to time.

7.4 Entire Agreement. This Agreement, the Exhibits and Schedules hereto,
the Related Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.

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7.5 Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

7.6 Amendment and Waiver.

(a) This Agreement may be amended or modified only upon the written consent
of the Company and holders of at least sixty-six and two-thirds percent
(66 2/3%) of the Shares (including any shares of the Company's Common Stock
acquired by any Purchaser upon exercise of a Warrant).

(b) The obligations of the Company and the rights of the holders of the
Shares and the Warrants under the Agreement may be waived only with the written
consent of the holders of at least sixty-six and two-thirds percent (66 2/3%) of
the Shares (including any shares of the Company's Common Stock acquired by any
Purchaser upon exercise of a Warrant).

7.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Related
Agreements or the Restated Charter, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on any Purchaser's
part of any breach, default or noncompliance under this Agreement, the Related
Agreements or under the Restated Charter or any waiver on such party's part of
any provisions or conditions of the Agreement, or the Related Agreements, or the
Restated Charter must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or the Related Agreements, the Restated Charter, by law, or otherwise
afforded to any party, shall be cumulative and not alternative.

7.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed facsimile if sent during normal
business hours of the recipient, if not, then on the next business day, (c) five
(5) days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) two (2) days after deposit with an
internationally recognized overnight courier, specifying no less than delivery
within 48 hours, with written verification of receipt. All communications shall
be sent to the Company at the address as set forth on the signature page hereof
and to Purchaser at the address set forth on Exhibit A attached hereto or at
such other address as the Company or Purchaser may designate by ten (10) days
advance written notice to the other parties hereto.

7.9 Expenses. Each party shall pay all costs and expenses that it incurs
with respect to the negotiation, execution, delivery and performance of the
Agreement.

7.10 Attorneys' Fees. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

7.11 Titles and Subtitles. The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.

7.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

7.13 Broker's Fees. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 6.13 being untrue.

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7.14 Exculpation Among Purchasers. Each Purchaser acknowledges that it is
not relying upon any person, firm, or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable to any other Purchaser for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
Shares and the Warrants.

7.15 Confidentiality. Each party hereto agrees that, except with the
prior written consent of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement or the Related Agreements,
discussions or negotiations relating to this Agreement or the Related
Agreements, the performance of its obligations hereunder or the ownership of the
Shares purchased hereunder. The provisions of this Section 6.15 shall be in
addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by the parties hereto.

7.16 Pronouns. All pronouns contained herein, and any variations thereof,
shall be deemed to refer to the masculine, feminine or neutral, singular or
plural, as to the identity of the parties hereto may require.

7.17 California Corporate Securities Law. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE
COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.

IN WITNESS WHEREOF, the parties hereto have executed this STOCK AND WARRANT
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

<TABLE>
<CAPTION>
COMPANY: PURCHASERS:
<S> <C>
INTEGRATED SURGICAL SYSTEMS, INC. ILTAG INTERNATIONAL LICENSING HOLDING S.A.L.

By: /s/ RAMESH C. TRIVEDI
------------------------------------------------- By: /s/ MOHAMMED Y. DOGMOCH
-------------------------------------------------
Its: President and Chief Executive Officer Its: Chairman

/s/ BERND HERRMANN
-----------------------------------------------------
BERND HERRMANN

/s/ URS WETTSTEIN
-------------------------------------------------
URS WETTSTEIN
</TABLE>

14
<PAGE> 77

<TABLE>
<S> <C>
LIST OF EXHIBITS

SCHEDULE OF PURCHASERS Exhibit A
FORM OF WARRANT Exhibit B
REGISTRATION AND STOCKHOLDER RIGHTS AGREEMENT Exhibit C
</TABLE>

15
<PAGE> 78

EXHIBIT A

SCHEDULE OF PURCHASERS

<TABLE>
<CAPTION>
AMOUNT PAID REMAINING AGGREGATE
NAME AND ADDRESS PRIOR TO CLOSING PURCHASE PRICE PURCHASE PRICE
---------------- ---------------- -------------- --------------
<S> <C> <C> <C>
ILTAG International Licensing Holding S.A.L....... $400,000 $1,600,000 $2,000,000
Adnan Al Hakim St.
Assaf Bldg.
P.O. Box 135660
Beirut, Lebanon
Bernd Herrmann.................................... -- $1,000,000 $1,000,000
37 Avenue des Papalins
MC-8000 Monaco
Urs Wettstein..................................... -- $1,000,000 $1,000,000
Gartenstrasse 33, 8002
Zurich, Switzerland
-------- ---------- ----------
Totals............................................ $400,000 $3,600,000 $4,000,000
======== ========== ==========
</TABLE>

i
<PAGE> 79

EXHIBIT B

NO. PW-

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.

WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
INTEGRATED SURGICAL SYSTEMS, INC.
[EXPIRES , 2002]

This certifies that or its assigns (the "HOLDER"), for value
received, is entitled to purchase from Integrated Surgical Systems, Inc., a
Delaware corporation (the "COMPANY"), having a place of business at 1850
Research Park Drive, Davis, CA 95616-4884, a maximum of fully paid and
nonassessable shares (the "Exercise Shares") of the Company's Common Stock for
cash at a price of 1.02656 per share (the "STOCK PURCHASE PRICE") at any time or
from time to time, up to 5:00 p.m. on a date which is three (3) years from the
date of this Warrant (the "EXPIRATION DATE"), upon surrender to the Company at
its principal office (or at such other location as the Company may advise the
Holder in writing) of this Warrant properly endorsed with the Form of
Subscription attached hereto duly filled in and signed and, if applicable, upon
payment in cash or by check of the aggregate Stock Purchase Price for the number
of shares for which this Warrant is being exercised determined in accordance
with the provisions hereof. The Stock Purchase Price and the number of shares
purchasable hereunder are subject to adjustment as provided in Section 3 of this
Warrant.

This Warrant is subject to the following terms and conditions:

1. Exercise; Issuance of Certificates; Payment for Shares. This Warrant
is exercisable at the option of the Holder, at any time or from time to time up
to the Expiration Date, for all or any part of the shares of Common Stock (but
not for a fraction of a share) which may be purchased hereunder. The Company
agrees that the shares of Common Stock purchased under this Warrant shall be and
are deemed to be issued to the Holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered, properly endorsed, the completed, executed Form of Subscription
delivered and payment made for such shares. Certificates for the shares of
Common Stock so purchased, together with any other securities or property to
which the Holder hereof is entitled upon such exercise, shall be delivered to
the Holder hereof by the Company at the Company's expense within a reasonable
time after the rights represented by this Warrant have been so exercised. In
case of a purchase of less than all the shares which may be purchased under this
Warrant, the Company shall cancel this Warrant and execute and deliver a new
Warrant or Warrants of like tenor for the balance of the shares purchasable
under the Warrant surrendered upon such purchase to the Holder hereof within a
reasonable time. Each stock certificate so delivered shall be in such
denominations of Common Stock as may be requested by the Holder hereof and shall
be registered in the name of such Holder.

2. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise
<PAGE> 80

of the rights represented by this Warrant. The Company will take all such action
as may be necessary to assure that such shares of Common Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Common Stock may
be listed; provided, however, that the Company shall not be required to effect a
registration under Federal or State securities laws with respect to such
exercise. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) (i) if
the total number of shares of Common Stock issuable after such action upon
exercise of all outstanding warrants, together with all shares of Common Stock
then outstanding and all shares of Common Stock then issuable upon exercise of
all options and upon the conversion of all convertible securities then
outstanding, would exceed the total number of shares of Common Stock then
authorized by the Company's Restated Certificate of Incorporation, or (ii) if
the total number of shares of Common Stock issuable after such action upon the
conversion of all such shares of Common Stock, together with all shares of
Common Stock then issuable upon exercise of all options and upon the conversion
of all such shares of Common Stock, together with all shares of Common Stock
then outstanding and all shares of Common Stock then issuable upon exercise of
all options and upon the conversion of all convertible securities then
outstanding would exceed the total number of shares of Common Stock then
authorized by the Company's Restated Certificate of Incorporation.

3. Adjustment of Stock Purchase Price and Number of Shares. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.

3.1 Subdivision or Combination of Stock. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to
such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined
into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.

3.2 Dividends in Common Stock, Other Stock, Property,
Reclassification. If at any time or from time to time the Holders of
Common Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,

(a) Common Stock or any shares of stock or other securities which
are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other
distribution,

(b) any cash paid or payable otherwise than as a cash dividend, or

(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than
shares of Common Stock issued as a stock split or adjustments in respect
of which shall be covered by the terms of Section 3.1 above), then and
in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of
Common Stock receivable thereupon, and without payment of any additional
consideration therefor, the amount of stock and other securities and
property (including cash in the cases referred to in clause (b) above
and this clause (c)) which such Holder would hold on the date of such
exercise had it been the holder of record of such Common Stock as of the
date on which holders of Common Stock received or became entitled to
receive such shares or all other additional stock and other securities
and property.

2
<PAGE> 81

3.3 Reorganization, Reclassification, Consolidation, Merger or
Sale. If any recapitalization, reclassification or reorganization of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets or other transaction shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or other
assets or property (an "ORGANIC CHANGE"), then, as a condition of such
Organic Change, lawful and adequate provisions shall be made by the Company
whereby the Holder hereof shall thereafter have the right to purchase and
receive (in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby) such shares of stock, securities or other assets
or property as may be issued or payable with respect to or in exchange for
a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby; provided, however, that
in the event the value of the stock, securities or other assets or property
(determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby is in excess of the Stock
Purchase Price hereof effective at the time of a merger and securities
received in such reorganization, if any, are publicly traded, then this
Warrant shall expire unless exercised prior to such Organic Change. In the
event of any Organic Change, appropriate provision shall be made by the
Company with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Stock Purchase Price and of
the number of shares purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or the
corporation purchasing such assets shall assume by written instrument
reasonably satisfactory in form and substance to the Holders of a majority
of the warrants to purchase Common Stock then outstanding, executed and
mailed or delivered to the registered Holder hereof at the last address of
such Holder appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
purchase.

3.4 Certain Events. If any change in the outstanding Common Stock of
the Company or any other event occurs as to which the other provisions of
this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the purchase rights of the Holder of the Warrant in
accordance with such provisions, then the Board of Directors of the Company
shall make an adjustment in the number and class of shares available under
the Warrant, the Stock Purchase Price or the application of such
provisions, so as to protect such purchase rights as aforesaid. The
adjustment shall be such as will give the Holder of the Warrant upon
exercise for the same aggregate Stock Purchase Price the total number,
class and kind of shares as it would have owned had the Warrant been
exercised prior to the event and had it continued to hold such shares until
after the event requiring adjustment.

3.5 Notices of Change. Immediately upon any adjustment in the number
or class of shares subject to this Warrant and of the Stock Purchase Price,
the Company shall give written notice thereof to the Holder, setting forth
in reasonable detail and certifying the calculation of such adjustment.

(a) The Company shall give written notice to the Holder at least 10
business days prior to the date on which the Company closes its books or
takes a record for determining rights to receive any dividends or
distributions.

(b) The Company shall also give written notice to the Holder at
least 30 business days prior to the date on which an Organic Change
shall take place.

4. Registration Rights. The Holders shall have such registration and
other rights as set forth in that certain Registration and Stockholder Rights
Agreement of even date herewith.

5. Issue Tax. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any

3
<PAGE> 82

applicable income taxes) in respect thereof; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the then Holder of the Warrant being exercised.

6. Closing of Books. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.

7. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.

8. Warrants Transferable. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.

9. Rights and Obligations Survive Exercise of Warrant. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.

10. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.

11. Notices. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other address
as either may from time to time provide to the other.

12. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.

13. Descriptive Headings and Governing Law. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.

14. Lost Warrants. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to

4
<PAGE> 83

the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant, the Company, at its expense, will make and deliver
a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Warrant.

15. Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
its officers.

DATED: , 1999 INTEGRATED SURGICAL SYSTEMS, INC.
a Delaware corporation

By:
--------------------------------------

Title:
--------------------------------------

ATTEST:

- ---------------------------------------------------------
Secretary

5
<PAGE> 84

EXHIBIT A

SUBSCRIPTION FORM

Date: ____________, ____

Integrated Surgical Systems, Inc.

1850 Research Park Drive

Davis, California 95616-4884

Attn: President

Ladies and Gentlemen:

The undersigned hereby elects to exercise the warrant issued to it by
(the "Company") and dated , Warrant No.
PW- (the "Warrant") and to purchase thereunder
shares of the Common Stock of the Company (the "Shares") at a purchase price of
Dollars ($ ) per Share or an aggregate purchase price of
Dollars ($ ) (the "Purchase Price").

Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.

Very truly yours,

--------------------------------------

By:
--------------------------------------

Title:
--------------------------------------
<PAGE> 85

EXHIBIT C

INTEGRATED SURGICAL SYSTEMS, INC.

REGISTRATION AND STOCKHOLDER RIGHTS AGREEMENT

THIS REGISTRATION AND STOCKHOLDER RIGHTS AGREEMENT (THE "AGREEMENT") is
entered into as of the day of , 199 , by and among INTEGRATED
SURGICAL SYSTEMS, INC. a Delaware corporation (the "COMPANY") and the purchasers
of the Company's Common Stock ("COMMON STOCK") set forth on Exhibit A of that
certain Stock and Warrant Purchase Agreement dated as of October 1, 1999 (the
"PURCHASE AGREEMENT") and Exhibit A hereto. The purchasers of the Common Stock
shall be referred to hereinafter as the "PURCHASERS" and each individually as a
"PURCHASER." Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Purchase Agreement.

RECITALS

WHEREAS, the Company proposes to sell and issue the Shares pursuant to the
Purchase Agreement, consisting of up to Two Million Nine Hundred Twenty Two
Thousand Three Hundred Ninety Six (2,922,396) shares of its Common Stock and
warrants (the "Warrants") for the purchase of up to an additional number of
shares of its Common Stock such that the number of shares issuable upon exercise
of the Warrants, together with the Shares, equals forty percent (40%) of the
fully diluted shares of the Company (taking all convertible securities as
converted into Common Stock, and all warrants exercisable for the purchase of
Common Stock as exercised and such Common Stock purchased, as of the Closing
Date); and

WHEREAS, as a condition of entering into the Purchase Agreement, the
Purchasers have requested that the Company extend to them registration rights,
information rights and other rights as set forth below.

NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and in the
Purchase Agreement, the parties mutually agree as follows:

SECTION 1. GENERAL

1.1 Definitions. As used in this Agreement the following terms shall have
the following respective meanings:

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

"FORM S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the
Company with the SEC.

"HOLDER" means any person owning of record Registrable Securities that
have not been sold to the public or any assignee of record of such
Registrable Securities in accordance with Section 2.10 hereof.

"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance
with the Securities Act, and the declaration or ordering of effectiveness
of such registration statement or document.

"REGISTRABLE SECURITIES" means (a) the Shares; (b) any Common Stock of
the Company issued upon the exercise of the Warrants; and (c) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in replacement
of, such above-described securities. Notwithstanding the foregoing,
Registrable Securities shall not include any securities sold by a
<PAGE> 86

person to the public either pursuant to a registration statement or Rule
144 or sold in a private transaction in which the transferor's rights under
Section 2 of this Agreement are not assigned.

"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the
Company's Common Stock that are Registrable Securities and either (a) are
then issued and outstanding or (b) are issuable pursuant to then
exercisable or convertible securities, including the Warrants.

"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including,
without limitation, all registration and filing fees, printing expenses,
fees and disbursements of counsel for the Company, reasonable fees and
disbursements not to exceed twenty-five thousand dollars ($25,000) of a
single special counsel for the Holders, blue sky fees and expenses and the
expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company).

"SEC" or "COMMISSION" means the Securities and Exchange Commission.

"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale.

"SHARES" shall mean the Company's Common Stock issued pursuant to the
Purchase Agreement and held by the Purchasers listed on Exhibit A hereto
and their permitted assigns.

SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER

2.1 Restrictions on Transfer.

(a) Each Holder agrees not to make any disposition of all or any portion of
the Shares or Registrable Securities unless and until:

(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or

(ii) (A) The transferee has agreed in writing to be bound by the terms
of this Agreement, (B) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(C) if reasonably requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act. It is agreed that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144
except in unusual circumstances.

(iii) Notwithstanding the provisions of paragraphs (i) and (ii) above,
no such registration statement or opinion of counsel shall be necessary for
a transfer by a Holder which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
shareholders in accordance with their interest in the corporation, (C) a
limited liability company to its members or former members in accordance
with their interest in the limited liability company, or (D) to the
Holder's family member or trust for the benefit of an individual Holder;
provided that in each case the transferee will be subject to the terms of
this Agreement to the same extent as if he were an original Holder
hereunder.

(b) Each certificate representing Shares or Registrable Securities shall
(unless otherwise permitted by the provisions of the Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws):

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS
2
<PAGE> 87

AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.

(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any holder thereof if the holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of without registration,
qualification or legend.

(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.

2.2 Demand Registration.

(a) Subject to the conditions of this Section 2.2, if the Company shall
receive a written request from the Holders of a majority of the Registrable
Securities then outstanding (the "INITIATING HOLDERS") that the Company file a
registration statement under the Securities Act covering the registration of at
least twenty-five percent (25%) of the Registrable Securities then outstanding
(or a lesser percent if the anticipated aggregate offering price, net of
underwriting discounts and commissions, would exceed $2,000,000 (a "QUALIFIED
PUBLIC OFFERING")), then the Company shall, within thirty (30) days of the
receipt thereof, give written notice of such request to all Holders, and subject
to the limitations of this Section 2.2, use its best efforts to effect, as soon
as practicable, the registration under the Securities Act of all Registrable
Securities that the Holders request to be registered.

(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 2.2
or any request pursuant to Section 2.4 and the Company shall include such
information in the written notice referred to in Section 2.2(a) or Section
2.4(a), as applicable. In such event, the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by a majority in interest of the
Initiating Holders (which underwriter or underwriters shall be reasonably
acceptable to the Company). Notwithstanding any other provision of this Section
2.2 or Section 2.4, if the underwriter advises the Company that marketing
factors require a limitation of the number of securities to be underwritten
(including Registrable Securities) then the Company shall so advise all Holders
of Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders); provided, however, that the number of shares
of Registrable Securities to be included in such underwriting and registration
shall not be reduced unless all other securities of the Company are first
entirely excluded from the underwriting and registration. Any Registrable
Securities excluded or withdrawn from such underwriting shall be withdrawn from
the registration.

The Company shall not be required to effect a registration pursuant to this
Section 2.2:

(i) after the Company has effected two (2) registrations pursuant to
this Section 2.2, and such registrations have been declared or ordered
effective;

(ii) during the period starting with the date of filing of, and ending
on the date one hundred eighty (180) days following the effective date of
the registration statement pertaining to a public offering; provided that
the Company makes reasonable good faith efforts to cause such registration
statement to become effective;

(iii) if within thirty (30) days of receipt of a written request from
Initiating Holders pursuant to Section 2.2(a), the Company gives notice to
the Holders of the Company's intention to make a public offering within
ninety (90) days;

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(iv) if the Company shall furnish to Holders requesting a registration
statement pursuant to this Section 2.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of the Board
of Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such registration statement to be effected
at such time, in which event the Company shall have the right to defer such
filing for a period of not more than one hundred twenty (120) days after
receipt of the request of the Initiating Holders; provided that such right
to delay a request shall be exercised by the Company not more than once in
any twelve (12) month period; or

(v) if the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2.4 below.

2.3 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least fifteen (15) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after the above-described notice from the
Company, so notify the Company in writing. Such notice shall state the intended
method of disposition of the Registrable Securities by such Holder. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.

(a) Underwriting. If the registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten
offering, the Company shall so advise the Holders of Registrable
Securities. In such event, the right of any such Holder to be included in a
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their Registrable Securities
through such underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of the
Agreement, if the underwriter determines in good faith that marketing
factors require a limitation of the number of shares to be underwritten,
the number of shares that may be included in the underwriting shall be
allocated, first, to the Company; second, to the Holders on a pro rata
basis based on the total number of Registrable Securities held by the
Holders; and third, to any shareholder of the Company (other than a Holder)
on a pro rata basis. No such reduction shall (i) reduce the securities
being offered by the Company for its own account to be included in the
registration and underwriting, or (ii) reduce the amount of securities of
the selling Holders included in the registration below twenty-five percent
(25%) of the total amount of securities included in such registration. In
no event will shares of any other selling shareholder be included in such
registration which would reduce the number of shares which may be included
by Holders without the written consent of Holders of not less than
sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities
proposed to be sold in the offering. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter, delivered at least ten
(10) business days prior to the effective date of the registration
statement. Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired
partners and shareholders of such Holder, or the estates and family members
of any such partners and retired partners and any trusts for the benefit of
any of the foregoing person shall be deemed to be a single "HOLDER", and
any pro rata reduction with respect to such "Holder" shall be based upon
the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "Holder," as defined in this
sentence.

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(b) Right to Terminate Registration. The Company shall have the right
to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by the
Company in accordance with Section 2.5 hereof.

2.4 Form S-3 Registration. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 (or any successor to Form S-3) or
any similar short-form registration statement and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:

(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders of Registrable
Securities; and

(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such
written notice from the Company; provided, however, that the Company shall
not be obligated to effect any such registration, qualification or
compliance pursuant to this Section 2.4:

(i) if Form S-3 (or any successor or similar form) is not available
for such offering by the Holders, or

(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if
any) at an aggregate price to the public of less than one million
dollars ($1,000,000), or

(iii) if within thirty (30) days of receipt of a written request
from any Holder or Holders pursuant to this Section 2.4, the Company
gives notice to such Holder or Holders of the Company's intention to
make a public offering within ninety (90) days;

(iv) if the Company shall furnish to the Holders a certificate
signed by the Chairman of the Board of Directors of the Company stating
that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 registration to be effected at such time,
in which event the Company shall have the right to defer the filing of
the Form S-3 registration statement for a period of not more than ninety
(90) days after receipt of the request of the Holder or Holders under
this Section 2.4; provided, that such right to delay a request shall be
exercised by the Company not more than once in any twelve (12) month
period, or

(v) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected two (2)
registrations on Form S-3 for the Holders pursuant to this Section 2.4,
or

(vi) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or
compliance.

(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders. Registrations effected
pursuant to this Section 2.4 shall not be counted as demands for
registration or registrations effected pursuant to Sections 2.2 or 2.3,
respectively. All such Registration Expenses incurred in connection with
registrations requested pursuant to this Section 2.4 after the first two
(2) registrations shall be paid by the selling Holders pro rata in
proportion to the number of shares sold by each.

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2.5 Expenses of Registration. Except as specifically provided herein, all
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 2.2 or
2.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
agree to forfeit their right to one requested registration pursuant to Section
2.2 or Section 2.4, as applicable, in which event such right shall be forfeited
by all Holders). If the Holders are required to pay the Registration Expenses,
such expenses shall be borne by the holders of securities (including Registrable
Securities) requesting such registration in proportion to the number of shares
for which registration was requested. If the Company is required to pay the
Registration Expenses of a withdrawn offering pursuant to clause (a) above, then
the Holders shall not forfeit their rights pursuant to Section 2.2 or Section
2.4 to a demand registration.

2.6 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:

(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to
cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for up to
thirty (30) days or, if earlier, until the Holder or Holders have completed
the distribution related thereto. The Company shall not be required to
file, cause to become effective or maintain the effectiveness of any
registration statement that contemplates a distribution of securities on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act.

(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by such registration statement for the period set forth in
paragraph (a) above.

(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Securities Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by
them.

(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business
or to file a general consent to service of process in any such states or
jurisdictions.

(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.

(g) Use its best efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities
are being sold through underwriters, (i) an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and
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substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and (ii) a letter dated as
of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering addressed to the underwriters.

2.7 Termination of Registration Rights. All registration rights granted
under this Section 2 shall terminate and be of no further force and effect as to
any Holder and Registrable Securities held by such Holder when (i) all such
Registrable Securities shall have been effectively registered under the Act and
sold by the Holder in accordance with such registration; (b) such Holder
(together with its affiliates, partners and former partners) holds less than 1%
of the Company's outstanding Common Stock (treating all share of convertible
Preferred Stock on an as converted basis)] or (c) all Registrable Securities
held by and issuable to such Holder (and its affiliates, partners, former
partners, members and former members) may be sold under Rule 144 during any
ninety (90) day period.

2.8 Delay of Registration; Furnishing Information.

(a) No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 2.

(b) It shall be a condition precedent to the obligations of the Company to
take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders
shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.

(c) The Company shall have no obligation with respect to any registration
requested pursuant to Section 2.2 or Section 2.4 if, due to the operation of
subsection 2.2(b), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in Section 2.2 or Section 2.4, whichever is
applicable.

2.9 Indemnification. In the event any Registrable Securities are included
in a registration statement under Sections 2.2, 2.3 or 2.4:

(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "VIOLATION")
by the Company: (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act,
any state securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law in connection
with the offering covered by such registration statement; and the Company
will pay as incurred to each such Holder, partner, officer, director,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided however, that
the indemnity agreement contained in this Section 2.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company,
which consent shall not be unreasonably withheld, nor shall the Company be
liable in any such case for any such loss, claim, damage, liability or
action to the extent that it arises out of or is based upon a

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<PAGE> 92

Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by such Holder, partner, officer, director, underwriter or
controlling person of such Holder.

(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which
such registration qualifications or compliance is being effected, indemnify
and hold harmless the Company, each of its directors, its officers and each
person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities
under such registration statement or any of such other Holder's partners,
directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person, underwriter or
other such Holder, or partner, director, officer or controlling person of
such other Holder may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder under an instrument duly executed by
such Holder and stated to be specifically for use in connection with such
registration; and each such Holder will pay as incurred any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or
action if it is judicially determined that there was such a Violation;
provided, however, that the indemnity agreement contained in this Section
2.9(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably
withheld; provided further, that in no event shall any indemnity under this
Section 2.9 exceed the net proceeds from the offering received by such
Holder.

(c) Promptly after receipt by an indemnified party under this Section
2.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if representation
of such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the indemnified
party under this Section 2.9, but the omission so to deliver written notice
to the indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 2.9.

(d) If the indemnification provided for in this Section 2.9 is held by
a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a
result of such loss, claim, damage or liability in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
Violation(s) that resulted in such loss, claim, damage or liability, as
well as any other relevant equitable considerations. The relative fault of
the indemnifying party and of the indemnified party shall be determined by
a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or
by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such

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statement or omission; provided, that in no event shall any contribution by
a Holder hereunder exceed the proceeds from the offering received by such
Holder.

(e) The obligations of the Company and Holders under this Section 2.9
shall survive completion of any offering of Registrable Securities in a
registration statement and the termination of this agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim
or litigation.

2.10 Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities pursuant to this Section 2 may be assigned by
a Holder to a transferee or assignee of Registrable Securities which (a) is a
subsidiary, parent, general partner, limited partner, retired partner, member or
retired member of a Holder, (b) is a Holder's family member or trust for the
benefit of an individual Holder, or (c) acquires at least fifty thousand
(200,000) shares of Registrable Securities (as adjusted for stock splits and
combinations); provided, however, (i) the transferor shall, within ten (10) days
after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (ii) such transferee shall agree
to be subject to all restrictions set forth in this Agreement.

2.11 Amendment of Registration Rights. Any provision of this Section 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least sixty-six and two-
thirds percent (66 2/3%) of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this Section 2.11 shall be
binding upon each Holder and the Company. By acceptance of any benefits under
this Section 2, Holders of Registrable Securities hereby agree to be bound by
the provisions hereunder.

2.12 Limitation on Subsequent Registration Rights. After the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable
Securities then outstanding, enter into any agreement with any holder or
prospective holder of any securities of the Company that would grant such holder
registration rights pari passu or senior to those granted to the Holders
hereunder.

2.13 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:

(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;

(b) File with the SEC, in a timely manner, all reports and other documents
required of the Company under the Exchange Act; and

(c) So long as a Holder owns any Registrable Securities, furnish to such
Holder forthwith upon request: a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 of the Securities
Act, and of the Exchange Act (at any time after it has become subject to such
reporting requirements); a copy of the most recent annual or quarterly report of
the Company; and such other reports and documents as a Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing it to
sell any such securities without registration.

SECTION 3. COVENANTS OF THE COMPANY

3.1 Basic Financial Information and Reporting.

(a) The Company will maintain true books and records of account in which
full and correct entries will be made of all its business transactions pursuant
to a system of accounting established and administered in

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accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently applied.

(b) Unless otherwise made publicly available, as soon as practicable after
the end of each fiscal year of the Company, and in any event within one hundred
twenty (120) days thereafter, to the extent requested by a Purchaser the Company
will furnish each Purchaser a balance sheet of the Company, as at the end of
such fiscal year, and a statement of income and a statement of cash flows of the
Company, for such year, all prepared in accordance with generally accepted
accounting principles consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail. Such financial statements shall be accompanied by a report and opinion
thereon by independent public accountants of national standing selected by the
Company's Board of Directors.

(c) Unless otherwise made publicly available, the Company will furnish each
Purchaser, as soon as practicable after the end of the first, second and third
quarterly accounting periods in each fiscal year of the Company, and in any
event within forty-five (45) days thereafter, to the extent requested by such
Purchaser a balance sheet of the Company as of the end of each such quarterly
period, and a statement of income and a statement of cash flows of the Company
for such period and for the current fiscal year to date, prepared in accordance
with generally accepted accounting principles, with the exception that no notes
need be attached to such statements and year-end audit adjustments may not have
been made.

3.2 Inspection Rights. Each Holder of at least Five Hundred Thousand
(500,000) shares of Common Stock ("MAJOR STOCKHOLDER") shall have the right to
visit and inspect any of the properties of the Company or any of its
subsidiaries, and to discuss the affairs, finances and accounts of the Company
or any of its subsidiaries with its officers, and to review such information as
is reasonably requested all at such reasonable times and as often as may be
reasonably requested; provided, however, that the Company shall not be obligated
under this Section 3.2 with respect to a competitor of the Company or with
respect to information which the Board of Directors determines in good faith is
confidential and should not, therefore, be disclosed.

3.3 Confidentiality of Records. Each Purchaser agrees to use, and to use
its best efforts to insure that its authorized representatives use, the same
degree of care as such Purchaser uses to protect its own confidential
information to keep confidential any information furnished to it which the
Company identifies as being confidential or proprietary (so long as such
information is not in the public domain), except that such Purchaser may
disclose such proprietary or confidential information to any partner, subsidiary
or parent of such Purchaser for the purpose of evaluating its investment in the
Company as long as such partner, subsidiary or parent is advised of the
confidentiality provisions of this Section 3.3.

3.4 Reservation of Common Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the exercise of the
Warrants, all Common Stock issuable from time to time upon such exercise.

3.5 Visitation Rights. The Company shall allow one representative
designated by each Purchaser the right to attend all meetings of the Company's
Board of Directors in a nonvoting capacity, and in connection therewith, the
Company shall give such representative copies of all notices, minutes, consents
and other materials, financial or otherwise, which the Company provides to its
Board of Directors; provided, however, that the Company reserves the right to
exclude such representative from access to any material or meeting or portion
thereof if the Company believes upon advice of counsel that such exclusion is
reasonably necessary to preserve the attorney-client privilege, to protect
highly confidential proprietary information or for other similar reasons.

3.6 Termination of Covenants. All covenants of the Company contained in
Section 3 of this Agreement shall expire and terminate as to each Purchaser upon
(a) the sale, lease or other disposition of all or substantially all of the
assets of the Company or (b) an acquisition of the Company by another
corporation or entity by consolidation, merger or other reorganization in which
the holders of the Company's outstanding voting stock immediately prior to such
transaction own, immediately after such transaction, securities representing
less than fifty percent (50%) of the voting power of the corporation or other
entity surviving such

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transaction, provided that this Section 3.8(b) shall not apply to a merger
effected exclusively for the purpose of changing the domicile of the Company (a
"CHANGE IN CONTROL").

SECTION 4. MISCELLANEOUS

4.1 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.

4.2 Survival. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.

4.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.

4.4 Entire Agreement. This Agreement, the Exhibits and Schedules hereto,
the Purchase Agreement and the other documents delivered pursuant thereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.

4.5 Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

4.6 Amendment and Waiver.

(a) Except as otherwise expressly provided, this Agreement may be amended
or modified only upon the written consent of the Company and the holders of at
least two-thirds (66 2/3%) of the Registrable Securities.

(b) Except as otherwise expressly provided, the obligations of the Company
and the rights of the Holders under this Agreement may be waived only with the
written consent of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the Registrable Securities.

(c) Notwithstanding the foregoing, this Agreement may be amended with only
the written consent of the Company to include additional purchasers of Shares as
"PURCHASERS," "HOLDERS" and parties hereto.

4.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.

4.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or
11
<PAGE> 96

facsimile if sent during normal business hours of the recipient; if not, then on
the next business day, (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) two (2) days
after deposit with an internationally recognized overnight courier, specifying
no less than delivery within 48 hours, with written verification of receipt. All
communications shall be sent to the party to be notified at the address as set
forth on the signature pages hereof or Exhibit A hereto or at such other address
as such party may designate by ten (10) days advance written notice to the other
parties hereto.

4.9 Attorneys' Fees. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

4.10 Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.

4.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Registration and
Stockholder Rights Agreement as of the date set forth in the first paragraph
hereof.

<TABLE>
<S> <C>
COMPANY: PURCHASERS:
</TABLE>

<TABLE>
<S> <C>
INTEGRATED SURGICAL SYSTEMS, INC. ILTAG INTERNATIONAL LICENSING HOLDINGS S.A.L.

By: By:
- ------------------------------------------------- -------------------------------------------------
Its: Its:

-----------------------------------------------------
BERND HERRMANN

-----------------------------------------------------
URS WETTSTEIN
</TABLE>

12
<PAGE> 97

EXHIBIT A

<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES WARRANTS
---------------- --------- ---------
<S> <C> <C>
ILTAG International Licensing Holding S.A.L................. 1,461,198
Adnan Al Hakim St.
Assaf Bldg.
P.O. Box 135660
Beirut, Lebanon
Bernd Herrmann.............................................. 730,599
37 Avenue des Papalins
MC-8000 Monaco
Urs Wettstein............................................... 730,599
Gartenstrasse 33, 8002
Zurich, Switzerland
--------- ---------
Total Shares and Warrants................................... 2,922,396
========= =========
</TABLE>

<PAGE> 98

INTEGRATED SURGICAL SYSTEMS, INC.

1550 RESEARCH PARK DRIVE
DAVIS, CALIFORNIA 95616-4884

PROXY
The undersigned, a holder of Common Stock of INTEGRATED SURGICAL SYSTEMS,
INC., a Delaware corporation (the "Company"), hereby appoints DR. RAMESH C.
TRIVEDI and MARK W. WINN, and each of them, the proxy of the undersigned, with
full power of substitution, to attend represent and vote for the undersigned,
all of the shares of the Company which the undersigned would be entitled to
vote, at the Special Meeting of Stockholders of the Company to be held on
November 9, 1999 and any adjournments thereof, as follows:

1. The approval of the issue and sale to ILTAG International Licensing Holding
S.A.L., Bernd Herrmann and URS Wettstein of an aggregate of 2,922,240 shares
of common stock and warrants to purchase an additional number of shares of
common stock that would give them 40% of the fully diluted Common Stock, for
a purchase price of $4 million. The exercise price of the warrants is
$1.02656 per share.

<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>

2. The transaction of such business as may properly come before the Special
Meeting and any adjournments thereof.

The undersigned hereby revokes any other proxy to vote at such Special
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitations hereby, said proxies are authorized to
vote in accordance with their best judgment.
(continued, and to be signed, on other side)
<PAGE> 99

(continued from other side)

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS ON THE OTHER SIDE HEREOF. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ADOPTION OF PROPOSAL 1.

THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF A COPY OF THE NOTICE OF SPECIAL
MEETING DATED OCTOBER 5, 1999 RELATING TO THE SPECIAL MEETING.

<TABLE>
<S> <C>
Date: , 1999

----------------------------------- ------------------------------------------------------------

------------------------------------------------------------

------------------------------------------------------------
SIGNATURE(S) OF STOCKHOLDER(S)
The signature(s) hereon should correspond exactly with the
name(s) of the Stockholder(s) appearing on the Stock
Certificate. If stock is jointly held, all joint owners
should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such. If signer is a corporation, please sign the full
corporate name, and give title of signing officer.
</TABLE>

THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS OF INTEGRATED SURGICAL
SYSTEMS, INC. PLEASE MARK, SIGN, DATE
AND RETURN THE PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.