COMPUTER MOTION INC, 424B4, 1997-08-13

COMPUTER MOTION INC
424B4, 1997-08-13
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

This filing is made pursuant
to Rule 424(b)(4) under the
Securities Act of 1933 in
connection with Registration
No. 333-29505

2,500,000 SHARES

[COMPUTER MOTION LOGO]

COMMON STOCK

All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Computer Motion, Inc. (the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "RBOT."

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK
OFFERED HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<S> <C> <C> <C>
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<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Per Share............................. $14.00 $0.98 $13.02
Total (3)............................. $35,000,000 $2,450,000 $32,550,000
============================================================================================
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting expenses payable by the Company estimated at $600,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $40,250,000, the Underwriting Discount will
total $2,817,500 and the Proceeds to Company will total $37,432,500. See
"Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities, on or about August 15, 1997.

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

MONTGOMERY SECURITIES PIPER JAFFRAY INC.

August 11, 1997.

<PAGE> 2

ZEUS
ENABLING MINIMALLY INVASIVE MICROSURGERY
The ZEUS robotic surgical system under development is designed to fundamentally
improve surgeon dexterity and precision, and to enable a new class of minimally
invasive microsurgery procedures by allowing conventional open microsurgery
procedures to be performed using endoscopic techniques.

The Company believes that these new procedures will result in reduced pain and
trauma for patients and lowered health care costs.

HERMES
OPERATING SYSTEM FOR THE OPERATING ROOM
The HERMES OR Control Center under development is comprised of a centralized
control unit networked to medical devices in the operating room. HERMES is
designed to enable surgeons to directly control these devices using verbal
commands. With fast, accurate responses to direct surgeon commands, OR
efficiency can be improved, surgical case times shortened and labor costs
reduced.

AESOP
AUTOMATED ENDOSCOPIC SYSTEM FOR
OPTIMAL POSITIONING
AESOP is a surgical robot capable of positioning an endoscope in response to a
surgeon's verbal commands. This allows the surgeon to have direct control over
the endoscope in minimally invasive surgical procedures.

The Company believes that AESOP is the world's first FDA-cleared surgical robot
and incorporates the world's first FDA-cleared voice control interface for use
in the operating room. Computer Motion's new products under development, ZEUS
and HERMES, leverage the core technologies underlying AESOP.
- --------------------------------------------------------------------------------
The Company's ZEUS and HERMES products are under development and have not been
approved by the FDA for sale in the United States. These products have not
been operated in clinical practice to date. Approval by the FDA could take
several years and there can be no assurance that such approval will ever be
obtained. In addition, these products have not been approved by international
regulatory agencies for sale in international markets. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and "-- Lack
of Clinical Testing Experience; Safety and Efficacy Not Yet Established."
- --------------------------------------------------------------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
NASDAQ OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

[PHOTOS]
<PAGE> 3

INTEGRATED OR NETWORK -- The HERMES OR Control Center under development is
designed to form an integrated network of operating room devices, allowing
surgeons to have direct control over these devices using verbal commands. In
addition, HERMES can be controlled by a touch-screen hand control.

[PHOTO]

INTERACTIVE INTERFACES -- HERMES is designed to bring a new dimension of
efficiency and safety to the operating room by providing both audible and visual
feedback to the surgical team regarding the status of medical devices.

HERMES OR CONTROL CENTER

[PHOTO]

- --------------------------------------------------------------------------------
The Company's ZEUS and HERMES products are under development and have not been
approved by the FDA for sale in the United States. These products have not
been operated in clinical practice to date. Approval by the FDA could take
several years and there can be no assurance that such approval will ever be
obtained. In addition, these products have not been approved by international
regulatory agencies for sale in international markets. The final design of the
Company's products may differ from the artist's rendering above. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and "-- Lack
of Clinical Testing Experience; Safety and Efficacy Not Yet Established."
- --------------------------------------------------------------------------------
<PAGE> 4

[PHOTO]

ROBOTIC SURGICAL INSTRUMENTS -- ZEUS is comprised of three robotic arms,
reusable and single-use instruments, a dedicated computer controller and an
ergonomic surgeon console. One robotic arm is used to position the endoscope,
while the other two are used to position and manipulate surgical instruments.

SURGEON CONSOLE -- The surgeon precisely controls the movements of the robotic
instruments by manipulating corresponding handles housed in the mobile console.
The endoscope and other key features of ZEUS can be controlled using voice
commands.
MINIMALLY INVASIVE (MI) MICROSURGERY
The ZEUS robotic surgical system under development is designed to enable new
microsurgery procedures such as E-CABG (Endoscopic Coronary Artery Bypass Graft)
on a beating or stopped heart, providing patients with the potential benefits of
significantly reduced pain and trauma, shortened convalescent periods and
lowered cosmetic concerns.

ENABLING MI MICROSURGERY

[PHOTO]

ROBOTIC SURGICAL INSTRUMENTS

[PHOTO]

SURGEON CONSOLE

[PHOTO]
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related Notes appearing elsewhere in
this Prospectus. The following summary and certain portions of this Prospectus
include forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ materially from the results predicted by
such forward-looking statements due to various factors, including but not
limited to those discussed in "Risk Factors." Except as otherwise specified, all
information in this Prospectus reflects (i) the reincorporation of the Company
in Delaware effected August 5, 1997, (ii) the automatic conversion of each
outstanding share of Preferred Stock into Common Stock upon completion of this
offering, (iii) a reverse stock split of 1-for-1.928 shares of the Preferred
Stock and Common Stock of the Company effected August 5, 1997 and (iv) no
exercise of the Underwriters' over-allotment option.

Computer Motion, Inc. (the "Company") develops and markets proprietary
robotic and computerized surgical systems that enhance a surgeon's performance
and centralize and simplify a surgeon's control of the operating room ("OR").
The Company believes that its products and technologies under development have
the potential to revolutionize surgery and the OR by providing a surgeon with
the precision and dexterity necessary to perform complex, minimally invasive
surgical procedures including fully endoscopic multivessel coronary artery
bypass grafts ("E-CABG") and by enabling a surgeon to control critical devices
in the OR through simple verbal commands. The Company believes that its products
and technologies under development will broaden the scope and increase the
effectiveness of minimally invasive surgery, improve patient outcomes, and
create a safer, more efficient and cost effective OR. The Company's current
commercial product, AESOP, is an FDA-cleared, robotic endoscope positioning
system.

Traditionally, the vast majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. Although
this approach can be highly effective, it often results in significant trauma,
pain and complications, as well as significant costs related to lengthy
convalescent periods for the patient. In an effort to mitigate these
shortcomings, minimally invasive surgical techniques and related technologies
have been developed. According to Medical Data International ("MDI"), in the
United Sates in 1995, over 13 million procedures which traditionally would have
been performed in an open manner were performed using minimally invasive
techniques. Minimally invasive surgery is intended to be as effective as
traditional open surgery while offering patients substantially reduced pain and
collateral trauma, shortened convalescent periods and decreased overall patient
care costs. While these benefits are significant, the minimally invasive
approach presents numerous challenges to surgeons, including the intricate
reconstruction of patient tissue by suturing, delicate manipulation of small
anatomical features and constrained access to, and limited visualization of, the
operative site.

The Company's robotic surgical system under development, ZEUS, is designed
to fundamentally improve a surgeon's ability to perform complex surgical
procedures and enable new, minimally invasive microsurgical procedures that are
currently impossible or very difficult to perform. ZEUS is comprised of three
surgeon-controlled robotic arms, one of which positions the endoscope and two of
which manipulate the Company's proprietary single-use and reusable surgical
instruments. The Company believes that ZEUS will improve a surgeon's dexterity
and precision and enhance visualization of, and access to, confined operative
sites. The Company also believes that new minimally invasive surgical procedures
performed with ZEUS will, like currently available minimally invasive surgical
procedures, result in reduced patient pain and trauma, fewer complications,
lessened cosmetic concerns and shortened convalescent periods and will increase
the number of patients qualified for certain surgical procedures. In addition,
the Company believes that an increase in minimally invasive options will result
in lower overall healthcare costs to providers, payors and patients. The Company
has commenced limited experimental animal testing with ZEUS at The Cleveland
Clinic, Pennsylvania State University's Hershey Medical Center and Sarasota
Memorial Hospital. The Company intends to commence testing with ZEUS in the near
future at Columbia/HCA Healthcare Corporation's Medical City of Dallas Hospital.
The Company intends to seek premarket approval ("PMA") by the FDA to market ZEUS
in the United States.

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<PAGE> 6

The Company also develops technologies to centralize and simplify control
of the OR. The modernization of the OR has resulted in the introduction of
numerous medical devices with widely varied methods of control and feedback.
These devices aid a surgeon but also increase the complexity and costs of the
OR. In many instances, these devices are manually controlled and monitored by
someone other than a surgeon in response to a surgeon's spoken commands and
requests for status. The Company's voice controlled technology platform under
development, HERMES, is designed to enable a surgeon to directly control
multiple OR devices, including various laparoscopic, arthroscopic and video
devices, as well as the Company's robotic devices, through simple verbal
commands. HERMES is also designed to provide standardized visual and digitized
voice feedback to a surgical team. The Company believes that the enhanced
control and feedback provided by HERMES has the potential to improve safety,
increase efficiency, shorten procedure times and reduce costs. The Company has
developed a prototype of HERMES and expects to commence functionality testing
under Institutional Review Board approval during the second half of 1997.

The Company's current commercial product, AESOP, approximates the form and
function of a human arm and allows control of the endoscope through simple
verbal commands. This eliminates the need for a member of a surgical staff to
manually control the endoscope and provides a surgeon with direct control of the
endoscope and results in a more stable and sustainable endoscopic image. As of
July 1, 1997, the Company had sold 240 AESOP units worldwide, which the Company
believes have been used to perform over 18,000 procedures.

In addition to directly marketing its products, the Company intends to
commercialize its robotic and computerized surgical systems by forming strategic
alliances with prominent corporate and clinical partners. For instance, the
Company and Medtronic, Inc. ("Medtronic"), a leading manufacturer of medical
devices, entered into an agreement pursuant to which ZEUS, for cardiothoracic
applications, will be co-marketed in North America by the Company and Medtronic
and distributed exclusively in Europe, the Middle East and Africa by Medtronic.
The Company has also entered into an agreement with Stryker Corporation
("Stryker"), a leading manufacturer of endoscopic equipment, pursuant to which
Stryker will purchase HERMES on an OEM basis and will market HERMES as an
integrated component of several of its laparoscopic and arthoroscopic products.
The Company intends to enter into similar development and OEM relationships with
other leading manufacturers of OR devices in order to establish the Company's
HERMES technology as the standard method of controlling devices and equipment in
the OR. The Company utilizes a number of third-party representatives to
distribute AESOP internationally, including Johnson & Johnson which distributes
AESOP in Australia and New Zealand. To date, the Company has not generated a
material amount of revenue from any of these strategic alliances. The Company
has also entered into agreements with a number of leading medical institutions
and formed a Clinical Advisory Board in order to validate and guide the
development process of the Company's robotic and computerized surgical systems.

The Company was founded in 1989 and incorporated in California on April 11,
1990. The Company was reincorporated in Delaware on August 5, 1997. The
Company's principal offices are located at 130-B Cremona Drive, Goleta, CA 93117
and its telephone number is (805) 968-9600. AESOP is a registered trademark and
Computer Motion is a trademark of the Company. This Prospectus also includes
trademarks of companies other than the Company.

4
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................... 2,500,000 shares
Common Stock to be outstanding after the offering..... 7,248,408 shares(1)
Use of proceeds....................................... For repayment of debt, research and
development, sales and marketing and
working capital.
Proposed Nasdaq National Market symbol................ RBOT
</TABLE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL NINE- THREE MONTHS
YEAR MONTHS ENDED
ENDED ENDED YEAR ENDED DECEMBER 31, MARCH 31,
MARCH 31, DECEMBER 31, ----------------------------- -----------------
1993 1993(2) 1994 1995 1996 1996 1997
--------- ------------ ------- ------- ------- ------ -------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 393 $ 66 $ 607 $ 2,271 $ 4,057 $ 676 $ 1,373
Cost of revenue............................ 259 88 500 1,973 2,627 444 651
----- ----- ------- ------- ------- ------ -------
Gross profit (loss)........................ 134 (22) 107 298 1,430 232 722
Operating expenses:
Research and development................. 132 495 630 739 1,359 336 558
Selling, general and administrative...... 134 367 2,784 3,158 4,144 745 1,338
----- ----- ------- ------- ------- ------ -------
Total operating expenses............... 266 862 3,414 3,897 5,503 1,081 1,896
----- ----- ------- ------- ------- ------ -------
Loss from operations....................... (132) (884) (3,307) (3,599) (4,073) (849) (1,174)
Interest and other income (expense), net... 1 10 63 9 (486) (41) (356)
----- ----- ------- ------- ------- ------ -------
Net loss................................... $(131) $ (874) $(3,244) $(3,590) $(4,559) $ (890) $(1,530)
===== ===== ======= ======= ======= ====== =======
Pro forma net loss per share............... $ (0.88) $(0.18) $ (0.28)
======= ====== =======
Pro forma shares used in per share
computations(3).......................... 5,151 5,041 5,459
======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 3,986 $ 33,686
Working capital...................................................................... 1,101 33,968
Total assets......................................................................... 7,052 36,752
Redeemable preferred stock........................................................... 6,002 --
Long-term debt, net of current portion............................................... 3,350 100
Total stockholders' equity (deficit)................................................. (7,054) 35,065
</TABLE>

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

(1) Excludes 1,490,054 shares of Common Stock issuable upon exercise of
outstanding stock options and 1,609,250 shares of Common Stock issuable upon
exercise of outstanding warrants as of August 1, 1997. Includes 2,430,945
shares of Common Stock issuable upon the automatic conversion of each
outstanding share of Preferred Stock into Common Stock that will occur upon
the completion of this offering and 76,805 shares of Common Stock to be
issued to Medtronic in a private placement which will be consummated
concurrently with the closing of this offering (the "Medtronic Private
Placement"). See "Capitalization," "Management -- Stock Plans," "Investment
by Medtronic," "Certain Transactions" and Notes 6, 14 and 15 of Notes to
Financial Statements.

(2) In 1993, the Company changed its fiscal year end from March 31 to December
31.

(3) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share and net loss per share.

(4) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
by the Company hereby at the initial public offering price of $14.00 per
share after deducting the underwriting discount and the estimated costs of
this offering, the $1.0 million of proceeds from the Medtronic Private
Placement, the automatic conversion of all outstanding shares of the
Company's Preferred Stock into Common Stock that will occur upon completion
of this offering, the conversion of the Secured Convertible Debenture issued
to Medtronic (the "Medtronic Debenture") which occurred in May 1997 and the
repayment of bridge debt, as if such sale, conversions and repayments had
occurred at March 31, 1997. See "Investment by Medtronic," "Capitalization,"
"Selected Financial Data" and "Certain Transactions."

5
<PAGE> 8

RISK FACTORS

Prospective investors should consider carefully the following risk factors,
in addition to the other information contained in this Prospectus concerning the
Company and its business, before purchasing the shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements within the meaning
of the federal securities laws, that involve certain risks and uncertainties.
Discussions containing such forward-looking statements may be found in the
material set forth under "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as in
the Prospectus generally. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and appearing
elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; ABSENCE OF PROFITABILITY

From its inception in 1989 through March 31, 1997, the Company has
generated revenues of approximately $9.3 million and incurred cumulative losses
of approximately $14.0 million. The Company
expects to incur significant additional losses for the foreseeable future and
the Company expects to significantly increase its spending over the next several
years with respect to research and development efforts, clinical trials,
manufacturing and marketing. There can be no assurance that the Company will
ever achieve significant commercial revenues, particularly from sales of HERMES
or ZEUS, or that the Company will be profitable. There can be no assurance that
the Company will not encounter substantial delays or incur unexpected expenses
related to the introduction of HERMES and ZEUS, or future products. Failure to
achieve significant commercial revenues and profitability would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Products."

RELIANCE ON SALES OF FUTURE PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE

The Company has been producing and selling its AESOP products since 1994,
but the Company has not received regulatory clearance or approval to market its
other products and will not commence commercial sales of these products until
such clearance or approval is obtained. If regulatory clearance or approval for
HERMES and ZEUS is obtained, the Company anticipates that HERMES and ZEUS will
comprise a substantial majority of the Company's sales. Accordingly, the
Company's future success depends on the successful development, regulatory
clearance or approval, commercialization and market acceptance of these
products. Even if the Company is successful in obtaining the necessary
regulatory clearances or approvals for HERMES and ZEUS, their successful
commercialization will depend upon the Company's ability to demonstrate the
clinical safety and efficacy, ease-of-use, reliability and cost-effectiveness of
such products in a clinical setting. Neither HERMES nor ZEUS has yet been
operated in clinical practice. There can be no assurance that these products
will adequately demonstrate these characteristics or that they will receive
market acceptance among surgeons, patients and health care payors. The Company
believes that surgeons' acceptance of, and health care payors' reimbursement of
procedures using, HERMES or ZEUS will be essential for market acceptance of
these products, and there can be no assurance that such acceptance and
reimbursement will be obtained. Surgeons will not adopt the Company's products
unless they conclude, based on clinical data and other factors, that they are an
attractive alternative to other drug or surgical treatments. In addition,
cardiac surgeons may elect not to use the proposed ZEUS system until such time
as the efficacy of the medical procedures using ZEUS, including its E-CABG
indication, can be successfully demonstrated as compared to conventional and
other methods of performing such procedures. Even if the safety and efficacy of
procedures using HERMES and ZEUS is established, surgeons may elect not to
recommend the use of these products for any number of reasons, including
inadequate levels of reimbursement. Broad use of the Company's products will
require training surgeons and the time required to complete such training could
adversely affect market acceptance. In addition, surgeons will not elect to use
the Company's products until they are comfortable relying on voice control to
adjust instruments and devices and are comfortable controlling robotic arms to
manipulate surgical instruments. Surgeons have traditionally relied on their
direct sight and sense of touch for delicate surgical operations. Using the ZEUS
product, physicians will rely primarily on

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<PAGE> 9

video images and computerized feedback as they manipulate instruments using
robotic controls. Surgeons will not elect to use the Company's ZEUS product
until they are convinced that surgical procedures performed in this manner are
as safe and effective as those performed by traditional manual methods.
Successful commercialization of the Company's products will also require the
Company to satisfactorily address the needs of various decision makers in the
hospitals that constitute the target market for the Company's products and to
address potential resistance to change in existing surgical methods. Such
efforts may extend the sales cycle for the Company's products and delay
commercial sales and market acceptance. If the Company is unable to gain market
acceptance of HERMES or ZEUS, the Company's business, financial condition and
results of operations will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Products."

GOVERNMENT REGULATION AND LACK OF REGULATORY APPROVAL

The research and development, design, testing, manufacture, labeling,
distribution and marketing of the Company's products in the United States are
regulated as medical devices by the United States Food and Drug Administration
("FDA") as well as various state agencies. The process of obtaining required
regulatory approvals and clearances is lengthy, expensive and uncertain.

Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket approval ("PMA")
application under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), or
through a premarket notification submission under Section 510(k) of the FDC Act,
and the regulations promulgated thereunder. The Company has obtained 510(k)
premarket notification clearance for AESOP, including its voice control
interface, but has not obtained FDA approval or clearance for HERMES or ZEUS.
Because HERMES will be sold by the Company to medical device manufacturers on an
OEM basis, the device manufacturers will be responsible for obtaining FDA
clearance for any product incorporating HERMES. There can be no assurance that
the FDA will determine that products incorporating HERMES can be cleared for
marketing through the 510(k) notification process, causing the device
manufacturers to incur increased costs and delay in seeking FDA approval through
PMA applications for this device. The Company intends to seek approval of a PMA
application for its ZEUS system. Generally, a PMA application may be submitted
to the FDA only after clinical trials and the required patient follow-up are
successfully completed. Upon acceptance of a PMA application for filing, the FDA
commences a review process that could take two years or more from the date on
which the PMA application is filed. Before approval of a PMA application, the
FDA will inspect the Company to determine whether its manufacturing facilities
and processes comply with FDA regulations.

The process of obtaining required regulatory approvals and clearances can
be expensive, and there can be no assurance that the Company or the device
manufacturers for HERMES will obtain such approvals or clearances on a timely
basis, if at all. There can be no assurance that the FDA will act favorably or
quickly on any submissions for approval or clearance of the Company's products,
and significant difficulties and costs may be encountered by the Company in its
efforts to obtain FDA approvals or clearances that could delay or preclude the
Company from selling its products in the United States. Furthermore, there can
be no assurance that the FDA will not request additional data or require the
Company to conduct further clinical trials, causing the Company to incur
substantial costs and delay. In addition, there can be no assurance that the FDA
will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition to approval or clearance. The
FDA strictly prohibits the marketing of FDA-cleared or approved medical devices
for unapproved uses. Failure to receive or delays in receipt of FDA clearances
or approvals, including as a result of the need for additional clinical trials
or data as a prerequisite to approval or clearance, or any FDA conditions that
limit the ability of the Company to market its products for particular uses or
indications, could have a material adverse effect on the Company's business,
financial condition and results of operations.

Commercial distribution of the Company's products in foreign countries is
also subject to varying government regulations which may delay or restrict
marketing of the Company's products in those countries. The time required to
obtain approval for the Company's products internationally may be longer or
shorter than that required for FDA approval or clearance and the requirements
may differ significantly. In addition, such

7
<PAGE> 10

regulatory authorities may impose limitations on the use of the Company's
products. After mid-1998, the Company will be required to obtain the
certifications necessary to enable the CE mark to be affixed to the Company's
products in order to sell its products in member countries of the European
Union. The Company has not obtained such certification and there can be no
assurance it will be able to do so in a timely manner, if at all.

Federal, state and international government regulations regarding the
manufacture and sale of medical devices are subject to future change, and
additional regulations may be adopted which may prevent the Company from
obtaining, or affect the timing of, future regulatory approvals or clearances.
The failure to obtain or any significant delay in obtaining any regulatory
approvals or clearances could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's manufacturing operations are subject to the FDA's Quality
System Regulation ("QSR"), formerly known as Good Manufacturing Practice
regulations, and similar regulations in other countries regarding the
manufacture, testing, labeling, record keeping and storage of devices. Ongoing
compliance with QSR requirements and other applicable regulatory requirements
will be monitored through periodic inspection by federal and state agencies,
including the FDA, and comparable agencies in other countries.

The Company's manufacturing processes are subject to stringent federal,
state and local regulations governing the use, generation, manufacture, storage,
handling and disposal of certain materials and wastes. Although the Company
believes that it has complied in all material respects with such laws and
regulations, the Company is subject to periodic inspection to ensure its
continued compliance with such laws and regulations. There can be no assurance
that the Company will not be required to incur significant costs in the future
in complying with such laws and regulations, or that the Company will not be
required to cease operations in the event of its continued failure to effect
compliance.

Failure to comply with applicable regulatory requirements can result in,
among other things, suspensions or withdrawals of approvals, product seizures,
injunctions, recalls of products, operating restrictions, and civil fines and
criminal prosecutions. Delays or failure to receive approvals or clearances to
market products, or loss of previously received approvals or clearances, would
materially adversely affect the marketing of the Company's products and the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."

LACK OF CLINICAL TESTING EXPERIENCE; SAFETY AND EFFICACY NOT YET ESTABLISHED

The Company has only limited, experimental animal data with respect to ZEUS
and HERMES. In addition, neither HERMES nor ZEUS has been operated in clinical
practice. The Company also has no experience conducting clinical trials and will
likely rely on its clinical development partners to perform any clinical study.
In order to conduct clinical trials with ZEUS, which is considered to be a
significant risk device, the Company must submit and obtain approval of an
Investigational Device Exemption ("IDE") application. The IDE application must
be supported by adequate data typically including the results of laboratory and
animal testing conducted under Good Laboratory Practices ("GLPs"). To date the
Company has not conducted any GLP animal studies on any of its products. The
Company will be required to submit the clinical data gathered in the study
and/or a summary thereof under its IDE to the FDA for review. The Company has
not yet submitted an IDE to the FDA. There can be no assurance that the FDA will
allow the Company to conduct clinical trials or that ZEUS will prove to be safe
and effective in clinical trials under United States or international regulatory
requirements or that the Company will not encounter problems in clinical testing
that will cause a delay in or prohibit commercialization of ZEUS. Moreover, the
clinical trials may identify significant technical or other obstacles to
overcome prior to obtaining necessary regulatory or reimbursement approvals, if
granted at all, also resulting in significant additional product development
expense and delays. Such expense and delays could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."

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INTENSE COMPETITION

The Company's products are designed to address the markets for minimally
invasive surgery and minimally invasive microsurgery, which are currently in
early stages of development. These markets are and the Company believes will
continue to be intensely competitive. Competitors have been pursuing or will be
pursuing opportunities in these markets, and most of these competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. In addition, some of these
companies may be able to market their products sooner than the Company if they
are able to achieve regulatory approval before the Company.

Many medical conditions that can be treated using the Company's systems,
particularly ZEUS, can also be treated by pharmaceuticals or other medical
devices and procedures. For example, many coronary artery diseases can be
treated with PTCA, intravascular stents, atherectomy catheters and lasers. Many
of these alternative treatments are widely accepted in the medical community and
have a long history of use. In addition, technological advances with other
procedures could make such therapies more effective or inexpensive than using
the Company's products and could render the Company's technology obsolete or
unmarketable. There can be no assurance that physicians will use the Company's
products to replace or supplement established treatments or that the Company's
products will be competitive with current or future technologies. In addition,
the Company may also experience competitive pricing pressures which may
adversely affect unit prices and sales levels. Such competition could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RELIANCE ON STRATEGIC RELATIONSHIPS AND CLINICAL SITES

The Company's future success will depend, in part, on its ability to enter
into and successfully develop strategic relationships with corporations and
medical institutions with respect to the research and development, regulatory
approval or clearance, production, marketing and distribution of its products.
For instance, the Company and Medtronic entered into an agreement pursuant to
which ZEUS, for cardiothoracic applications, will be co-marketed in North
America by the Company and Medtronic and distributed exclusively in Europe, the
Middle East and Africa by Medtronic. The Company has also entered into an
agreement with Stryker, pursuant to which Stryker will purchase HERMES on an OEM
basis and will market HERMES as an integrated component of several of its
laparoscopic and arthroscopic products. The Company intends to enter into
similar OEM relationships with other leading manufacturers of OR devices with
the goal of establishing the Company's HERMES technology as the standard method
of controlling devices and equipment in the OR. The Company utilizes a number of
third-party representatives to distribute AESOP internationally, including
Johnson & Johnson, which distributes AESOP in Australia and New Zealand. The
Company has also entered into agreements with a number of leading medical
institutions in order to validate and guide the development process of the
Company's robotic and computerized surgical systems. The success of the
Company's strategic relationships will depend on the other parties' strategic
interests in the specific products involved and their willingness and ability to
perform the role contemplated by the Company. The Company will have limited or
no control over the resources that any particular third party partner devotes to
its relationship with the Company. To date, the Company has not generated a
material amount of revenue from any of these strategic relationships. There can
be no assurance that the Company's current strategic relationships will be
successful, that the Company will be successful in locating qualified parties
with whom to enter into additional strategic relationships or that any strategic
relationships can be maintained or will ultimately prove beneficial to the
Company. See "Business -- Corporate Alliances and Clinical Sites" and "-- Sales,
Marketing and Distribution."

LIMITATIONS ON THIRD PARTY REIMBURSEMENT

Sale of the Company's proposed products in most markets in the United
States and internationally will depend on the availability of adequate
reimbursement from third-party health care payors, such as government and
private insurance plans, health maintenance organizations and preferred provider
organizations. In the United States, the Company's products under development,
if and when approved for commercial sale, would be acquired primarily by medical
institutions which then bill various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans for the
health care services provided to

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<PAGE> 12

their patients. Government agencies, certain private insurers and certain other
payors generally reimburse hospitals for medical treatment at a fixed rate based
on the diagnosis related group ("DRG") established by the federal Health Care
Financing Administration ("HCFA") which covers this treatment. The Company
believes that the procedures using AESOP are eligible and future products will
be eligible for reimbursement under existing DRG reimbursement codes. However,
Medicare and other third-party payors are increasingly scrutinizing whether to
cover new products and the level of reimbursement for covered products and
procedures. Third-party payors have challenged, and in certain circumstances
have ceased, reimbursement for procedures under existing codes where the
aggregate level of reimbursement has been significantly increased. In addition,
third-party payors have required, following further study regarding safety and
efficacy, establishment of new reimbursement codes. Even if a procedure is
covered by a DRG, payors may deny reimbursement if they determine that the
device used in a treatment was unnecessary, inappropriate, not cost-effective,
experimental or used for a non-approved indication. Medicare reimburses
hospitals on a prospectively determined fixed amount for the costs associated
with an in-patient hospitalization based on the patient's discharge diagnosis,
and reimburses physicians on a prospectively determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and unrelated to the specific devices used
in that procedure.

Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for products developed or being
developed by the Company.

Medicare coverage may be available, under certain circumstances for
investigational devices when used in clinical IDE trials, which have not been
approved or cleared for marketing by the FDA. However, Medicare coverage may be
denied if certain coverage requirements are not met, including if the treatment
is not medically needed for the specific patient. There can be no assurance that
the Company's products under development will be covered when they are used in
clinical trials and, if covered, whether the payment amounts for their use will
be considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered inadequate, the Company may need to bear
additional costs to sponsor such trials and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.

The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets, as the overall escalating costs of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage for the Company's products
will be available or adequate, that current reimbursement amounts will not be
decreased in the future, or that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise affect the demand for the
Company's products or its ability to sell its products on a profitable basis,
particularly if the Company's products are more expensive than competing
surgical or other procedures. If third-party payor coverage or reimbursement is
unavailable or inadequate, the Company's business, financial condition and
results of operations would be materially adversely affected.

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<PAGE> 13

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY

The success of the Company will depend, in part, on its ability to obtain
and maintain patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of others. The
Company's policy is to seek to protect its proprietary positions by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of July 8, 1997, the Company has six issued United States
patents which cover certain technologies embodied in its products relating to
computer processing, endoscopic positioning techniques by means of robotics and
user interface elements. The patented inventions have use in certain
applications, including computer assisted surgery and robotic tissue
manipulation. The Company also has 16 United States patent applications pending,
two of which have received a Notice of Allowance, by which it is seeking to
obtain protection for its concepts relating to robotic assisted surgery and
operating room control systems. In addition, the Company has four foreign patent
applications pending. There can be no assurance that the Company's issued
patents or any patents that may be issued in the future will provide significant
proprietary protection or provide a competitive advantage for the Company. In
addition, there can be no assurance that any pending patents will be issued, or
that any patents or patent applications will not be challenged, invalidated or
circumvented in the future. Further, there can be no assurance that competitors,
many of which have substantially more resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or
internationally.

Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices and robotics are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products or processes used or proposed to be used by the
Company. The Company is aware of patents issued to third parties, particularly
in the field of robotics, that contain subject matters related to the Company's
technology. Based in part on advice of its patent counsel, Blakely, Sokoloff,
Taylor & Zafman LLP, the Company believes that the technologies employed by the
Company in its devices and systems do not infringe the claims of such patents.
There can be no assurance, however, that third parties will not seek to assert
that the Company's devices and systems infringe their patents or seek to expand
their patent claims to cover aspects of the Company's technology. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as the laws of the United States. The failure of the
Company to protect its intellectual property rights could have a material
adverse effect on its business, financial condition and results of operations.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office (the "USPTO") to determine the priority of inventions or an opposition to
a patent grant in a foreign jurisdiction. The defense and prosecution of
intellectual property suits, USPTO interference or opposition proceedings and
related legal and administrative proceedings are costly, time-consuming, divert
the attention of management and technical personnel and could result in
substantial uncertainty regarding the Company's future viability. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. If any relevant claims of third-party patents are
upheld as valid and enforceable in any litigation or administrative proceeding,
the Company could be prevented from practicing the subject matter claimed in
such patents, or would be required to obtain licenses from the patent owners of
each such patent, or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be available on terms acceptable to the Company or that
the Company

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<PAGE> 14

would be successful in any attempt to redesign its products or processes to
avoid infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope, and validity of the proprietary rights of others.

The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and technologies or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.

RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DEVELOPMENT

The market for the Company's products and products under development is
characterized by rapidly changing technology and new product introductions and
enhancements. In addition to the risks associated with market acceptance of
AESOP and the Company's other products under development, the Company's success
will depend to a significant extent upon its ability to enhance and expand the
utility of AESOP and its other products and to develop and introduce additional
innovative products that gain market acceptance. The Company maintains research
and development programs to continually improve and refine its product offerings
and those under development. There can be no assurances, however, that such
efforts will be successful or that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancing its existing
products on a timely or cost-effective basis. Moreover, the Company may
encounter technical problems in connection with its product development efforts
that could delay introduction of new products or product enhancements. Failure
to develop or introduce new products or product enhancements on a timely basis
that achieve market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
technological advances with other therapies could make such therapies less
expensive or more effective than using the Company's products and could render
the Company's technology obsolete or unmarketable. There can be no assurance
that physicians will use the Company's products to replace or supplement
established treatments or that the Company's products will be competitive with
current or future technologies. See "Business -- Research and Development" and
"-- Competition."

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS

The Company expects that the proceeds of this offering will be used for
repayment of certain debt, research and development, sales and marketing and
working capital. The Company is not able to estimate precisely the allocation of
the proceeds among such uses, and the timing and amount of expenditures will
vary depending upon numerous factors. The Company's management will have broad
discretion to allocate the proceeds of this offering and to determine the timing
of expenditures. See "Use of Proceeds."

CONTROL BY MANAGEMENT, EXISTING STOCKHOLDERS AND AFFILIATED ENTITIES

Upon completion of this offering and upon completion of the Medtronic
Private Placement, the present directors and executive officers of the Company
and their affiliates will, in the aggregate, beneficially own 36.9% of the
outstanding Common Stock (35.2% if the Underwriters' over-allotment option is
exercised in full). As a result, these stockholders, acting together, will have
the ability to control the election of the Company's directors and most other
stockholders' actions and, as a result, direct the Company's affairs and
business. Such concentration may have the effect of delaying or preventing a
change in control of the Company. Additionally, pursuant to a Stockholders
Agreement, among Chase Manhattan Capital Corpora-

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<PAGE> 15

tion, the Company and certain executives designated therein, each party to the
Stockholder's Agreement, other than the Company, is obligated to vote their
shares to cause one representative designated by the holders of a majority of
the shares issuable upon conversion of the Series D Preferred Stock which have
not been sold into the public market (the "Underlying Stock") to be elected to
the Company's Board of Directors. This provision shall terminate upon the
earlier of (i) August 24, 2004 or (ii) such time as the Underlying Stock
constitutes less than 2.5% of the aggregate voting power of all classes of the
Company's voting securities. The Underlying Stock is expected to constitute
approximately 8.7% of the aggregate voting power of all classes of the Company's
voting securities following completion of this offering and following completion
of the Medtronic Private Placement. See "Principal Stockholders" and
"Management -- Election of Directors and Officers."

FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLE

The Company's results of operations may vary significantly from quarter to
quarter depending upon numerous factors, including the following: delays
associated with the FDA and other regulatory approval processes; health care
reimbursement policies; timing and results of clinical trials; demand for the
Company's products; changes in pricing policies by the Company or its
competitors; the number, timing and significance of product enhancements and new
products by the Company and its competitors; and product quality problems.

The sale of the Company's products is often subject to delays associated
with the lengthy approval processes that typically accompany capital
expenditures by bureaucratic entities such as hospitals. Sales of the Company's
products therefore often have a lengthy sales cycle, which can range from 30
days to 180 days, while the customer evaluates and receives approvals for the
acquisition of the Company's products. It is not unusual for several months to
lapse between a new customer's initial evaluation of the Company's products and
the execution of a contract. Accordingly, it is inherently difficult to
accurately predict the sales cycle of any particular order. A failure by the
Company to ship orders as forecasted could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION

The Company currently has a limited domestic sales force consisting of ten
field sales persons, whose efforts are complemented by clinical education
specialists. The Company anticipates it will significantly increase the number
of sales personnel to more fully cover its target markets, particularly as
additional products become commercially available. There can be no assurance
that the Company will be able to compete effectively in attracting, motivating
and retaining qualified sales personnel, as needed. The Company currently
intends to market and sell its products outside the United States principally
through distributors. In order to accomplish this, the Company will be required
to significantly expand its distributor network. The Company's ability to
distribute its products in certain areas may depend on strategic alliances with
distribution partners. There can be no assurance that the Company will be able
to identify suitable distribution partners in desirable markets or, if
identified, that the Company will be successful in entering into distribution
agreements on acceptable terms, if at all, or that such distribution agreements
will result in significant sales. Any such failure could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Sales, Marketing and Distribution."

DEPENDENCE ON INDEPENDENT CONTRACT MANUFACTURERS; LIMITED MANUFACTURING
EXPERIENCE

The Company relies on independent contract manufacturers, some of which are
single source suppliers, for the manufacture of the principal components of
AESOP. The Company anticipates that it will continue to rely to a significant
extent on third parties to manufacture components of AESOP and its products
currently under development. Reliance on independent contract manufacturers
involves several risks, including the potential inadequacy of capacity, the
unavailability of or interruptions in access to certain process technologies and
reduced control over product quality, delivery schedules, manufacturing yields
and costs. Shortages of raw materials, production capacity constraints or delays
on the part of the Company's contract manufacturers

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<PAGE> 16

could negatively affect the Company's ability to meet its production obligations
and result in increased prices for affected parts. Any such reduction,
constraint or delay may result in delays in shipments of the Company's products
or increases in the prices of components, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has no supply agreements with certain of its current
contract manufacturers and orders through purchase orders which are subject to
supplier acceptance. The unanticipated loss of any of the Company's contract
manufacturers could cause delays in the Company's ability to deliver products
while the Company identifies and qualifies a replacement manufacturer. Such an
event could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that current or
future independent contract manufacturers will be able to meet the Company's
requirements for manufactured products.

The Company does not have experience in manufacturing its products in
commercial quantities. The Company's manufacturing experience to date has been
focused primarily on assembling components produced by third party manufacturers
for its AESOP product. The Company's manufacturing activities to date with
respect to HERMES and ZEUS have consisted primarily of manufacturing a limited
number of prototypes for use in laboratory testing. The manufacture of the
Company's products and products under development involves and will involve
complex operations, including a number of separate processes and components.
Manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving quality control and assurance, component
and service availability, adequacy of control policies and procedures, lack of
qualified personnel, compliance with FDA QSR regulations, and the need for
further FDA approval of new manufacturing processes that could affect the safety
or efficacy of the product or new manufacturing facilities. The Company has
considered and will continue to consider as appropriate the internal manufacture
of components currently provided by third parties, as well as the implementation
of new production processes. There can be no assurance that manufacturing yields
or costs will not be adversely affected by a transition to in-house production
or to new production processes if such efforts are undertaken or that the FDA's
QSR requirements or any international ISO certification requirements can be met
and that such a transition would not have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that, in connection with the commercialization of its products, it may
also be necessary to expand its manufacturing capabilities. If necessary, this
expansion will require the commitment of capital resources for facilities,
tooling and equipment and for leasehold improvements. Further, any delay by or
inability of the Company in expanding its manufacturing capacity or in obtaining
the commitment of such resources could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company expects to continue to manufacture its products based on
product orders, and intends to continue to purchase subassemblies and components
prior to receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly, and depend on factors such
as the business practices of the specific suppliers, contract terms, and general
demand for a component at a given time. Certain components used in the Company's
products have long lead-times. As a result, the Company may not be able to
maintain adequate inventories of certain components which could result in delays
in shipments. An inability of the Company to ship its products on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."

POSSIBLE NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF ADDITIONAL FINANCING

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trials, the timing and costs required to receive both United States and
international governmental approvals or clearances, market acceptance of new
products, the results and scope of ongoing research and development projects,
competing technologies, the costs of training physicians to become proficient in
the use of the Company's products and procedures, the cost of developing
marketing and distribution capabilities, and other market and regulatory
developments. To the extent that existing resources are insufficient to fund the
Company's activities, the Company may seek to raise additional funds through
public or private financings. There can be no assurance that additional
financing, if required, would be available on acceptable terms, if at all. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders may result. If adequate funds were not available, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Use of Proceeds," "Investment by Medtronic"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

RISK OF PRODUCT LIABILITY CLAIMS

The development, manufacture and sale of medical products, such as the
Company's robotic and computerized surgical systems, entail significant risk of
product liability claims and product failure claims. The Company has not
conducted any clinical trials and does not have sufficient data to allow the
Company to measure the risk of such claims with respect to its products
currently under development. The Company faces an inherent business risk of
financial exposure to product liability claims in the event that the use of it
products results in personal injury or death. The Company also faces the
possibility that defects in the design or manufacture of the Company's products
might necessitate a product recall. There can be no assurance that the Company
will not experience losses due to product liability claims or recalls in the
future. The Company currently maintains product liability insurance with
coverage limits of $5 million per occurrence and $5 million annually in the
aggregate and there can be no assurance that the coverage limits of the
Company's insurance policies will be adequate. In addition, the Company may
require increased product liability coverage if any potential products are
successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. Any
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.

DEPENDENCE ON KEY PERSONNEL

The Company's future business and operating results depend in significant
part on its key management, scientific and technical personnel, many of whom
would be difficult to replace, and its future success will depend partially upon
its ability to retain these persons and recruit additional qualified management,
technical, marketing, sales and support, regulatory and manufacturing personnel
for its operations. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel. The loss of the services of one or more members of the management
group or the inability to hire additional qualified personnel as needed may have
a material adverse affect on the Company's business, financial condition and
results of operations. See "Management."

MANAGEMENT OF GROWTH

The Company's business has grown rapidly over the past three years and such
growth has placed and, if sustained, will continue to place, significant demands
on the Company's management and resources. In order to compete effectively
against current and future competitors, prepare products for clinical trials and
develop future products, the Company believes it must continue to expand its
operations, particularly in the areas of research and development and sales and
marketing. Although the Company believes that its current operating and
financial control systems are adequate for the present time, it is likely that
the Company will be required to implement additional operating and financial
controls, as well as hire and train additional technical, marketing and
administrative personnel, install additional reporting and management
information systems for order processing, system monitoring, customer service
and financial reporting, successfully expand its operations, improve its
operating and financial control systems, hire additional personnel and otherwise
improve coordination between the product development, marketing, sales and
finance functions. The

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Company's future success will depend, in part, on management's ability to manage
any future growth and there can be no assurance that these efforts will be
successful.

NO PRIOR TRADING MARKET; MARKET VOLATILITY

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or, if one does develop, that it will be
maintained. The initial public offering price, which has been established by
negotiations between the Company and the Underwriters, may not be indicative of
prices that will prevail in the trading market. See "Underwriting" for
information relating to the method of determining the initial public offering
price. The market price of shares of the Common Stock is likely to be volatile
and may be affected by actual or anticipated decisions by the FDA with respect
to approvals or clearances of the Company's products, actual or anticipated
fluctuations in the Company's operating results, announcements of technological
innovations, new commercial products by the Company or its competitors, changes
in third party reimbursement policies, developments concerning proprietary
rights, conditions and trends in the medical device and other technology
industries, governmental regulation, changes in financial estimates by
securities analysts, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In particular, the securities of medical device
companies have experienced extreme price and volume fluctuations, which have
often been unrelated to the companies' operating performances.

EFFECT OF ANTITAKEOVER PROVISIONS

Upon the completion of this offering, the Board of Directors will have
authority to issue up to 5,000,000 shares of Preferred Stock, $.001 par value,
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any future vote or action by the
stockholders. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. The Company has no
present plans to issue shares of Preferred Stock.

Upon the completion of this offering, certain provisions of the Company's
charter documents, including a provision eliminating the ability of stockholders
to take actions by written consent, and of the Delaware law could delay or make
difficult a merger, tender offer or proxy contest involving the Company.
Further, Section 203 of General Corporation Law of Delaware prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions may have the effect of delaying or preventing
change in control of the Company without action by the stockholders and
therefore could adversely affect the price of the Company's Common Stock. See
"Description of Capital Stock."

ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; OUTSTANDING WARRANTS;
REGISTRATION RIGHTS

Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options or warrants) in the public market after this
offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. In addition to the 2,500,000 shares of Common
Stock offered hereby and after completion of the Medtronic Private Placement,
the Company will have 4,748,408 shares of Common Stock outstanding, all of which
are restricted shares ("Restricted Shares") under the Securities Act. The
Company's directors, officers and certain of its stockholders (beneficially
holding an aggregate of approximately 4,485,000 of such Restricted Shares) have
agreed that they will not sell, directly or indirectly, any Common Stock without
the prior written consent of Montgomery Securities for a period of 180 days from
the date of this Prospectus. The number of outstanding

16
<PAGE> 19

shares that will be available for sale, subject in certain circumstances to
volume and manner of sale restrictions, in the public market, after giving
effect to the lock-up agreements, will be as follows: (i) 252,000 shares of
Common Stock will be eligible for sale as of the effective date of this
offering, (ii) 121,000 shares of Common Stock will be eligible for sale
beginning 90 days after the effective date of this offering, including
approximately 110,000 shares of Common Stock issuable upon exercise of
outstanding vested options, and (iii) 4,596,454 shares of Common Stock,
including approximately 474,000 shares of Common Stock issuable upon exercise of
outstanding vested options, will be eligible for sale 180 days after the date of
this Prospectus. The approximately 362,954 remaining Restricted Shares and
2,515,304 shares of Common Stock issuable upon exercise of outstanding warrants
and options will be eligible for sale thereafter pursuant to Rules 144 and 701.
In addition, following the closing of this offering, the holders of 3,027,123
Restricted Shares and shares issuable upon the exercise of the Company's
outstanding warrants will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Shares Eligible
for Future Sale."

SUBSTANTIAL AND IMMEDIATE DILUTION; ABSENCE OF DIVIDENDS

Purchasers of the shares of Common Stock offered hereby will incur
immediate dilution of approximately $9.17 per share in net tangible book
(excluding the effect of the shares of Common Stock to be issued in the
Medtronic Private Placement). The exercise of existing options and warrants
would also have a dilutive effect on the interests of the investors in this
offering. The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends upon its
Common Stock in the foreseeable future. It is currently anticipated that
earnings, if any, will be used to finance the development and expansion of the
Company's business. The terms of certain outstanding notes currently prohibit
the Company from paying dividends until such notes are repaid in full. See
"Dividend Policy."

17
<PAGE> 20

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock in this offering, after deducting the underwriting discount and
estimated offering expenses payable by the Company, are estimated to be
approximately $32.0 million ($36.8 million if the Underwriters' over-allotment
option is exercised in full). The Company will also receive $1.0 million in
proceeds from the sale of 76,805 shares of its Common Stock to Medtronic in the
Medtronic Private Placement. See "Investment by Medtronic" and "Certain
Transactions."

The Company intends to use a portion of the net proceeds of this offering
to repay up to $3.5 million due under outstanding adjustable rate bridge notes
issued by the Company in 1995 and 1996 (the "Bridge Notes"). The Bridge Notes
have an interest rate of prime plus 1%. Of the amounts owed thereunder
$1,840,000 are due upon the completion of this offering and the remainder are
due from July to November 1998. The Company intends to use the remainder of the
net proceeds for research and development, including new product introductions
(approximately 43% of the remainder of the net proceeds of this offering), sales
and marketing (approximately 18% of the remainder of the net proceeds of this
offering), capital expenditures (approximately 11% of the remainder of the net
proceeds of this offering) and for working capital and general corporate
purposes (approximately 11% of the remainder of the net proceeds of this
offering). A portion of the net proceeds may also be used for strategic
acquisitions of businesses, products or technologies complementary to those of
the Company. The Company is not currently a party to any commitments or
agreements, and is not currently involved in any negotiations, with respect to
any acquisitions. Except as approximated above, the Company has not precisely
determined the amounts it plans to expend with respect to each of the listed
uses or the timing of such expenditures. The amounts actually expended for each
use may vary significantly depending on a number of factors and contingencies,
including the Company's success in obtaining FDA and other clearances or
approvals for its products, the Company's future revenue growth, if any, the
amount of cash generated or used by the Company's operations, the progress of
the Company's product development efforts, technological advances, the status of
competitive products and acquisition opportunities presented to the Company.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest bearing, investment-grade securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

DIVIDEND POLICY

The Company has not paid any dividends on its Common Stock and does not
anticipate paying any dividends on the Common Stock in the foreseeable future.
The Company's Bridge Notes currently prohibit the Company from paying dividends
until such notes are repaid in full. The Company anticipates that all future
earnings will be retained to finance future growth.

INVESTMENT BY MEDTRONIC

Medtronic has committed to purchase from the Company, pursuant to a
one-time right granted to Medtronic in connection with Medtronic's purchase of
the Medtronic Debenture, 76,805 shares of Common Stock in the Medtronic Private
Placement at a purchase price of $13.02 per share (the initial public offering
price per share, less the underwriting discounts and commissions indicated on
the cover page of this Prospectus). The sale to Medtronic is expected to be
consummated concurrently with the closing of this offering.

Medtronic currently owns 363,743 shares of Common Stock and is not an
affiliate of the Company. See "Certain Transactions" and "Principal
Stockholders."

18
<PAGE> 21

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1997, (ii) the pro forma capitalization of the Company, giving
effect to the reincorporation of the Company in Delaware, the conversion of all
outstanding shares of Preferred Stock into Common Stock upon completion of this
offering and the conversion of the Medtronic Debenture based upon the initial
public offering price of $14.00 per share, (iii) the capitalization of the
Company as adjusted to give effect to the sale of the 2,500,000 shares of Common
Stock offered by the Company hereby (at the initial public offering price of
$14.00 per share, after deduction of the estimated underwriting discount and
offering expenses), the sale of 76,805 shares of Common Stock to Medtronic in
the Medtronic Private Placement for an aggregate price of $1.0 million and the
repayment by the Company of all amounts owed under the Bridge Notes. This table
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible subordinated debt(1).............................. $ 3,167 $ -- $ --
Long-term debt, net of current portion(2)..................... 3,250 100 100
Redeemable Preferred Stock.................................... 6,002 -- --
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; 1,704,317 shares outstanding actual; no
shares outstanding, pro forma and as adjusted(3)......... 5,930 -- --
Common Stock, $.001 par value, 25,000,000 shares authorized;
1,744,207 shares outstanding actual; 4,522,596 shares
outstanding, pro forma; 7,022,596 shares outstanding as
adjusted(4).............................................. 431 5 7
Additional paid-in capital.................................. 1,104 16,629 49,577
Deferred compensation....................................... (555) (555) (555)
Accumulated deficit......................................... (13,964) (13,964) (13,964)
-------- --------- --------
Total stockholders' equity (deficit)..................... (7,054) 2,115 35,065
-------- --------- --------
Total capitalization................................... $ 5,365 $ 2,215 $ 35,165
======== ========= ========
</TABLE>

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

(1) See Note 14 of Notes to Financial Statements.

(2) See Notes 8 and 9 of Notes to Financial Statements.

(3) See Note 6 of Notes to Financial Statements.

(4) Excludes (i) 1,383,623 shares of Common Stock issuable upon exercise of
outstanding stock options as of March 31, 1997 at a weighted average
exercise price of $4.05 per share under the Company's stock option plans,
(ii) 1,609,250 shares of Common Stock issuable upon exercise of outstanding
warrants as of March 31, 1997, which are exercisable at a weighted average
exercise price of $5.32 per share and (iii) a total of 1,283,545 additional
shares of Common Stock reserved for future issuance under the Company's
stock option plans and its Employee Stock Purchase Plan. See "Investment by
Medtronic," "Management -- Stock Plans," "Description of Capital Stock" and
Notes 5, 6 and 15 of Notes to Financial Statements.

19
<PAGE> 22

DILUTION

The pro forma net tangible book value of the Company's Common Stock at
March 31, 1997 was $2,021,900, or $0.45 per share of Common Stock. "Pro forma
net tangible book value" per share represents the amount of the Company's total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding, after giving effect to the automatic conversion of
each outstanding share of Preferred Stock into Common Stock upon the completion
of this offering and the conversion of the Medtronic Debenture based upon the
initial public offering price of $14.00 per share. After giving effect to the
receipt of the net proceeds from the sale by the Company of the 2,500,000 shares
offered hereby at the initial public offering price of $14.00 per share and
after deduction of the estimated underwriting discount and offering expenses,
pro forma net tangible book value of the Company at March 31, 1997 would have
been approximately $33,971,900, or $4.83 per share of Common Stock. This
represents an immediate increase in the pro forma net tangible book value of
$4.38 per share of Common Stock to existing stockholders and an immediate
dilution of $9.17 per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price...................................... $14.00
Pro forma net tangible book value as of March 31, 1997........... $ 0.45
Increase attributable to new investors........................... 4.38
------
Pro forma net tangible book value after this offering.............. 4.83
------
Dilution to new investors.......................................... $ 9.17
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the investors purchasing shares of Common Stock
in this offering (based on the initial public offering price of $14.00 per share
and before deducting the estimated underwriting discount and offering expenses
payable).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 4,526,710 64.4% $16,053,000 31.4% $ 3.55
New investors............... 2,500,000 35.6 35,000,000 68.6 14.00
--------- ----- ----------- -----
Total..................... 7,026,710 100.0% $51,053,000 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables and calculations exclude the effects of the Medtronic
Private Placement and assume no exercise of outstanding options or warrants. As
of March 31, 1997, 1,383,623 shares of Common Stock were subject to outstanding
options at a weighted average exercise price of $4.05 per share under the
Company's stock option plans and 1,609,250 shares of Common Stock were subject
to outstanding warrants at a weighted average exercise price of $5.32 per share.
If all of the options and warrants outstanding as of March 31, 1997 were
exercised, the new investors would experience an additional dilution of $0.03
per share. In addition, as of March 31, 1997, 1,283,545 shares of Common Stock
were reserved for future issuance under the Company's stock option plans and its
Employee Stock Purchase Plan. To the extent that any shares available for
issuance upon exercise of outstanding options, warrants or reserved for future
issuance under the Company's stock option plans or Employee Stock Purchase Plan
are issued, there will be further dilution to new investors. See "Investment by
Medtronic," "Management -- Stock Plans," "Certain Transactions," "Description of
Capital Stock," and Notes 5, 6 and 15 of Notes to Financial Statements.

20
<PAGE> 23

SELECTED FINANCIAL DATA

The selected financial data set forth below for the fiscal years ended
December 31, 1994, 1995 and 1996 are derived from the Company's financial
statements audited by Arthur Andersen LLP, independent public accountants,
included elsewhere in this Prospectus. The selected financial data for the nine
months ended December 31, 1993 and for the fiscal year ended March 31, 1993 are
derived from the Company's audited financial statements not included in this
Prospectus. The selected financial data for the three-month periods ended March
31, 1996 and 1997 are derived from the Company's unaudited financial statements
which, in the opinion of management, reflect all adjustments necessary for a
fair presentation of the Company's financial position and results of operations
for such periods. The results of interim periods are not necessarily indicative
of the results that may be expected for future periods including the year ending
December 31, 1997. The data set forth below is qualified in its entirety by and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR NINE-MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31, ENDED MARCH 31,
MARCH 31, DECEMBER 31, --------------------------- ----------------
1993 1993(1) 1994 1995 1996 1996 1997
----------- ------------ ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $ 393 $ 66 $ 607 $ 2,271 $ 4,057 $ 676 $ 1,373
Cost of revenue...................... 259 88 500 1,973 2,627 444 651
----- ----- ------- ------- ------- ------ -------
Gross profit (loss).................. 134 (22) 107 298 1,430 232 722
Operating expenses:
Research and development........... 132 495 630 739 1,359 336 558
Selling, general and
administrative................... 134 367 2,784 3,158 4,144 745 1,338
----- ----- ------- ------- ------- ------ -------
Total operating expenses......... 266 862 3,414 3,897 5,503 1,081 1,896
----- ----- ------- ------- ------- ------ -------
Loss from operations................. (132) (884) (3,307) (3,599) (4,073) (849) (1,174)
Interest and other income (expense),
net................................ 1 10 63 9 (486) (41) (356)
----- ----- ------- ------- ------- ------ -------
Net loss............................. $(131) $ (874) $(3,244) $(3,590) $(4,559) $ (890) $(1,530)
===== ===== ======= ======= ======= ====== =======
Pro forma net loss per share......... $ (0.88) $(0.18) $ (0.28)
======= ====== =======
Pro forma shares used in per share
computations(2).................... 5,151 5,041 5,460
======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------- MARCH 31,
1993 1993 1994 1995 1996 1997
--------- ---- ------ ------- ------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 227 $377 $ 12 $ 64 $ 433 $ 3,986
Working capital (deficit)................. 597 310 3,136 (44) (665) 1,101
Total assets.............................. 697 595 4,699 2,017 3,556 7,052
Redeemable preferred stock................ -- -- 5,438 5,882 6,002 6,002
Long-term debt, net of current portion.... 0 2 46 535 3,326 3,350
Total stockholders' equity (deficit)...... 648 471 (1,231) (5,269) (8,694) (7,054)
</TABLE>

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

(1) In 1993, the Company changed its fiscal year end from March 31 to December
31.

(2) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share and net loss per share.

21
<PAGE> 24

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and Notes included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

From its inception in 1989 through 1991, the Company conducted contract
research in the area of robotics for several government agencies such as the
National Aeronautics and Space Administration, the National Science Foundation,
National Institutes of Health and the United States Navy. In 1991, the Company
began applying its research efforts to the medical marketplace, focusing on the
development of robotic systems for surgical applications. As a result, the
Company introduced AESOP, which it believes is the world's first FDA-cleared
surgical robot, in October 1994. In October 1996, the Company introduced the
next version of AESOP which incorporates what the Company believes is the
world's first FDA-cleared voice control interface for a surgical device. Since
AESOP's commercial introduction, a significant portion of the Company's revenues
have been derived from the sale of AESOP and related single-use surgical
accessories. Since AESOP's introduction, approximately 240 units have been sold.

The Company is leveraging its AESOP technology to develop HERMES, a voice
controlled, networked, computer interface providing a surgeon with direct
control of and feedback from multiple devices in the OR. The Company is also
developing ZEUS, a surgical robotic system for minimally invasive surgery
utilizing technologies from both AESOP and HERMES. The initial target market for
ZEUS will be cardiovascular procedures. To date, all revenues from ZEUS and
HERMES have been payments made pursuant to development agreements.

The Company has entered into several strategic partnerships with
international medical device manufacturers and has established relationships
with leading medical institutions. The Company has entered into clinical
development agreements for ZEUS with The Cleveland Clinic, Hershey Medical
Center and Sarasota Memorial Hospital in order to enhance its research efforts
through use of prototype systems and provide cost sharing and revenue to the
Company. For cardiothoracic applications, Medtronic will act as the Company's
exclusive distributor of ZEUS in Europe, the Middle East and Africa and will
co-market ZEUS with the Company in North America. Stryker will purchase the
Company's HERMES system on an OEM basis, as a means of providing surgeons with
centralized and simplified voice control over a number of Stryker's endoscopic
and arthroscopic products. The Company currently distributes AESOP directly in
the United States and utilizes third-party distributors internationally. Johnson
& Johnson distributes AESOP in Australia and New Zealand and provides the
Company with certain strategic support in the areas of customer service and
training.

Since inception, the Company has sustained significant losses resulting in
an accumulated deficit of $14.0 million as of March 31, 1997. From inception
through March 31, 1997, the Company has raised approximately $11.5 million from
issuances of Common and Preferred Stock, $4.2 million in debt financing and $5.0
million in debt from strategic corporate partners. These financings have been
used to fund the Company's working capital needs, develop AESOP, HERMES and ZEUS
and continue its research and development efforts.

The Company expects to continue to incur significant operating losses due
to its research and development efforts, costs associated with obtaining
regulatory approvals and clearances, continued marketing expenditures to
increase sales and other costs associated with the Company's planned growth.
Furthermore, the Company anticipates that its operating results may fluctuate
significantly from quarter to quarter in the future, and that fluctuation will
depend on a number of factors, many of which are outside the Company's control.
These factors include timing and results of clinical trials, delays associated
with FDA and other

22
<PAGE> 25

approval and clearance processes, changes in pricing policy by the Company or
its competitors, the number, timing and significance of product enhancements and
new products by the Company and its competitors, health care reimbursement
policies and product quality issues.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 Compared to the Three Months Ended March 31,
1996

Revenues. Revenues increased 103% to $1.4 million for the three months
ended March 31, 1997 from $676,000 for the same period in 1996. Approximately
20% of the increase resulted from an increase in unit sales volume,
approximately 55% is attributable to an increase in the selling price of AESOP
from the introduction of an enhanced version of AESOP in the fourth quarter of
1996 and the balance of the increase primarily related to increases in product
development revenues.

Cost of Revenues. Cost of revenues increased to $651,000 for the three
months ended March 31, 1997 from $444,000 for the same period in 1996. Gross
margin increased to 53% in the first quarter of 1997 as compared to 34% in the
first quarter of 1996. The increase in gross margin was primarily due to
increases in selling price per unit.

Research and Development. Research and development expense increased 66% to
$558,000 in the three months ended March 31, 1997 from $336,000 for the same
period in 1996, primarily as a result of increased expenditures for HERMES and
ZEUS. The Company expects these expenditures to increase as it continues to
develop its technologies.

Selling, General and Administrative. Selling, general and administrative
expenses increased 79% to $1.3 million in the three months ended March 31, 1997
from $746,000 for the same period in 1996, an increase of approximately
$592,000. Approximately $250,000 of the increase is due to the addition of sales
and managerial personnel and commissions on increased AESOP unit sales accounted
for $60,000 of the increase. The balance of the increase relates to general
increases as the Company expanded its infrastructure. The Company expects
selling, general and administrative expenses to increase in future periods as
the Company continues to expand its infrastructure and incurs compensation
charges related to the grant of stock options. See Note 15 of Notes to Financial
Statements.

Interest and Other Expense, Net. Interest and other expense, net, increased
to $356,000 for the three months ended March 31, 1997, from $41,000 for the same
period in 1996. Interest and other expense, net, in the first quarter of 1997
included the amortization of approximately $167,000 of interest cost
attributable to the fixed conversion feature of the Medtronic Debenture and
approximately $63,000 of interest cost related to warrants issued with the
Bridge Notes. The remainder of the increase in interest expense was attributable
to an increase in overall indebtedness. See "Certain Transactions" and Notes 8
and 14 of the Notes to the Financial Statements.

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

Revenues. Revenues increased 79% to $4.1 million in 1996 from $2.3 million
in 1995. Approximately 50% of this increase was due to the commercial
introduction of the enhanced version of AESOP in the fourth quarter of 1996. The
Company also received additional revenue in 1996 as a result of the sale of ZEUS
prototypes which accounted for approximately 35% of the increase. The balance
primarily related to additional revenue from development contracts.

Cost of Revenues. Cost of revenues increased to $2.6 million in 1996 from
$2.0 million in 1995. Gross margin increased to 35% in 1996 as compared to 13%
in 1995. Increases in selling price accounted for approximately 55 percent of
the increase in gross margin with efficiencies of scale associated with
increased production accounting for most of the balance of the increase.

Research and Development. Research and development expenses increased 84%
to $1.4 million in 1996 as compared to $739,000 in 1995. During 1996, the
Company incurred additional costs for the development of voice control and more
sophisticated user interfaces related to the enhanced version of AESOP as well
as research and development efforts with respect to HERMES and ZEUS.

Selling, General and Administrative. Selling, general and administrative
expenses increased 31% to $4.1 million in 1996 as compared to $3.2 million in
1995. The increase was due almost entirely to additional

23
<PAGE> 26

salary and commission paid as the Company increased its personnel in the Selling
and Administrative functions.

Interest and Other Expense, Net. Interest and other expense, net, was
$486,000 in 1996 as compared to interest and other income, net, of $9,000 in
1995. The increase was due primarily to interest cost on Bridge Notes issued in
1996.

Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994

Revenues. Revenues increased 274% to $2.3 million in 1995 from $607,000 in
1994 primarily due to the timing of the commercial introduction of AESOP in
October 1994.

Cost of Revenues. Cost of revenues increased to $2.0 million in 1995 from
$500,000 in 1994. Gross margin decreased to 13% in 1995 as compared to 18% in
1994. The decrease in gross margin was primarily attributable to investments in
manufacturing capabilities to support expanded production.

Research and Development. Research and development expenses increased 17%
to $739,000 in 1995 as compared to $630,000 in 1994. The increase was primarily
due to the addition of research and development staff and research related to
the development of AESOP.

Selling, General and Administrative. Selling general and administrative
expenses increased 13% to $3.2 million in 1995 as compared to $2.8 million in
1994. The increase was primarily attributable to payroll and commissions as the
Company transitioned from selling through independent representatives to a
direct sales force and as the Company grew to support the manufacture and
distribution of AESOP.

INCOME TAXES

Minimal provision for state income taxes has been recorded for the
Company's pre-tax losses through December 31, 1996. As of December 31, 1996, the
Company had federal and state net operating loss carryforwards of approximately
$11.0 million and $4.9 million, respectively, which are available to offset
future federal and state taxable income. Federal carryforwards expire fifteen
years after the year of loss and state carry forwards expire from five to seven
years after the year of loss. Under the Tax Reform Act of 1986, the amounts of
and the benefits from net operating loss carryforwards may be impaired in
certain circumstances. Events which may cause such limitations in the amount of
available net operating losses which the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. The effect of such limitation, if imposed, has not
been determined. The Company has provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its realization. See
Note 7 of Notes to Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's expenses have exceeded cash inflows,
resulting in an accumulated deficit of approximately $14.0 million as of March
31, 1997. In addition to AESOP product sales and product development and grant
revenues totaling approximately $8.1 million from the date of introduction of
AESOP through March 31, 1997, the Company has primarily relied on proceeds from
issuances of Preferred Stock and Common Stock of approximately $11.5 million,
bridge debt financing of approximately $4.2 million and proceeds from debt
financing from strategic corporate partners of approximately $5.0 million to
fund operations.

For the three months ended March 31, 1997, the Company had net cash used in
operating activities of $1.4 million primarily attributable to a net loss and an
increase in accounts payable partially offset by depreciation and amortization,
amortization of fixed discount on convertible subordinated debt and a decrease
in accounts receivable. In fiscal 1996, 1995 and 1994, net cash used in
operating activities totaled $3.5 million, $3.6 million and $3.3 million,
respectively. Net cash used in operating activities for these periods has been
primarily attributable to net losses and increases in accounts receivable.

24
<PAGE> 27

For the three months ended March 31, 1997, cash outflows from investing
activities of approximately $45,000 related to purchases of property and
equipment. The Company currently has no material commitments for capital
expenditures. In 1994 and certain periods of 1995, unspent proceeds from equity
and debt offerings were invested, generating earnings on cash balances.

For the three months ended March 31, 1997, net cash provided by financing
activities of approximately $5.0 million was attributable to net proceeds from
long-term debt of approximately $3.0 million and preferred stock sales of
approximately $2.2 million. In fiscal years 1996, 1995 and 1994, net cash
provided by financing activities resulted primarily from issuances of Preferred
Stock and Common Stock and proceeds from issuances of long-term debt.

The Company's operations to date have consumed substantial amounts of cash,
and the Company expects its capital and operating expenditures to increase in
the next few years. The Company believes that its existing capital resources and
anticipated cash flow from planned operations together with the net proceeds of
this offering and of the Medtronic Private Placement should be adequate to
satisfy its capital requirements at least through 1998. There can be no
assurance, however, that the Company will not need significant additional
capital before such time. The Company's need for additional financing will
depend upon numerous factors, including, but not limited to, the extent and
duration of the Company's future operating losses, the level and timing of
future revenues and expenditures, the progress and scope of clinical trials, the
timing and costs required to receive both United States and international
governmental approvals or clearances, market acceptance of new products, the
results and scope of ongoing research and development projects, competing
technologies, the costs of training physicians to become proficient in the use
of the Company's products and procedures, the cost of developing marketing and
distribution capabilities, and other market and regulatory developments. To the
extent that existing resources are insufficient to fund the Company's
activities, the Company may seek to raise additional funds through public or
private financings. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders may result. There can be no
assurance that additional financing, if required, would be available on
acceptable terms, if at all. If adequate funds are not available, the Company's
business, financial condition and results of operations would be materially
adversely affected.

25
<PAGE> 28

BUSINESS

INTRODUCTION

The Company develops and markets proprietary robotic and computerized
surgical systems that enhance a surgeon's performance and centralize and
simplify a surgeon's control of the operating room ("OR"). The Company believes
that its products and technologies under development have the potential to
revolutionize surgery and the OR by providing a surgeon with the precision and
dexterity necessary to perform complex, minimally invasive surgical procedures
including E-CABG and by enabling a surgeon to control critical devices in the OR
through simple verbal commands. The Company believes that its products and
technologies under development will broaden the scope and increase the
effectiveness of minimally invasive surgery, improve patient outcomes and create
a safer, more efficient and cost effective OR.

BACKGROUND

Surgical techniques and related technologies have changed rapidly over the
past twenty years. The widespread adoption of minimally invasive surgical
techniques has significantly expanded the number of surgical procedures
available to patients, and the increasing complexity of these minimally invasive
procedures has placed substantial emphasis on technical surgical skills. The
demand for minimally invasive surgical procedures has largely been driven by
patients and payors, as such procedures generally result in improved patient
outcomes and reduced overall procedure costs. In addition, the number of
surgical devices in the OR has grown dramatically, increasing the potential for
error and miscommunication during surgery. Finally, the impact of managed care
has increased pressure on hospitals to minimize the costs of surgery.

Minimally Invasive Surgery

Traditionally, the vast majority of all surgeries have been open, requiring
large incisions measuring up to 18 inches to access the operative site. These
large openings enable the surgeon to manipulate and view the operative site and
allow unobstructed access to the patient's anatomy. However, the invasiveness of
open surgery often results in significant trauma, pain and complications, as
well as significant costs related to lengthy convalescence periods for the
patient.

In an effort to mitigate the shortcomings of traditional surgical
techniques, minimally invasive surgery and related technologies have been
developed. In minimally invasive surgery, specially designed surgical
instruments and an endoscope (a miniature camera attached to a maneuverable
tube) are inserted into the patient through ports in the body measuring
approximately 3-to-10 millimeters. The endoscope is connected to a video monitor
which allows the surgeon to view the operative site. Minimally invasive surgery
is intended to be as effective as traditional open surgery while offering
patients substantially reduced pain and trauma, shortened convalescent periods
and decreased overall patient care costs.

The development and subsequent widespread adoption of minimally invasive
techniques have revolutionized many surgical fields, including orthopedics,
gynecology and general surgery. According to MDI, in the United States in 1995,
over 13 million procedures which traditionally would have been performed in an
open manner were performed minimally invasively. MDI estimates that the number
of minimally invasive procedures will grow to over 15 million annually in the
United States by 2000. The majority of minimally invasive procedures are
currently limited to less complex excisional or dissection-based procedures that
do not require microsuturing or other intricate surgical techniques. In cases
where minimally invasive surgical options are not available, many patients who
cannot withstand the trauma associated with open surgical procedures must forego
surgery as a means of treatment.

To date, the application of minimally invasive techniques to more complex
procedures, including microsurgical procedures such as cardiovascular, neuro and
ophthalmic surgery, has been limited. Microsurgical procedures involve accessing
and delicately manipulating extremely small anatomical structures. A surgeon's
ability to perform microsurgical procedures with traditional minimally invasive
instruments is often limited by the small size of the surgical workspace within
the patient's body, constrained access to, and limited visualization of, the
operative site and the difficulty of manually performing extremely precise
manipulations

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with currently available minimally invasive surgical instruments. As a result,
the Company believes that for minimally invasive microsurgical procedures to be
more widely applied, technology must be developed which improves visualization
of, and access to, confined operative sites and enhances a surgeon's dexterity
and precision.

The Operating Room

Another key challenge for a surgeon is the efficient control of the
multitude of devices which have been introduced into the OR. The typical OR
contains a variety of devices which aid a surgeon, such as patient monitors,
electrocautery devices, imaging systems and endoscopic equipment. Coordination
and control of these devices can be difficult, since they generally have
different user interfaces, such as buttons, dials, foot pedals and hand
controls, as well as numerous, non-intuitive methods of providing feedback to a
surgeon, such as small LCD screens on their front panels and numerous audible
alarms, including beeps, buzzes and bells. In most instances, these devices are
manually controlled by someone other than a surgeon in response to a surgeon's
spoken commands, and the person controlling the devices is often responsible for
giving a surgeon verbal feedback with regard to the status of these devices.
Such indirect control and feedback are necessary because a surgeon's hands are
usually occupied with surgical instruments and a surgeon cannot exit the sterile
operating field. This indirect control and feedback is inefficient and can
increase the potential for miscommunication and error. As a result, the Company
believes that technology which provides a surgeon with greater control over, and
enhanced feedback from, the devices within the OR will increase the efficiency
of surgical procedures, while reducing the potential for error during surgery.

Surgical Costs

The impact of managed care has placed significant pressure on hospitals to
minimize the costs associated with patient care, especially with regard to
surgical procedures and the associated pre-operative and post-operative care. A
number of procedural and administrative measures have been implemented during
the past decade which reduced these costs, although these costs are still
significant. For instance, it is still common for members of the surgical team
to perform manual tasks, such as holding and maneuvering the endoscope, even
though managed care has increased pressure to re-deploy these often highly paid
OR personnel to more value-added roles. The Company believes that there is
considerable demand for technology which will result in increased efficiency and
lower surgical costs.

THE COMPUTER MOTION SOLUTION

The Company's strategy is to become the leading provider of robotic and
computerized surgical systems. The Company intends to implement this strategy by
developing technologies and products to broaden the scope and effectiveness of
minimally invasive surgery, centralize and simplify control of the OR and reduce
the costs associated with surgical procedures.

The Company is developing robotic surgical systems to fundamentally improve
a surgeon's performance. The proprietary technologies underlying these systems
include voice control, robotic motion control, motion scaling, tremor filtering,
positioning memory and sophisticated mechanical and electrical redundancies. The
Company believes that its robotic surgical systems will provide a surgeon with
greater dexterity and precision and enhanced visualization of, and access to,
confined operative sites. The Company's robotic surgical system under
development, ZEUS, incorporates a robotic endoscope positioner, as well as two
robotic arms which permit a surgeon to remotely manipulate surgical instruments
while seated at a control console. The Company believes that this technology
will improve a surgeon's ability to perform complex, minimally invasive surgical
procedures and will allow a surgeon to perform new, minimally invasive
microsurgical procedures that currently are impossible or very difficult to
perform safely and economically.

The Company is also developing voice controlled technologies which simplify
and centralize a surgeon's control of the OR. These proprietary technologies
include advanced speech recognition software, intuitive user interfaces, device
networking software and computer hardware. The Company has commenced marketing a
product incorporating this technology, AESOP, a robotic endoscope positioner,
which is controlled through

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simple verbal commands. The initial version of AESOP has been cleared by the FDA
and has been commercially available since October 1994. The voice control
interface incorporated into the current version of AESOP is also FDA-cleared,
and has been commercially available since October 1996. The Company is also
developing HERMES, a voice control system that is designed to enable a surgeon
to directly control various critical devices in the OR, such as laparoscopic,
arthroscopic and video devices, through simple verbal commands. HERMES is also
designed to provide standardized visual and digitized voice feedback, which the
Company believes has the potential to increase safety by substantially reducing
the various non-intuitive feedback mechanisms associated with most medical
devices. The Company also believes that this enhanced control and feedback in
the OR has the potential to increase efficiency, shorten procedure times and
reduce costs.

The Company believes that its products and technologies under development
have the potential to revolutionize surgery and the OR by broadening the scope
and increasing the effectiveness and safety of minimally invasive surgery and
improving patient outcomes. The Company also believes that its proprietary
technology could reduce the direct costs of performing complex surgical
procedures by decreasing the number of personnel required to operate the devices
in the OR, shortening procedure times and enabling more effective deployment of
clinical personnel.

PRODUCTS AND MARKETS

The Company currently has three robotic and computerized surgical systems
in various stages of development, one of which is commercially available. The
Company believes that its products can be used in conjunction with devices
common to most ORs today. The following table identifies the Company's
commercially available products and products under development:
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DEVELOPMENT STATUS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
AESOP Proprietary robotic voice Commercially available and
controlled endoscope positioning FDA-cleared through the 510(k)
system used in laparoscopic, process
cardiovascular and thorascopic
procedures
- ----------------------------------------------------------------------------------------------
HERMES Proprietary voice controlled Functionality testing under
system designed to centralize Institutional Review Board approval
and simplify control of various expected in second half of 1997
OR devices, which is expected to
initially include certain Initial OEM Customer -- Stryker
laparoscopic, arthroscopic and
video devices
- ----------------------------------------------------------------------------------------------
ZEUS Proprietary robotic surgical Limited, experimental animal
system designed to facilitate functionality procedures commenced
performance of minimally at clinical sites including The
invasive surgical procedures and Cleveland Clinic, Pennsylvania
enable performance of new State University's Hershey Medical
minimally invasive microsurgical Center and Sarasota Memorial
procedures, including Hospital; testing is expected to
cardiovascular, neuro and commence in the near future at
gynecologic surgeries Columbia/HCA Healthcare
Corporation's Medical City of
Dallas Hospital
Cardiothoracic Marketing Partner --
Medtronic
</TABLE>

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

AESOP

The Company's Automated Endoscopic System for Optimal Positioning ("AESOP")
is a robotic endoscope positioner that enables surgeons to directly control the
movement of the endoscope through simple verbal commands and provides surgeons
with an image that is more stable and sustainable than the image provided when a
human assistant holds the scope. AESOP connects directly to the operating table
and

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approximates the form and function of a human arm. AESOP can accommodate nearly
any brand and size of endoscope. The scopes are attached to AESOP by a magnetic,
sterilizable collar and the arm is covered by a sterile single-use drape. AESOP
consists of a voice control microphone, and a proprietary, fault-tolerant
computer controller which translates a surgeon's commands into movements of the
robotic arm as well as a customized cart which allows AESOP to be easily
transported throughout the hospital. This system also includes manual, back-up
hand and foot controls that provide a surgeon and other members of a surgical
team with multiple interfaces to the robot. The Company believes that AESOP is
the world's first FDA-cleared surgical robot and incorporates the world's first
FDA-cleared voice interface for use in the OR.

Prior to the introduction of AESOP, surgeons were forced to rely primarily
on a surgical assistant to hold and maneuver the endoscope to provide the
surgical field of view. This approach contributes to some of the inefficiencies
associated with minimally invasive surgical procedures, including an unstable
video image caused by the human endoscope holder's involuntary hand tremors, the
difficulty of the human endoscope holder to properly execute a surgeon's verbal
commands, including returning to a specific surgical site, the resultant
crowding around the OR table, often requiring the human endoscope holder to
reach under or across the surgeon to hold the endoscope, and the frequent
smearing of the endoscope lens caused by the human endoscope holder
inadvertently touching it against tissue.

The use of AESOP eliminates the need for a human endoscope holder and some
of the inefficiencies associated with minimally invasive surgical procedures by
providing a steady and sustainable video image and allowing a surgeon to
maneuver the endoscope by means of a proprietary voice control interface that
recognizes a surgeon's voice and moves the endoscope in response to a surgeon's
simple verbal commands. This direct control by a surgeon mitigates the risks
associated with miscommunication between the human endoscope holder and the
surgeon and allows a surgeon to access specific operative sites, including a
specific suture or the position of a clamp, stored in AESOP's memory. The use of
AESOP also reduces crowding in the OR, while allowing a surgical staff to
perform more productive tasks. The Company believes that the advantages of AESOP
result in shorter, safer and more cost effective minimally invasive surgical
procedures. AESOP has been cleared by the FDA for use in general thorascopy,
cardiothoracic and laparoscopic, as well as in a number of minimally invasive
ear, nose and throat ("ENT") procedures. These applications are performed by
thoracic, cardiac, general, orthopedic, gynecologic, urologic, plastic and ENT
surgeons.

In October 1994, the Company released the initial version of AESOP, which
utilized a foot pedal to control the robotic arm. The Company introduced the
current version of AESOP in October 1996. The initial version of AESOP can be
upgraded to include the Company's proprietary voice control technology. As of
July 1, 1997, the Company sold 240 AESOP units, which were used to perform over
18,000 minimally invasive surgical procedures. The domestic and international
list prices of AESOP were $44,900 and $31,500, respectively, during the first
quarter of 1997.

HERMES

The Company's OR control system, HERMES, is a voice controlled technology
platform which is designed to serve as a centralized and simplified interface
for a surgeon to control a variety of medical devices in the OR. These devices
currently include the endoscopic camera and light source, insufflator,
arthroscopic shaver and pump, VCR, video printer, video frame grabber and the
Company's robotic devices. HERMES consists of a control box which is networked
with multiple HERMES compatible devices, and is controlled by a surgeon using a
headset microphone.

HERMES allows a surgeon to directly control the OR devices and equipment to
which it is connected through simple verbal commands. In addition, HERMES can
also be controlled by a touch screen pendant. HERMES also provides visual and
digitized voice feedback to a surgical team. The digitized voice feedback is
device-specific and the video feedback is displayed on the endoscopic video
monitor. Both the audio and video feedback features are customizable by a
surgeon in real time, allowing a surgeon to modify the amount and type of
feedback received. The Company believes that HERMES has the potential to
increase the

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effectiveness of a surgical team by augmenting the utility of the devices it
controls, thereby enhancing the efficiency and safety of surgical procedures. As
a result of these efficiencies, the Company believes that use of HERMES also has
the potential to reduce costs associated with surgical procedures.

The Company has developed a prototype of HERMES and expects to commence
functionality testing under Institutional Review Board ("IRB") approval at
selected sites in the second half of 1997. These sites are expected to include,
among others, Stanford University Medical Center, Duke University, Johns
Hopkins, Baylor College of Medicine and Louisiana State University Medical
Center. The Company believes that HERMES could be utilized in a majority of the
approximately 23,000 ORs in the United States.

In order to leverage its proprietary voice recognition technology in the
arthroscopic and laparoscopic market, the Company entered into a Development and
Supply Agreement with Stryker, a leading manufacturer of endoscopic equipment,
during the third quarter of 1996. Pursuant to this agreement, the Company is
developing interfaces between the Company's proprietary voice recognition
technology and certain of Stryker's arthroscopic and laparoscopic surgical
devices. The Company anticipates that Stryker will apply for 510(k) FDA
marketing clearance of the initial devices integrated with HERMES during the
latter half of 1997. The Company intends to enter into additional OEM agreements
with other leading medical device manufacturers to potentially expand the number
and type of devices to be integrated with HERMES, including the OR table, the OR
lights, electrocautery devices, various imaging systems, as well as numerous
devices in the catheterization laboratory. See "Business -- Corporate Alliances
and Clinical Sites."

ZEUS

The Company's robotic surgical system under development, ZEUS, is designed
to fundamentally improve a surgeon's ability to perform complex, minimally
invasive procedures and enable new, minimally invasive microsurgical procedures
that are currently impossible or very difficult to perform with conventional
surgical methods. ZEUS is comprised of three surgeon-controlled robotic arms,
one of which positions an endoscope while the other two hold the Company's
proprietary single-use and reusable surgical instruments. The Company believes
that these new minimally invasive surgical procedures, like currently available
minimally invasive surgical procedures, would result in reduced patient pain and
trauma, fewer complications, lessened cosmetic concerns and shortened
convalescence periods and would increase the number of patients qualified for
certain surgical procedures. In addition, the Company believes that an increase
in minimally invasive options would result in lower overall health care costs to
providers, payors and patients.

ZEUS' robotic arms can be directly attached to the surgical table in order
to maintain a constant orientation to the patient. A surgeon controls the
movement of the robotic arms by manipulating two corresponding robotic
instrument handles, which are housed in a mobile console which can be positioned
anywhere in the OR. The physical design of these instrument handles are similar
to conventional surgical instrument handles. A surgeon's precise manipulation of
the instrument handles is communicated to a proprietary computer controller
which filters, scales and translates the movements to the robotic arms. A
surgeon can operate these instrument handles from a comfortable, ergonomic
position, including sitting with his or her forearms positioned on an armrest.
The surgeon controls the robotic arm which holds the endoscope through means of
simple verbal commands spoken into a headset microphone. A video display of the
endoscopic image is placed directly in front of the surgeon and a second monitor
is positioned next to the patient for use by the other members of the surgical
team. In addition, the Company believes that ZEUS could be used in conjunction
with the Company's HERMES technology to control a variety of ZEUS' features,
including motion scaling and tactile feedback.

The Company believes that ZEUS will enable new minimally invasive
microsurgical procedures and facilitate the performance of existing minimally
invasive procedures by providing clinicians with the following technical
benefits:

Improved Precision. ZEUS incorporates technology that is designed to enable
a surgeon to scale his or her movements, allowing manipulation of instruments on
a microsurgical scale while utilizing normal hand and arm movements. For
instance, in microsurgical procedures which involve extremely small bodily
structures and which utilize sutures ranging from 20-to-40 microns, or one-third
to two-thirds of the width of a

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human hair, if a surgeon selects a scaling ratio of 15-to-1, each one inch
movement by the surgeon would result in a 1/15 inch movement by the robotic
surgical instruments.

Improved Dexterity. ZEUS is designed to enhance a surgeon's performance by
enabling manipulations of the surgical instruments, which are impossible or very
difficult to use when manually performing surgery. For instance, a surgeon can
activate and deactivate the instrument handles to further extend his or her
range of motion to complete a particular movement, such as suturing, without
having to physically contort his or her arms. In addition, in order to gain
anatomical access to certain regions of the body in a minimally invasive manner,
the instruments must be placed in positions that would be extremely difficult
for a surgeon to manipulate manually using conventional minimally invasive
surgical techniques, due to the distance between the instruments and their
relative positions to each other. ZEUS allows a surgeon to control the
instruments by means of the robotic instrument handles, regardless of the
positions of the instruments relative to each other.

Eliminated Effects of Involuntary Hand Tremors. ZEUS is designed to hold
the surgical instruments and the endoscope in a steady manner, eliminating a
surgeon's incidental and unintended hand motions and tremors which are
intensified when holding surgical instruments for extended periods of time.

Enhanced Tactile Feedback. ZEUS is designed to provide a surgeon with
computerized, scaleable feedback which enhances and amplifies the surgeon's
sense of touch while grasping delicate tissue as compared to traditional
minimally invasive surgical instruments.

Enhanced Visualization. ZEUS incorporates a robotic arm that controls the
endoscope to produce a steady, magnified video image under direct surgeon
control which facilitates performance of minimally invasive surgical procedures.

Improved Minimally Invasive Anatomical Access. ZEUS is designed to provide
a surgeon with access to confined areas in the body and critical anatomical
structures that are currently only accessible by means of highly invasive, open
surgical procedures or multiple "less invasive" incisions. In the case of
cardiac surgery, these less invasive approaches can require multiple 3-to-5 inch
incisions and often involve the removal of rib cartilage. In contrast, ZEUS
provides a surgeon with complete access to the heart through several 3
millimeter ports.

Minimized Surgeon Fatigue. ZEUS allows a surgeon to operate the surgical
instrument handles in a comfortable, ergonomic position, including sitting down
and positioning his or her forearms on armrests. The Company believes that these
enhanced ergonomics would extend the professional lives of surgeons and increase
the efficiency and effectiveness of demanding and lengthy microsurgical
procedures.

ZEUS has been used by the Company's clinical development partners to
perform limited, experimental procedures on animals, including minimally
invasive coronary artery bypass grafts, as well as anastomosis of the small
bowel, bile duct, ureteral and iliac artery. Each clinical development partner
has purchased a prototype ZEUS system and has provided funds to the Company to
partially offset the ongoing costs associated with the development and clinical
validation of ZEUS.

The Company will seek PMA approval by the FDA to market ZEUS for a number
of indications. To date, the Company has no experience with the testing of ZEUS
in clinical trials. The Company anticipates that it will begin clinical trials
during the first quarter of 1998. However, there can be no assurance that the
FDA will allow such trials to commence in a timely manner, if at all. Any delay
in the commencement of clinical trials would delay market introduction of ZEUS.
See "Risk Factors -- Government Regulation and Lack of Regulatory Approval."

Initial Applications for ZEUS

Conventional, open chest coronary artery bypass graft ("CABG") procedures
have been performed on a widespread basis for over 35 years, with approximately
318,000 patients undergoing this procedure in the United States during 1994,
according to the American Heart Association. Although many other surgical
procedures in the areas of arthroscopic, gynecologic and general surgery have
been performed in a minimally

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invasive manner during the past three decades, the Company believes that
cardiovascular surgery remains the largest surgical discipline which still
utilizes a highly invasive approach. This is primarily due to the difficulty of
accessing and visualizing all regions of the heart within the confines of the
patient's body and performing the precise and highly dexterous movements
required to suture cardiac vessels with minimally invasive instruments. In order
to gain access to the heart, the surgeon currently must open the chest by
cutting a 12-to-18-inch incision in the patient's sternum with a bone saw and
split the ribcage apart approximately 6 inches by means of a steel retractor.
The surgeon then sutures a vein or artery harvested from elsewhere in the
patient's body directly onto the heart, effectively bypassing the diseased areas
of the coronary arteries. The anastomosis, or suturing process, is one of the
most critical aspects of the CABG procedure and is very difficult to perform
minimally invasively. This efficacious, but highly traumatic, open chest
approach results in a lengthy and painful convalescence period for the patient.
The typical hospital stay resulting from this procedure ranges from 5 to 10
days, with several additional weeks required for a complete recovery. The total
cost of this procedure ranges from $25,000 to $50,000.

A number of cardiovascular surgeons and medical device companies have
developed surgical procedures which are less invasive than the open chest
approach. These less invasive approaches are divided between the "beating" and
"stopped" heart methodologies. These approaches require making one or more
3-to-5 inch incisions parallel to the patient's ribs and, in many cases,
removing a portion of the patient's rib cartilage and retracting the
non-dissected ribs in order to gain access to the heart. Although the
anastomosis is performed under the surgeon's direct vision, it is still
extremely difficult to execute due to the limited anatomical and visual access
and the crowded surgical field, which place significant demands on the surgeon's
precision and dexterity. In most multiple bypass procedures, multiple incisions
are required to access all of the necessary regions of the heart. While
substantial progress has been made to reduce the pain and trauma associated with
cardiovascular surgery, the Company believes that significant limitations remain
which will preclude the wide application of these less invasive techniques
without the introduction of technology to enhance a surgeon's performance.

ZEUS is designed to enable a surgeon to perform a beating or stopped heart
E-CABG by providing visual and anatomical access to all regions of the heart as
well as the precision and dexterity required to perform the anastomosis
minimally invasively. This approach may greatly diminish collateral damage,
resulting in reduced pain and trauma, fewer complications, lessened cosmetic
concerns, shortened convalescence periods, increased patient qualification for
certain cardiovascular surgical procedures and lower overall costs for the
provider, payor and patient. In addition to the E-CABG, the Company believes
that ZEUS will also enable fully endoscopic heart valve replacement and repair
procedures, of which approximately 54,000 open procedures were performed in the
United States during 1994.

Potential Applications for ZEUS

In addition to cardiovascular procedures, ZEUS is also being designed to
enable a surgeon to perform new minimally invasive microsurgical procedures
which are impossible or very difficult to perform without robotic instruments.
These procedures include bowel resection, the treatment of female stress
incontinence, radical prostatectomy and nissen fundoplications. The Company
anticipates that ZEUS may make these, and numerous other procedures more
efficient and cost effective by simplifying the suturing process and allowing a
surgeon to more effectively manipulate a number of existing medical instruments,
such as clips, staples, energy sources, and lasers. The Company believes that
this precision would increase the number and scope of complex surgical
procedures that can be consistently, safely and economically performed minimally
invasively.

Digital imaging technology, including MRI, ultrasound and X-ray, generates
three dimensional renderings of soft anatomical features, such as organs and
other porous tissue. Due to the constraints associated with interpreting two
dimensional images on video monitors, the Company believes that significant
clinical and economic benefits could be derived by combining robotic systems
with digital imaging. By interfacing the imaging source with a positioning
robot, the robot can be "guided" in three dimensional space to the desired
location within the patient's body. Procedures which could potentially benefit
from the use of image guided robots include breast and brain biopsies, as well
as orthopedic implants and organ transplants.

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The Company also believes that ZEUS may allow clinicians to remotely
perform certain diagnostic and therapeutic procedures which involve the use of
low levels of radiation, such as radioactive seed implants for chemotherapy and
radioactive stents for cardiovascular therapies. Such radioactive materials do
not harm patients, but can have an adverse cumulative impact on clinicians. This
separation of the clinician from the radioactive substances would minimize the
clinician's exposure to the radiation, while enhancing his or her precision with
respect to placing radioactive materials in the patient's body. The Company
believes that the clinician's enhanced precision will also reduce collateral
damage to the patient's non-diseased tissue.

The Company has also developed proprietary technology that allows robotic
commands to be transmitted over conventional phone lines and the Internet. The
Company intends to eventually couple this technology with ZEUS in order to
enable telesurgery, in which a surgeon could operate on a patient irrespective
of the geographic distance between them. The Company has sold custom AESOP
Telesurgery Systems, which incorporate this proprietary technology, to a number
of leading teaching institutions, including Yale University, Johns Hopkins
University and George Washington University.

The Company has no immediate plans to obtain FDA clearance or approval for
any of the foregoing purposes and there can be no assurance that ZEUS will be
successfully utilized to perform these surgical procedures or that ZEUS will be
granted required regulatory clearances or approvals to enable ZEUS to be
marketed for these purposes. See "Risk Factors -- Government Regulation and Lack
of Regulatory Approval."

CORPORATE ALLIANCES AND CLINICAL SITES

In order to access development capital and marketing resources and to
rapidly commercialize its products, the Company has pursued strategic alliances
with corporations and has undertaken testing at clinical institutions in order
to advance the development, marketing and distribution of its robotic and
computerized surgical systems. To date, the Company has formed the following
corporate alliances and has commenced testing, or will commence testing, at the
following clinical sites:

Medtronic, Inc. In the first quarter of 1997, the Company and Medtronic, a
leading manufacturer of medical devices, entered into an agreement pursuant to
which Medtronic will act as the Company's exclusive distributor of ZEUS for use
in cardiothoracic applications in Europe, the Middle East and Africa. Under this
agreement, Medtronic and the Company will co-market ZEUS in North America for
use in cardiothoracic applications. In addition, the Company granted to
Medtronic a right of first refusal for distribution rights outside of Europe,
the Middle East and Africa and for distribution or license rights for the use of
ZEUS in cardiology, urology and neurology. The Company anticipates cooperating
closely with Medtronic in the areas of training, service and after-market
support with regard to ZEUS. In connection with the distribution and
co-promotion arrangement, Medtronic invested $4.0 million in the Company in the
form of a loan which converted into 363,743 shares of Common Stock of the
Company. Pursuant to a one-time right granted to Medtronic in connection with
its purchase of the Medtronic Debenture, Medtronic has also committed to
purchase from the Company 76,805 shares of Common Stock at a per share price of
$13.02 (the initial public offering price per share, less underwriting discounts
and commissions) in a private placement which will be consummated concurrently
with the closing of this offering. See "Investment by Medtronic" and "Certain
Transactions."

Stryker Corporation. In the third quarter of 1996, the Company entered into
an agreement with Stryker, a leading manufacturer of endoscopic equipment,
pursuant to which Stryker will purchase the Company's HERMES system on an OEM
basis and sell it worldwide, as a means of providing surgeons with centralized
and simplified voice control over certain of Stryker's endoscopic products.
Stryker has agreed to pay a significant percentage of the development costs of
HERMES. The Company will retain all intellectual property rights arising from
this development effort with respect to its proprietary voice control and
networking technology. Although Stryker is under no obligation to purchase the
developed product, the agreement between the Company and Stryker provides that
Stryker must meet certain sales targets in order to maintain marketing rights
and exclusivity of this voice control technology for use with specified OR
devices within specific fields of use. The Company intends to enter into similar
OEM relationships with other leading manufacturers of OR devices with the goal
of establishing the Company's HERMES technology as the

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standard method of controlling devices and equipment in the OR, including the OR
table, the OR lights, electrocautery devices, imaging systems, as well as
numerous devices in the catheterization laboratory.

Clinical Sites. The Company has entered into several agreements with
leading medical institutions in order to validate and guide the development
process of the Company's products and technology. These sites include The
Cleveland Clinic, Pennsylvania State University's Hershey Medical Center and
Sarasota Memorial Hospital. The Company intends to commence testing with Zeus in
the near future at Columbia/HCA Healthcare Corporation's Medical City of Dallas
Hospital. Each of these facilities has purchased a ZEUS prototype system and has
agreed to assist the Company in developing and validating ZEUS.

SALES, MARKETING AND DISTRIBUTION

The Company utilizes two methods to sell and distribute AESOP.
Domestically, the Company sells AESOP and its related single-use products
through a direct sales force comprised of nine field sales persons and six
clinical education specialists. The Company employs a two-tier sales force,
which combines a field sales person and one or more clinical education
specialists in each territory. The clinical education specialists, who are
registered nurses, train new customers and increase the utilization rate of the
Company's products among existing customers. This structure separates the
selling and training functions to increase the sales force's efficiency.
Internationally, the Company distributes AESOP through independent, third party
distributors. The Company currently has distributors serving a number of
countries in Asia and Europe, including Johnson & Johnson in Australia and New
Zealand, AMCO in Japan and Joseph Trading Co. in Korea. The Company intends to
initially sell HERMES on an OEM basis to manufacturers of surgical devices for
use with their respective products. HERMES will initially be marketed by Stryker
as an integrated component of several of Stryker's endoscopic products.

The Company intends to utilize a combination of direct sales personnel and
strategic partners to sell its future products. In the United States and Canada,
the Company intends to sell ZEUS through its direct sales representatives and
the product will be co-marketed by Medtronic for cardiothoracic applications.
Internationally, the Company currently intends to distribute ZEUS through
independent, third party distributors. The Company believes that this approach
will allow the Company to maximize the size of its international installation
base in a rapid and economical manner. In Europe, the Middle East and Africa,
Medtronic will act as the exclusive distributor of ZEUS together with related
single-use and reusable products for use in cardiothoracic applications.

The Company's international sales, as a percentage of its total sales, were
9%, 21% and 49% in 1994, 1995 and 1996, respectively. See Note 12 of Notes to
Financial Statements.

RESEARCH AND DEVELOPMENT

As of July 1, 1997, the Company's research and development department was
comprised of 19 engineers, including four Ph.D.s. This group has collectively
earned 13 Masters Degrees in areas including electrical engineering and
mechanical engineering. Certain members of this team have been working together
for over ten years and have built numerous sophisticated robotic systems and
advanced motion control computers for a variety of companies and government
agencies, including the National Institutes of Health and the National
Aeronautical Space Agency. During 1994, 1995, 1996 and the three month period
ended March 31, 1997, the Company spent approximately $630,000, $739,000, $1.4
million and $558,000, respectively, on research and development activities. In
certain cases, the Company places a full-time employee at the facilities of its
strategic partners in order to enhance communications between the Company and
these strategic partners and to maximize the value of the development
partnership. In addition, certain of the Company's strategic partners fund a
portion of the Company's research and development activities. See
"Business -- Corporate Alliances and Clinical Sites."

MANUFACTURING

The Company purchases most of the components and certain subassemblies used
in the manufacture of its AESOP products from outside vendors. These items are
generally produced to the Company's specifications and the final products are
assembled, tested and shipped by the Company at its headquarters. Certain
components of its product are obtained by the Company from single source
suppliers. However, the Company believes that alternative suppliers are
available for its product components and intends to qualify additional

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<PAGE> 37

suppliers as sales volume warrants. The Company plans to utilize a similar
approach to engage third parties to manufacture components of its other products
under development, including HERMES and ZEUS. Although the Company intends to
maintain sufficient levels of inventory to avoid any material disruption
resulting from increased demand or a disruption in supply, there can be no
assurance that the Company will be able to manufacture and supply products to
meet potential demand.

The Company has implemented quality control systems as part of its
manufacturing process, as required by the FDA's QSR. The Company has also been
inspected by the California Department of Health Services ("CDHS") on behalf of
the State and on behalf of the FDA, and is registered with the State of
California to manufacture its medical devices. The Company believes that it is
in compliance, in all material respects, with the FDA QSR requirements for
medical devices. There can be no assurance, however, that the Company will
remain in compliance with QSR requirements. Failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, if the Company files a PMA application for
ZEUS, the FDA will conduct, and the Company must pass, a pre-approval QSR
inspection, before approval of ZEUS can be granted.

The Company is also in the process of implementing policies and procedures
which are intended to allow the Company to achieve ISO 9001/EN 46001
certification of its quality control systems. The European Union has promulgated
rules which require that medical products receive the right to affix the CE
Mark, an international symbol of adherence to quality assurance standards, by
mid-1998. Failure to receive the right to affix the CE Mark would prohibit the
Company from selling its products in member countries of the European Union, and
there can be no assurance that the Company will be successful in meeting the
European quality standards or other certification requirements. See "Risk
Factors -- Government Regulation and Lack of Regulatory Approval" and
"-- Dependence on Independent Contract Manufacturers; Limited Manufacturing
Experience."

PATENTS AND PROPRIETARY RIGHTS

The success of the Company will depend, in part, on its ability to obtain
and maintain patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of others. The
Company's policy is to seek to protect its proprietary positions by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of July 8, 1997, the Company has six issued United States
patents which cover certain technologies embodied in its products relating to
computer processing, endoscopic positioning techniques by means of robotics and
user interface elements. The patented inventions have use in certain
applications, including computer assisted surgery and robotic tissue
manipulation. The Company also has 16 United States and five foreign patent
applications pending, two of which have received a Notice of Allowance, by which
it is seeking to obtain protection for its concepts relating to robotic assisted
surgery and operating room control systems. There can be no assurance that the
Company's issued patents or any patents that may be issued in the future will
provide significant proprietary protection or provide a competitive advantage
for the Company. In addition, there can be no assurance that any pending patents
will be issued, or that any patents or patent applications will not be
challenged, invalidated or circumvented in the future. Further, there can be no
assurance that competitors, many of which have substantially more resources than
the Company and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use or sell its products either in
the United States or internationally.

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<PAGE> 38

Blakely, Sokoloff, Taylor & Zafman LLP, the Company believes that the
technologies employed by the Company in its devices and systems do not infringe
the claims of such patents. There can be no assurance, however, that third
parties will not seek to assert that the Company's devices and systems infringe
their patents or seek to expand their patent claims to cover aspects of the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of the
United States. The failure of the Company to protect its intellectual property
rights could have a material adverse effect on its business, financial condition
and results of operations.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the USPTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, USPTO interference or
opposition proceedings and related legal and administrative proceedings are
costly, time-consuming, divert the attention of management and technical
personnel and could result in substantial uncertainty regarding the Company's
future viability. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. If any
relevant claims of third-party patents are upheld as valid and enforceable in
any litigation or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such patent, or to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be available on terms
acceptable to the Company or that the Company would be successful in any attempt
to redesign its products or processes to avoid infringement. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
intends to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the enforceability, scope, and validity of the
proprietary rights of others.

COMPETITION

The Company's products are designed to address the markets for minimally
invasive surgery and minimally invasive microsurgery, which are currently in
early stages of development. These markets are and the Company believes will
continue to be intensely competitive. The Company believes that it competes, and
intends to compete, primarily on the basis of its operational competence in, and
its reputation for, developing, protecting, manufacturing and marketing unique
and technologically advanced robotic products and obtaining timely regulatory
agency approvals. Competitors have been pursuing or will be pursuing
opportunities in these markets, most of which have significantly greater
financial, manufacturing, marketing, distribution and technical resources and
experience than the Company. In addition, some of these companies may be able to
market their products sooner than the Company if they are able to achieve
regulatory approval before the Company.

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<PAGE> 39

diseases can be treated with PTCA, intravascular stents, atherectomy catheters
and lasers. Many of these alternative treatments are widely accepted in the
medical community and have a long history of use. In addition, technological
advances with other procedures could make such therapies more effective or
inexpensive than using the Company's products and could render the Company's
technology obsolete or unmarketable. There can be no assurance that physicians
will use the Company's products to replace or supplement established treatments
or that the Company's products will be competitive with current or future
technologies. In addition, the Company may also experience competitive pricing
pressures which may adversely affect unit prices and sales levels. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.

GOVERNMENT REGULATION

United States

The Company's products, including AESOP, HERMES and ZEUS, are regulated as
medical devices. Accordingly, clinical trials, product development,
manufacturing processes, labeling, promotional activities and product
distribution are subject to extensive review and rigorous regulation by
government agencies in most countries in which the Company will seek to
commercialize its products. In the United States, the Company's products are
subject to applicable provisions of the FDC Act and implementing regulations and
require clearance or approval by the FDA prior to commercialization. In
addition, significant changes or modifications to medical devices also are
subject to regulatory review and clearance or approval. Under the FDC Act, the
FDA regulates, among other things, the research, clinical testing,
manufacturing, labeling, storage, record keeping, advertising, distribution,
sale and promotion of medical devices in the United States. In addition, the FDA
has promulgated regulations effective in June 1997 to extend its oversight of
medical devices to design and development activities. The testing for,
preparation of and subsequent review of applications by the FDA and foreign
regulatory authorities is expensive, lengthy and uncertain. Noncompliance with
applicable requirements can result in, among other things, Warning Letters,
proceedings to detain imported products, fines, injunctions, civil and criminal
penalties against the Company, its officers and its employees, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and a recommendation by the FDA that the
Company not be permitted to enter into government contracts. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.

In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to QSR) and Class II devices are subject to
general and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval ("PMA") by the FDA to
ensure their safety and efficacy (for example, certain life-sustaining,
life-supporting and implantable devices, or new devices that have not been found
substantially equivalent to legally marketed Class I or Class II devices).

The FDA also has the authority to require clinical testing of certain
medical devices as part of the clearance or approval process. If clinical
testing of a device is required and if the device presents a "significant risk,"
an Investigation Device Exemption ("IDE") application must be approved by the
FDA prior to commencing clinical trials. If a device does not present a
significant risk to patients, a clinical investigation may commence subject to
obtaining IRB approval and the patients' informed consent. The IDE application
must be supported by adequate data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA,
clinical trials may begin at a specific number of investigational sites with a
maximum number of patients, as approved by the agency. Sponsors of clinical
trials are permitted to sell those devices distributed in the course of the
study provided such costs do not exceed recovery of the costs of manufacture,
research, development and handling. All clinical trials must be conducted under
the auspices of IRBs pursuant to FDA regulations and informed consent. To date,
the Company has conducted only limited experimental animal procedures, has not
conducted any clinical trials and has not submitted an IDE to the FDA.

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<PAGE> 40

Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA approval of a PMA
application or clearance of a 510(k) submission. If the manufacturer or
distributor cannot establish that a proposed device is substantially equivalent
to a legally marketed Class I or II predicate device as discussed below, or a
Class III device not requiring a PMA, the manufacturer or distributor must seek
premarket approval of the proposed device through submission of a PMA
application. A PMA application must be supported by extensive data, including
laboratory, preclinical and clinical trial data to prove the safety and efficacy
of the device for each of its intended uses, as well as extensive manufacturing
information. If the FDA determines, upon initial review, that a submitted PMA
application is sufficiently complete to permit substantive review, the FDA will
accept the PMA application for filing. Depending on the technology and the
quality of the PMA application, the FDA review of a PMA application on average
takes approximately one year from the date of acceptance for filing, but review
times vary depending upon FDA resources and workload demands and the complexity
of PMA submissions. In addition, there can be no assurance that the FDA will
approve the PMA. Additionally, as one of the conditions for approval, the FDA
will inspect the manufacturing establishment at which the subject device will be
manufactured to determine whether the quality control and manufacturing
procedures conform to QSR requirements. If granted, the PMA approval may include
significant limitations on the indicated uses for which a product may be
marketed.

If a medical device manufacturer or distributor can establish, among other
things, that a device is "substantially equivalent" in intended use and
technological characteristics to a legally marketed Class I or Class II medical
device, or to a Class III medical device for which the FDA has not required a
PMA (known as a predicate device), the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k). The 510(k)
submission must establish to the satisfaction of the FDA the claim of
substantial equivalence to the predicate device. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence,
including the requirement for IDE clinical trials, before 510(k) clearance.

Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA submission. Such a request for
additional information including clinical data or a determination that the
device is not substantially equivalent would delay market introduction of the
products that are the subject of the 510(k). According to the FDA's Office of
Device Evaluation Annual Report for fiscal year 1996, it generally takes 150
days from the date the FDA files a 510(k) to obtain clearance, although it may
take significantly longer, in particular if the device is novel and clinical
trials are required.

As of July 1, 1997, the Company had received three 510(k) clearances for
certain intended uses and indications of AESOP, including general thorascopy,
general laparoscopy and general cardiothoracic surgery. Because HERMES will be
sold by the Company to medical device manufacturers on an OEM basis, the device
manufacturers will be responsible for obtaining FDA clearance for their products
incorporating HERMES. There can be no assurance that the FDA will determine that
HERMES can be cleared for marketing through the 510(k) notification process. If
HERMES cannot be cleared for marketing through the 510(k) notification process,
the Company or the device manufacturers will be required to seek FDA approval
for HERMES through submission of a PMA application. The Company intends to
submit an IDE application with regards to ZEUS, in the second half of 1997, in
order to commence clinical trials. Following completion of clinical trials, the
Company plans to file a PMA application for ZEUS.

There can be no assurance that the Company or any device manufacturers for
HERMES will be able to obtain necessary PMA approvals or 510(k) clearances to
market the Company's products for the intended uses on a timely basis, if at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, or failure
to comply with existing or future regulatory

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<PAGE> 41

requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company is also required to register its manufacturing establishment
with the FDA and state agencies such as the CDHS and to list its products with
the FDA. As such, the Company will be inspected by both the FDA and CDHS for
compliance with the QSR and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner. In July 1994, the Company's facility in Goleta, California
was inspected by the CDHS, acting on behalf of the State and under contract with
the FDA. The Company received no significant inspectional observations and was
subsequently granted a California medical device manufacturing license. In March
1995, the Company's facility was inspected by the FDA and no significant
inspectional observations were received. There can be no assurance that the
Company will be able to continue to be in substantial compliance on an ongoing
basis with CDHS and FDA QSR requirements or that it will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's business, financial condition and results of operations.

The Company is required to provide information to the FDA on deaths or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as certain product malfunctions that would likely cause or
contribute to a death or serious injury if the malfunction was to reoccur. In
addition, the FDA prohibits the marketing of devices for uses other than those
specifically cleared or approved for marketing by the FDA. Failure to comply
with the regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. Regulations
regarding the manufacture and sale of the Company's products are subject to
change. The Company cannot predict what impact, if any, such changes might have
on its business, financial condition and results of operations.

International

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing a
product in a foreign country may differ significantly from FDA requirements.
Some countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in others.

The Company has received registrations and approvals to market AESOP in
Japan, Australia, New Zealand and certain European countries.

The primary regulatory environment in Europe is that of the European Union,
which consists of 15 member countries encompassing most of the major countries
in Europe. The European Union has adopted numerous directives and standards
regulating the design, manufacturing, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements
of a relevant directive will be entitled to bear a CE Mark, indicating that the
device conforms with the essential requirements of the applicable directive, and
accordingly, can be commercially distributed throughout the European Union.
Medical products must receive by mid-1998 the right to affix the CE Mark. ISO
9000/EN 46001 certification is one of the CE Mark certification requirements.
Failure to receive the right to affix the CE Mark will prohibit the Company from
selling its products in member countries of the European Union and there can be
no assurance that the Company will be successful in meeting the European quality
standards or other certification requirements.

Unapproved devices subject to the PMA requirements generally must receive
prior FDA export approval unless they are approved for use by any member country
of the European Union and certain other countries, including Australia, Canada,
Israel, Japan, New Zealand, Switzerland and South Africa, in which case they can
be exported to any country without prior FDA approval upon meeting certain
requirements. Exports of products subject to the 510(k) notification
requirements, but not yet cleared to market, are permitted without FDA export
approval provided certain requirements are met. However, the Company must, among
other

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<PAGE> 42

things, notify the FDA and meet the importing countries' requirements. To obtain
FDA export approval, when it is required, certain requirements must be met and
information must be provided to the FDA, including documentation demonstrating
that the product is approved for import into the country to which it is to be
exported and, in some instances, safety data from animal or human studies. There
can be no assurance that the Company will receive FDA export approval when such
approval is necessary, or that countries to which the devices are to be exported
will approve the devices for import. Failure of the Company to receive import
approval from foreign countries, or to obtain Certificates for Products for
Export when required, meet FDA's export requirements, or obtain FDA export
approval when required to do so, could have a material adverse effect on the
Company's business, financial condition and results of operations.

THIRD-PARTY REIMBURSEMENT

In the United States, the Company's new products, if and when approved for
commercial sale, would be purchased primarily by medical institutions which then
bill various third-party payors, such as Medicare, Medicaid and other government
programs and private insurance plans for the health care services provided to
their patients. Government agencies, certain private insurers and certain other
payors generally reimburse hospitals for medical treatment at a fixed rate based
on the DRG established by the HCFA which covers this treatment. The Company
believes that the procedures using the Company's AESOP are eligible and future
products will be eligible for reimbursement under existing DRG reimbursement
codes. However, Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products and procedures. Third-party payors have challenged, and in
certain circumstances have ceased, reimbursement for procedures under existing
codes where the aggregate level of reimbursement has been significantly
increased and required, following further study regarding safety and efficacy,
establishment of new reimbursement codes. Even if a procedure is covered by a
DRG, payors may deny reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate or not cost-effective, experimental or
used for a non-approved indication. Medicare reimburses hospitals on a
prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians on a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital or
physician in furnishing the care and unrelated to the specific devices used in
that procedure.

Capital costs for medical equipment purchased by hospitals are currently
reimbursed under Medicare separately from medical procedure payments. Recent
Federal Medicare legislation has called for these capital costs to be reimbursed
on a prospective payment system. During a transition period due to end in 2000,
each hospital's capital expenditures will be based in part on its own historical
capital costs and in part on the prospective payment system. There can be no
assurance that the movement to a prospective payment system will not cause
hospitals to reduce their expenditure payments for equipment such as the
products developed or being developed by the Company.

Medicare coverage may be available, under certain circumstances for
devices, such as the Company's HERMES and ZEUS products, which have not been
approved or cleared for marketing by the FDA. However, Medicare coverage may be
denied if certain coverage requirements are not met, including if the treatment
is not medically needed for the specific patient. There can be no assurance that
the Company's future products will be covered when they are used in clinical
trials and, if covered, whether the payment amounts for their use will be
considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered inadequate, the Company may need to bear
additional costs to sponsor such trials and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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<PAGE> 43

international markets targeted by the Company. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular time, for a particular amount, or at all.

The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets, as the overall escalating costs of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance that third-party reimbursement and coverage for the Company's products
will be available or adequate, that current reimbursement amounts will not be
decreased in the future, or that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise affect the demand for the
Company's products or its ability to sell its products on a profitable basis,
particularly if the Company's products are more expensive than competing
surgical procedures. If third-party payor coverage or reimbursement is
unavailable or inadequate, the Company's business, financial condition and
results of operations could be materially adversely affected.

PRODUCT LIABILITY AND INSURANCE

The development, manufacture and sale of medical products, such as the
Company's robotic and computerized surgical systems, entail significant risk of
product liability claims and product failure claims. The Company has conducted
only limited clinical trials and does not yet have, and will not have for a
number of years, sufficient clinical data to allow the Company to measure the
risk of such claims with respect to its products. The Company faces an inherent
business risk of financial exposure to product liability claims in the event
that the use of it products results in personal injury or death. The Company
also faces the possibility that defects in the design or manufacture of the
Company's products might necessitate a product recall. There can be no assurance
that the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance with coverage limits of $5 million per occurrence and $5 million
annually in the aggregate and there can be no assurance that the coverage limits
of the Company's insurance policies will be adequate. In addition, the Company
may require increased product liability coverage if any potential products are
successfully commercialized. Such insurance is expensive, difficult to obtain
and may not be available in the future on acceptable terms, or at all. Any
claims against the Company, regardless of their merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.

BACKLOG

The Company ships products as ordered and, therefore, does not have a
backlog of orders.

EMPLOYEES

As of July 1, 1997, the Company had 84 employees, of which 11 were
primarily involved in manufacturing operations, 31 in research and development
and clinical affairs, 15 in administration and 27 in sales, marketing and
customer service. None of the Company's employees are covered by a collective
bargaining agreement and management believes that its relationship with its
employees is good.

FACILITIES

The Company occupies approximately 17,500 square feet in a complex in
Goleta, California. The facility is subject to a lease which expires in November
2001, with a five-year renewal option. The Company believes that currently
leased facilities will be sufficient for the immediate future and that adequate
additional space is available within the same geographical area, should
expansion prove necessary or advisable in the future. The Company's business,
financial condition and results of operations could be materially adversely
effected if additional space were required and could not be obtained in near
proximity to the Company's current facilities at an acceptable cost.

LEGAL PROCEEDINGS

The Company is not currently a party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
July 1, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Gene Wang.................... 40 Chief Executive Officer, President and Director
Yulun Wang................... 37 Executive Vice President, Chief Technical Officer and Director
Stephen L. Wilson............ 44 Executive Vice President, Chief Financial Officer and Secretary
John M. Greathouse........... 35 Vice President of Business Development
Kermit R. (Kerry) Pope,
Jr......................... 50 Vice President of Sales and Marketing
David A. Stuart.............. 40 Vice President of Operations
Robert W. Duggan(1)(2)....... 53 Chairman of the Board of Directors
Daniel R. Doiron............. 46 Director
W. Peter Geis................ 55 Director
Stephen F. Wiggins(1)(2)..... 40 Director
William D. Williams(2)....... 50 Director
</TABLE>

- ---------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

Gene Wang has been Chief Executive Officer, President and a Director of the
Company since January 1996. Mr. Wang served as Executive Vice President at
Symantec Corporation from 1992 to 1995 and served as Vice President and General
Manager of the Languages Business Unit of Borland International from 1988 to
1992. Mr. Wang earned a B.S. in computer science from the University of
California at Berkeley. Gene Wang is the brother of Yulun Wang.

Yulun Wang, Ph.D., has been Executive Vice President and Chief Technical
Officer of the Company since January 1996 and a Director since 1990 and has
served in numerous other capacities since he founded the Company in 1989. Prior
to founding the Company, Dr. Wang had been the principal investigator on
research and development contracts and grants from the National Science
Foundation, the National Aeronautics and Space Administration ("NASA")/Jet
Propulsion Laboratories, NASA/Langley, National Institutes of Health and the
United States Navy. Dr. Wang earned B.S., M.S. and Ph.D. degrees in electrical
engineering from the University of California at Santa Barbara. Yulun Wang is
the brother of Gene Wang.

Stephen L. Wilson joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in May 1997. Prior to joining the Company, Mr.
Wilson had served as the Vice President of Finance and Chief Financial Officer
at St. Jude Medical Inc., a medical device manufacturer, since 1990. Mr. Wilson
earned a B.S. in accounting from the University of Connecticut School of
Business Administration.

John M. Greathouse joined the Company as Director of Finance in 1993 and
has served as the Company's Vice President of Business Development since
February 1997. Prior to joining the Company, Mr. Greathouse served as Manager of
Corporate Development with Mitchell Humphrey & Co., a developer of financial
software, from 1990 to 1993. Mr. Greathouse earned his B.S. degree in accounting
from the University of Maryland and an M.B.A. from the University of
Pennsylvania's Wharton School of Business.

Kerry R. Pope, Jr. joined the Company in May 1997 as Vice President of
Sales and Marketing. Prior to joining the Company, Mr. Pope served as a Vice
President of Baxter Healthcare's Vascular Systems Division since May 1994. Prior
to that, Mr. Pope served in several sales related capacities at Vitaphone
Corporation, a manufacturer of collagen-based medical devices, since December
1986. Mr. Pope earned a B.S. in business from the University of Maryland.

David A. Stuart has been Vice President of Operations of the Company since
June 1996. From 1992 to 1996, Mr. Stuart served as Director of Materials at
Quantum Corporation, a disk drive manufacturer, and served as Director of
Materials and Manager of Manufacturing Finance for LTX Corporation, a
manufacturer and distributor of semi-conductor automatic test equipment, from
1984 to 1991.

42
<PAGE> 45

Robert W. Duggan has been Chairman of the Board of Directors of the Company
since 1990. Mr. Duggan is a venture capitalist and private investor. Mr. Duggan
has served as a member of the board of directors of a number of public and
private companies and currently serves as a member of the board of directors at
several private companies. Mr. Duggan serves on the Board of Trustees for the
University of California at Santa Barbara Foundation and is a member of the
University of California at Santa Barbara's Engineering Steering Committee.

Daniel R. Doiron, Ph.D., has been a Director of the Company since November
1996. Dr. Doiron is a founder and director of PDT, Inc., a pharmaceutical
company specializing in photodynamic therapy for certain cancers and other
diseases, where he served in various capacities, including Vice President of
Technology and Chief Scientist and President of its subsidiary, PDT Systems,
Inc., from 1989 to 1997. Dr. Doiron holds B.S. and M.S. degrees in Nuclear
Engineering and a Ph.D. in Chemical Engineering from the University of
California at Santa Barbara.

W. Peter Geis, M.D., has been a Director of the Company since March 1996.
Dr. Geis is a Director of the Minimally Invasive Surgical Training Institute
("MISTI"), an endoscopic training institution in Baltimore, Maryland. Dr. Geis
was an Associate Professor of Surgery at the University of Illinois. Dr. Geis
has been Clinical Professor of Surgery for the University of Chicago since 1991.
Dr. Geis is a member of the American College of Surgeons and the Society of
American Gastrointestinal Endoscopic Surgeons. Dr. Geis also sits on the
advisory faculty of Johnson & Johnson's Ethicon Endo-Surgery Unit. Dr. Geis
received his M.D. from Loyola University in Chicago in 1968, where he
subsequently served as an Associate Professor from 1974 to 1983.

Stephen F. Wiggins has been a Director of the Company since February 1996.
Mr. Wiggins is Chairman and Chief Executive Officer of Oxford Health Plans, Inc.
("Oxford"), a health management organization, which he founded in 1984. Mr.
Wiggins serves on the White House Commission for Consumer Protection and Quality
in Health Care and the Executive Committee of the National Healthcare Leadership
Council. Prior to founding Oxford, Mr. Wiggins founded Accessible Space
Incorporated ("A.S.I."), a residential housing program for individuals with
physical handicaps and brain injuries. Mr. Wiggins continues to serve on the
board of directors of A.S.I. Mr. Wiggins earned a B.A. from Macalester College
and an M.B.A. from the Harvard School of Business.

William D. Williams has been a Director of the Company since 1995. Mr.
Williams has served as the President of Pyxis Corporation ("Pyxis"), a
subsidiary of Cardinal Health Inc., since 1996. From 1988 to 1996, Mr. Williams
served as Vice President of Sales and Marketing for Pyxis. Mr. Williams earned a
B.S. from the University of Missouri.

ELECTION OF DIRECTORS AND OFFICERS

All members of the Company's Board of Directors hold office until the next
annual meeting of stockholders or until their successors are elected and
qualified. Officers serve at the discretion of the Board of Directors and are
elected annually. Gene Wang is the brother of Yulun Wang. There are no other
familial relationships among the directors and officers of the Company.

Pursuant to the terms of a Stockholders Agreement among Chase Manhattan
Capital Corporation, the Company and certain executives designated therein, each
party to the Stockholders Agreement, other than the Company, is obligated to
take all necessary or desirable actions within its control to cause one
representative designated by the holders of a majority of shares issued upon
conversion of the Series D Preferred Stock which have not been sold into the
public market (the "Underlying Stock") to be elected as a member of the
Company's Board of Directors until the earlier of (i) August 24, 2004 or (ii)
such time as the Underlying Stock constitutes less than 2.5% of the aggregate
voting power of all classes of the Company's voting securities. The Series D
Preferred Stock will convert to Common Stock upon completion of this offering,
and the Underlying Stock is expected to constitute approximately 8.7% of the
aggregate voting power of all classes of the Company's voting securities
following completion of this offering and following completion of the Medtronic
Private Placement. No designee of the holders of the Underlying Stock currently
sits on the Board. In addition, until such time that the holders of the
Underlying Stock no longer have the right to designate a

43
<PAGE> 46

member of the Company's Board of Directors, the Company cannot increase the size
of the Board of Directors above seven members without such holders' consent.

BOARD COMMITTEES AND COMPENSATION

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Duggan and Wiggins. The Audit Committee
makes recommendations to the Board of Directors regarding the selection of
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's internal control functions.

The Company's Board of Directors formed a Compensation Committee, which
currently consists of Messrs. Duggan, Wiggins and Williams, in April 1997. The
Compensation Committee administers the Company's Tandem Stock Option Plan, 1997
Stock Incentive Plan and Employee Stock Purchase Plan and makes recommendations
to the Board of Directors concerning compensation for executive officers of the
Company. Prior to the formation of the Compensation Committee, such functions
were performed by the Board of Directors as a whole.

The Company does not currently compensate its directors for service in such
capacity. The Company intends to consider compensating non-employee directors in
the future.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended December 31, 1996, the Company had no
Compensation Committee or other committee of the Board of Directors performing
similar functions. Decisions regarding compensation of executive officers were
made by the Board of Directors as a whole. The Company anticipates that
executive compensation for future periods will be determined by the Compensation
Committee.

EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth compensation earned
during the fiscal year ended December 31, 1996, by the Company's Chief Executive
Officer and the two other most highly compensated executive officers whose total
salary and bonus during such year exceeded $100,000 and one additional selected
officer (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OTHER($)(1) OPTIONS(#)
- --------------------------------------------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Gene Wang, Chief Executive Officer and
President.................................. $ 183,462 $50,000 $11,070(2) 250,259
Yulun Wang, Executive Vice President and
Chief Technical Officer.................... 110,208 -- -- 47,976
John M. Greathouse, Vice President of
Business Development....................... 60,000 5,822 50,000(3) 15,560
David A. Stuart, Vice President of
Operations(4).............................. 55,000 4,244 -- 70,020
</TABLE>

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

(1) Except as indicated below other annual compensation in the case of each
indicated Named Executive Officer consisted exclusively of perquisites
which, in each instance, did not exceed the lesser of $50,000 or 10% of such
Named Executive Officer's salary plus bonus.

(2) In the case of Mr. Wang, other annual compensation consisted of
reimbursement of certain expenses and a housing allowance in connection with
the initiation of his employment with the Company.

(3) In the case of Mr. Greathouse, other annual compensation consisted of
commissions.

(4) Mr. Stuart joined the Company as its Vice President of Operations in June of
1996 at an annual base salary of $110,000.

44
<PAGE> 47

In May 1997, the Company hired Stephen L. Wilson and Kerry R. Pope, Jr. as
the Executive Vice President, Chief Financial Officer and Secretary and the Vice
President of Sales and Marketing, respectively. Each has an annual salary of
$150,000.

Option Grants in Last Fiscal Year. The following table sets forth certain
information concerning grants of options to each of the Named Executive Officers
during the fiscal year ended December 31, 1996:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS DURING PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) 1996(%)(2) ($/SHARE)(3) DATE 5%($) 10%($)
- ----------------------- ------------- ---------------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene Wang.............. 207,469 21.6% $ 4.57 1/08/06 $596,276 $ 1,511,080
42,790 4.4 4.57 12/25/06 122,980 311,657
Yulun Wang............. 5,186 0.5 5.03 10/01/01 4,162 12,084
42,790 4.4 5.03 12/25/01 34,344 99,702
John M. Greathouse..... 15,560 1.6 4.57 12/25/06 44,720 113,330
David A. Stuart........ 51,867 5.4 4.57 6/01/06 149,068 377,768
7,780 0.8 4.57 8/01/06 22,360 56,665
10,373 1.1 4.57 12/25/06 29,813 75,551
</TABLE>

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

(1) Options were granted under the Company's Tandem Stock Option Plan and vest
over five years from the date of grant, with the exception of 5,186 options
granted to Yulun Wang, which vested immediately on the date of grant.

(2) Based on an aggregate of 961,859 options granted by the Company in the
fiscal year ended December 31, 1996 to employees, including the Named
Executive Officers.

(3) The exercise price per share of each option was equal to the fair market
value of the underlying Common Stock on the date of grant as determined by
the Board of Directors.

(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price. The 5% and 10% assumed annual rates of
stock price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of the Company's future Common Stock prices. Actual gain, if any,
on stock options exercises are dependent on the future performance of the
Common Stock and overall stock market condition. The amounts reflected in
the table may be higher or lower than the amounts actually realized.

In May 1997, Messrs. Wilson and Pope received a total of 116,701 and 77,801
options, respectively, at an exercise price of $4.57 per share in connection
with the initiation of their employment.

45
<PAGE> 48

Option Exercises in 1996 and Fiscal Year-End Option Values. No options were
exercised by the Named Executive Officers during 1996. The following table sets
forth certain information regarding the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1996:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gene Wang................................ -- 250,259 $ -- $ 2,359,942
Yulun Wang............................... 2,999 44,977 26,901 403,453
John M. Greathouse....................... 15,301 23,599 164,157 236,599
David A. Stuart.......................... -- 70,020 -- 660,289
</TABLE>

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

(1) Calculated by determining the difference between the assumed initial public
offering price of $14.00 per share and the exercise price of the options.

STOCK PLANS

Tandem Stock Option Plan. The Company's Tandem Stock Option Plan (the
"Tandem Plan") was adopted by the Board of Directors and approved by the
shareholders in 1993. At June 1, 1997, of the 1,556,017 shares of Common Stock
which have been reserved for issuance under the Tandem Plan, 1,408,740 were
subject to outstanding options at a weighted average exercise price of $4.05 per
share and 147,277 shares had been purchased upon exercise of options. There are
no additional shares available for grant under the Tandem Plan. The Tandem Plan
provides for the grant to employees of the Company of "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and for the grant of nonstatutory options to employees,
consultants and non-employee directors of the Company. The purpose of the Tandem
Plan is to provide participants with incentives which will encourage them to
acquire a proprietary interest in, and continue to provide services to, the
Company. The Tandem Plan is administered by the Compensation Committee which has
discretion and authority, consistent with the provisions of the Tandem Plan, to
determine which eligible participants will receive options, the time when
options will be granted, the terms of options granted and the number of shares
which will be subject to options granted under the Tandem Plan.

The exercise price under the Tandem Plan is determined by the Board of
Directors, provided that, generally in the case of an incentive stock option,
the exercise price shall be equal to the fair market value of the Common Stock
as of the date of grant, as determined by the Board of Directors. In the case of
an incentive stock option granted to an optionee who owns at least 10% of the
voting power of all classes of stock of the Company or any parent or subsidiary
of the Company, the exercise price may be no less than 110% of the fair market
value of the Common Stock on the date the option is granted. Payment of the
exercise price may be made in cash or by cashiers' check, or, in the discretion
of the Company, by delivery of shares of the Company's Common Stock having a
fair market value equal to the exercise price of the options being exercised.
The Board has the authority to determine the time or times at which options
granted under the Tandem Plan become exercisable, provided that incentive
options must expire no later than ten years from the date of grant (five years
with respect to optionees who own at least 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary of the Company).
Options are not assignable and are nontransferable, other than by will and the
laws of descent and distribution upon death, and generally may be exercised only
by an employee while employed by the Company or within 30 days after termination
of employment. The Tandem Plan will terminate in 2003, unless earlier terminated
by the Board of Directors.

1997 Stock Incentive Plan. The Company adopted the 1997 Stock Incentive
Plan (the "Stock Incentive Plan") in April 1997. The purpose of the Stock
Incentive Plan is to provide participants with incentives which

46
<PAGE> 49

will encourage them to acquire a proprietary interest in, and continue to
provide services to, the Company. The Stock Incentive Plan provides for the
granting of incentive stock options, nonstatutory options and rights to purchase
restricted stock. An aggregate of 1,037,344 shares have been reserved for grant
under the Stock Incentive Plan. As of June 1, 1997, there were 145,241 options
outstanding under the Stock Incentive Plan. The Stock Incentive Plan provides
that options to purchase shares of the Company's Common Stock and restricted
stock grants of the Company's Common Stock may be granted to directors,
officers, employees and consultants of the Company, except that incentive stock
options may not be granted to non-employee directors or consultants. The Stock
Incentive Plan is administered by the Compensation Committee, which has sole
discretion and authority, consistent with the provisions of the Stock Incentive
Plan, to determine which eligible participants will receive options, the time
when options will be granted, the terms of options granted and the number of
shares which will be subject to options granted under the Stock Incentive Plan.

The exercise price of incentive stock options must at least be equal to the
fair market value of a share of Common Stock on the date the option is granted
(110% with respect to optionees who own at least 10% of the voting power of all
classes of stock of the Company or any parent or subsidiary of the Company).
Nonstatutory options shall have an exercise price of not less than 85% of the
fair market value of a share of Common Stock on the date such option is granted.
Payment of the exercise price may be made in cash, by delivery of shares of the
Company's Common Stock, waiver of compensation due or accrued or, in certain
circumstances, through the delivery of a promissory note. The Compensation
Committee has the authority to determine the time or times at which options
granted under the Plan become exercisable, provided that options must expire no
later than ten years from the date of grant (five years with respect to
optionees who own at least 10% of the voting power of all classes of stock of
the Company or any parent or subsidiary of the Company). Options are
nontransferable, other than upon death by will and the laws of descent and
distribution.

Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors in April 1997. An
aggregate of 129,668 shares of Common Stock have been reserved for issuance
under the Purchase Plan. The Purchase Plan, which is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code, will be
implemented by two year offerings with purchases occurring at six-month
intervals commencing on the completion of this offering. The initial offering
period will conclude on June 30, 1999. The Purchase Plan will be administered by
the Compensation Committee. Employees will be eligible to participate if they
are employed by the Company for at least 20 hours per week and if they have been
employed by the Company for at least 90 days. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 10% of an employee's compensation. The price of stock purchased under the
Purchase Plan will be 85% of the lower of the fair market value of the Common
Stock at the beginning of the two year offering period or on the applicable
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment. The Board may at any time amend or terminate the Purchase Plan,
except that no such amendment or termination may adversely affect shares
previously purchased under the Purchase Plan. In addition, the Board may not,
without stockholder approval, materially increase the number of shares of Common
Stock available for issuance, alter the purchase price formula so as to reduce
the purchase price payable for shares of Common Stock or materially modify the
eligibility requirements for participation or the benefits available to
participants. The Purchase Plan will terminate on June 30, 2007.

EMPLOYMENT AGREEMENT

The Company has entered into an agreement relating to the employment of
Stephen L. Wilson whereby the Company has agreed to provide Mr. Wilson with
severance benefits during the first year of employment equal to one year's
salary plus bonus and thereafter equal to two years' salary plus bonus. The
Agreement also provides that, in the event of termination following a change of
control of the Company, Mr. Wilson will receive three years' salary plus bonus
and all his outstanding options will fully vest.

47
<PAGE> 50

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its other employees and agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence by indemnified parties,
and permits the Company to advance litigation expenses in the case of
stockholder derivative actions or other actions, against an undertaking by the
indemnified party to repay such advances if it is ultimately determined that the
indemnified party is not entitled to indemnification. Prior to the completion of
this offering, the Company expects to have in place liability insurance for its
officers and directors.

In addition, the Company's Second Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable to the Company or its stockholders for monetary damages for breach of
the directors' fiduciary duty. This provision in the Second Amended and Restated
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
however, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify the directors and officers against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from actions not taken in good faith or in a manner the
indemnitee believed to be opposed to the best interests of the Company), to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified and to obtain directors' insurance if available
on reasonable terms. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. The Company believes that these provisions of
its Second Amended and Restated Certificate of Incorporation and Bylaws and the
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.

48
<PAGE> 51

CERTAIN TRANSACTIONS

In April 1997, the Company entered into an agreement relating to the
employment of Stephen L. Wilson whereby the Company has agreed to provide Mr.
Wilson with severance benefits during the first year of employment equal to one
years' salary plus bonus and thereafter equal to two years' salary plus bonus.
The Agreement also provides that, in the event of termination following a change
of control of the Company, Mr. Wilson will receive three years' salary plus
bonus and all his outstanding options will fully vest. In June 1997, pursuant to
such agreement, Stephen L. Wilson purchased 32,417 shares of Common Stock at
$4.57 per share and was issued warrants to purchase an additional 32,417 shares
of Common Stock at $4.57 per share.

In March 1997, the Company and Medtronic entered into an agreement
providing for the distribution and co-promotion of the Company's robotic systems
that position and maneuver both visualization equipment and instruments for
minimally invasive cardiothoracic surgery, including ZEUS (the "Systems").
Pursuant to a Sales Agreement dated May 28, 1997 (the "Sales Agreement"),
Medtronic will act as the Company's exclusive distributor for the Systems for
use in cardiothoracic surgical procedures in Europe, the Middle East and Africa
and will co-promote the Systems for use in cardiothoracic surgical procedures in
North America. In exchange for co-promoting the Systems in North America,
Medtronic will receive a commission based on the Company's net revenues from the
sale of the Systems. The Company retains direct distribution rights in North
America, as well as the worldwide right to distribute its systems for use in
other procedures. In connection with the strategic alliance, Medtronic invested
$4.0 million in the Company in the form of a convertible loan, evidenced by a
convertible debenture (the "Medtronic Debenture"), which bore interest at a rate
equal to prime, as announced by Norwest Bank of Minnesota N.A., plus 1%. Such
loan was converted into 363,743 shares of Common Stock of the Company upon the
execution of the Sales Agreement. In addition, Medtronic had the right, at its
election, to invest up to an additional $10.0 million for shares of the
Company's Common Stock. Pursuant to this right, Medtronic will purchase from the
Company, concurrently with the closing of this offering, 76,805 shares of Common
Stock at a per share price of $13.02 (the initial public offering price per
share, less underwriting discounts and commissions). See "Investment by
Medtronic."

In February 1997, Daniel R. Doiron, a director of the Company, loaned the
Company the sum of $150,000 at an interest rate equal to the prime rate plus 1%.
Such loan was evidenced by a promissory note and was repaid in April 1997
pursuant to its terms.

Between September 1996 and March 1997, the Company sold 405,302 common
equivalent shares of Series E Preferred Stock at an effective purchase price of
$7.71 per share and warrants to purchase 405,302 shares of Common Stock at an
effective purchase price of $.015 per warrant. The effective exercise price of
each warrant is $7.71 per share. All of the aforementioned issuances were made
pursuant to Purchaser Representation and Subscription Agreements. Of such shares
and warrants, 116,702 were sold to certain directors of the Company as follows:

<TABLE>
<CAPTION>
SHARES OF
SERIES E PREFERRED
STOCK PURCHASED WARRANTS TO
PURCHASER AND RELATIONSHIP (COMMON EQUIVALENT PURCHASE AGGREGATE
TO THE COMPANY BASIS) COMMON STOCK CONSIDERATION
-------------------------------------------- ------------------ ------------ -------------
<S> <C> <C> <C>
Robert W. Duggan, Director.................. 25,934 25,934 $ 200,000
Stephen F. Wiggins, Director................ 58,351 58,351 450,000
William D. Williams, Director............... 6,483 6,483 50,000
Daniel R. Doiron, Director.................. 25,934 25,934 200,000
</TABLE>

49
<PAGE> 52

On various dates between November 6, 1995 and May 20, 1996, the Company
entered into Bridge Financing Agreements with certain officers and directors of
the Company, pursuant to which agreements the Company issued promissory notes
("Bridge Notes") in the total original principal amount indicated below,
together with warrants to purchase shares of its common stock as indicated
below:

<TABLE>
<CAPTION>
PURCHASER AND RELATIONSHIP ORIGINAL PRINCIPAL WARRANTS TO PURCHASE
TO THE COMPANY BALANCE OF BRIDGE NOTE COMMON STOCK
- -------------------------------------------------------- ---------------------- --------------------
<S> <C> <C>
Robert W. Duggan, Director.............................. $750,000 245,687
Gene Wang, Chief Executive Officer, President and 100,000 32,758
Director..............................................
Yulun Wang, Executive Vice President, Chief Technical 12,000 3,931
Officer and Director..................................
Stephen F. Wiggins, Director............................ 350,000 114,654
Daniel R. Doiron, Director.............................. 100,000 32,758
</TABLE>

The Bridge Notes bear interest at a rate equal to the lesser of the prime
rate quoted by Chase Manhattan Bank plus one percent or the highest rate
permitted by law, and have a term of thirty months. The Bridge Notes held by Mr.
Duggan, Messrs. Wang and Mr. Wiggins were subsequently amended to waive current
payment of interest thereon and to make the entire balance of principal and
accrued interest due and payable within 30 days following a public offering of
the Company's Common Stock. The warrants issued in connection with the Bridge
Notes were sold for $.0002 per warrant, may be exercised at any time, have an
exercise price of $4.57 per share and expire seven years after the applicable
issuance date.

On August 24, 1994, the Company entered into a Series D Convertible
Preferred Stock and Warrant Purchase Agreement with Chase Manhattan Capital
Corporation, a principal stockholder of the Company, pursuant to which the
Company issued 545,971 shares of its Series D Preferred Stock for aggregate
consideration totaling $5.0 million. On April 13, 1995, Chase Manhattan Capital
Corporation transferred 59,688 of such shares to Archery Partners, an affiliated
entity.

Holders of Series D Preferred Stock and Series E Preferred Stock, the
warrants issued in connection with the Bridge Notes and Medtronic are entitled
to certain registration rights. See "Description of Capital
Stock -- Registration Rights."

50
<PAGE> 53

PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of the Common Stock
as of August 1, 1997, adjusted to reflect the sale of Common Stock offered
hereby and in the Medtronic Private Placement for (i) each person or entity
known to the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all directors and executive officers of the Company
as a group.

<TABLE>
<CAPTION>
PERCENT OF TOTAL
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Robert W. Duggan(2)................................................ 1,166,052 23.2% 15.5%
Yulun Wang(3)...................................................... 1,001,318 20.5 13.6
Chase Manhattan Capital Corporation ("CMCC")(4).................... 870,026 17.4 11.6
c/o Chase Capital Partners
380 Madison, 12th Floor
New York, NY 10017
Medtronic, Inc.(5)................................................. 440,548 9.3 6.1
Corporate Center
7000 Central Avenue N.E.
Minneapolis, MN 55432
Stephen F. Wiggins(6).............................................. 240,432 4.9 3.2
Gene Wang(7)....................................................... 267,885 5.4 3.6
Stephen L. Wilson(8)............................................... 103,734 2.2 1.4
Daniel R. Doiron(9)................................................ 85,923 1.8 1.2
John M. Greathouse(10)............................................. 30,342 * *
William D. Williams(11)............................................ 41,493 * *
David A. Stuart(12)................................................ 26,323 * *
W. Peter Geis(13).................................................. 13,512 * *
Kerry R. Pope...................................................... -- * *
All executive officers and directors as a group (11 persons)(14)... 2,964,501 53.5 36.8
</TABLE>

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

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable, or exercisable within 60 days of August
1, 1997, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote and subject
to community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.

(2) Includes an aggregate of 280,685 shares subject to options and warrants
exercisable within 60 days of August 1, 1997.

(3) Includes 18,144 shares subject to options and warrants exercisable within
60 days of August 1, 1997 and 8,754 shares owned by minor children of Yulun
Wang. Dr. Wang disclaims beneficial ownership of shares owned by such
children. Also includes 311,204 shares subject to an option granted by Dr.
Wang to Gene Wang. An aggregate of 136,151 shares subject to such option
are exercisable within 60 days of August 1, 1997.

(4) Includes (i) 138,591 shares subject to a warrant, exercisable within 60
days of August 1, 1997, (ii) 69,151 outstanding shares and 17,011 shares
subject to warrants exercisable within 60 days of August 1, 1997 owned by
Archery Partners, an affiliate of CMCC, and (iii) 81,896 shares subject to
a warrant exercisable within 60 days of August 1, 1997 owned by Chemical
Venture Capital Associates, an affiliate of CMCC. CMCC disclaims beneficial
ownership of the shares referenced in items (ii) and (iii) above.

(5) Includes 76,805 shares of Common Stock to be purchased by Medtronic in the
Medtronic Private Placement. All shares held by Medtronic are held of
record by Medtronic Asset Management, Inc., a wholly-owned subsidiary of
Medtronic, Inc. See "Investment by Medtronic."

(6) Includes an aggregate of 182,082 shares subject to options and warrants
exercisable within 60 days of August 1, 1997.

(7) Includes an aggregate of 224,754 shares subject to options exercisable
within 60 days of August 1, 1997, including 136,151 shares owned by Yulun
Wang subject to an option exercisable within 60 days of August 1, 1997 and
32,758 shares subject to a warrant exercisable within 60 days of August 1,
1997. Excludes 175,503 shares owned by Yulun Wang subject to an option
exercisable after 60 days after August 1, 1997.

(8) Includes an aggregate of 71,317 shares subject to options and warrants
exercisable within 60 days of August 1, 1997.

(9) Includes an aggregate of 59,988 shares subject to warrants exercisable
within 60 days of August 1, 1997.

(10) Includes an aggregate of 23,080 shares subject to options exercisable
within 60 days of August 1, 1997.

(11) Includes an aggregate of 35,010 shares subject to an option and a warrant
each exercisable within 60 days of August 1, 1997.

(12) Includes an aggregate of 25,415 shares subject to options exercisable
within 60 days of August 1, 1997.

(13) Consists of an aggregate of 13,512 shares subject to options exercisable
within 60 days of August 1, 1997.

(14) Includes an aggregate of 797,836 shares subject to options and warrants
exercisable within 60 days of August 1, 1997.

51
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, $.001 par value per
share, and 5,000,000 shares of Preferred Stock, $.001 par value per share.

COMMON STOCK

As of August 1, 1997, there were 2,240,658 shares of Common Stock
outstanding held by 54 stockholders of record. There will be 7,248,408 shares of
Common Stock outstanding after giving effect to (i) the sale of 2,500,000 shares
of Common Stock offered by the Company hereby, (ii) the sale of 76,805 shares of
Common Stock in the Medtronic Private Placement and (iii) the conversion of all
shares of Preferred Stock into an aggregate of 2,430,945 shares of Common Stock.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, including the election of
directors, and do not have cumulative voting rights. Subject to preferences that
may be applicable to the holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock shall be entitled to receive pro rata all of the assets of the
Company available for distribution to its stockholders. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and shares
of Common Stock to be issued pursuant to this offering shall be fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors has authority to issue up to 5,000,000 shares of
Preferred Stock, $.001 par value, and to fix the rights, preferences, privileges
and restrictions, including voting rights, of those shares without any future
vote or action by the stockholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights senior to the Common Stock, and, as a result, the issuance thereof could
have a material adverse effect on the market value of the Common Stock. The
Company has no present plans to issue shares of Preferred Stock.

REGISTRATION RIGHTS

Pursuant to the terms of a Registration Agreement dated as of August 24,
1994, as amended to date (the "Registration Agreement"), subject to the terms
and conditions therein, and upon expiration of lock-up agreements with the
Underwriters, persons who are the holders of an aggregate of (i) 1,037,830
outstanding shares of Common Stock issuable upon conversion of all outstanding
shares of Series D and Series E Preferred Stock, (ii) 1,625,550 shares issuable
upon exercise of the warrants to purchase Common Stock issued in connection with
the Company's Bridge Note financing and the issuance of Series E Preferred Stock
and (iii) 363,743 shares of Common Stock issued upon conversion of the Medtronic
Debenture, (collectively, the "Registrable Securities") are entitled to certain
rights, including demand registration rights and piggyback rights, with respect
to the registration of such shares under the Securities Act. Subject to certain
limitations in the Registration Agreement, at any time after completion of this
offering, the holders of 20% or more of the Registrable Securities may request
registration under the Securities Act of all or part of their Registrable
Securities on Form S-1 and the holders of any Registrable Securities may request
registration under the Securities Act of all or part of their Registrable
Securities on Form S-2 or S-3 or any similar short form. In

52
<PAGE> 55

addition, the holders of a majority of the Common Stock issuable upon conversion
of the Medtronic Debenture are entitled to request one registration on Form S-1,
provided that the amount of Registrable Securities sold by Medtronic shall not
be less than $2.0 million. See "Certain Transactions."

ANTI-TAKEOVER EFFECT OF DELAWARE LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (an anti-takeover law). In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless either (i) prior to the date at which the person becomes an
interested stockholder, the Board of Directors approves such transaction or
business combination, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
such transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to such
interested stockholder. For purposes of Section 203, "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.

STOCK TRANSFER AGENT AND REGISTRAR

The stock transfer agent and registrar for the Company's Common Stock is
American Stock Transfer and Trust Company.

LISTING

The Company has applied to have its Common Stock approved for quotation on
the Nasdaq National Market under the symbol "RBOT."

53
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely and materially affect market prices prevailing from time
to time. Furthermore, because only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering and upon completion of the Medtronic
Private Placement, the Company will have 7,248,408 shares of Common Stock
outstanding assuming (i) no exercise of the Underwriters' over-allotment option,
(ii) no exercise after August 1, 1997 of the approximately 3,099,304 shares
issuable pursuant to outstanding options and warrants, and (iii) the conversion
of all outstanding shares of Preferred Stock into 2,430,945 shares of Common
Stock. Of these outstanding shares of Common Stock, the 2,500,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless purchased by an "affiliate" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
remaining outstanding shares of Common Stock are "restricted securities" as that
term is defined in Rule 144 under the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration such as Rules 144 or 701 promulgated
under the Securities Act, which are summarized below. Sales of the Restricted
Shares in the public market, or the availability of such shares for sale, could
adversely affect the market price of the Common Stock.

The Company's directors, officers and certain holders of its Common Stock
(beneficially holding an aggregate of approximately 4,485,000 Restricted Shares)
have agreed, pursuant to certain "lock-up" agreements, that they will not offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
the shares of Common Stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company for
certain designated periods. All shares owned by any holder signing such lock-ups
will be restricted from sale for 180 days following the date of this Prospectus,
unless such holder receives the prior written consent of Montgomery Securities
to sell such shares. The number of outstanding shares that will be available for
sale, subject in certain circumstances to volume and manner of sale
restrictions, in the public market, after giving effect to the lock-up
agreements, will be as follows: (i) 252,000 shares of Common Stock will be
eligible for sale as of the effective date of this offering, (ii) 121,000 shares
of Common Stock will be eligible for sale beginning 90 days after the effective
date of this offering, including approximately 110,000 shares of Common Stock
issuable upon exercise of outstanding vested options, and (iii) 4,596,454 shares
of Common Stock, including approximately 474,000 shares of Common Stock issuable
upon exercise of outstanding vested options, will be eligible for sale beginning
180 days after the date of this Prospectus. The approximately 2,878,258
remaining Restricted Shares and shares of Common Stock issuable upon exercise of
outstanding vested options and warrants will be eligible for sale pursuant to
Rule 144 upon the expiration of their respective one-year holding periods
required under Rule 144. In addition, following the completion of this offering,
the holders of 3,027,123 Restricted Shares (including shares issuable upon the
exercises of the Company's outstanding warrants) will be entitled to certain
rights with respect to registration of such shares for sale in the public
market.

Under Rule 144 as currently in effect, beginning 90 days after the date of
this Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed affiliates of the Company, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) one percent of the number of shares of Common Stock then outstanding (which
will equal approximately 72,484 shares immediately after the effective date of
this offering); or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years

54
<PAGE> 57

(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.

In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits an affiliate to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares. On June 1, 1997, the Company had outstanding options to purchase
1,553,981 shares of Common Stock, 359,407 of which were then exercisable, and an
additional 892,103 shares of Common Stock are available for issuance pursuant to
the Stock Incentive Plan.

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issued or issuable pursuant to the
Company's Tandem Plan, Stock Incentive Plan and Common Stock issuable pursuant
to the Company's Purchase Plan. Accordingly, shares issuable upon exercise of
these options or under the Purchase Plan may be sold under such registration
statements, subject to Rule 144 volume limitations applicable to affiliates in
the open market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
See "Management -- Stock Plans."

55
<PAGE> 58

UNDERWRITING

The Underwriters named below, represented by Montgomery Securities and
Piper Jaffray Inc. (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters to pay for and
accept delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase all of such
shares, if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities............................................................. 655,000
Piper Jaffray Inc. ............................................................... 655,000
Bear, Stearns & Co. Inc. ......................................................... 100,000
Alex. Brown & Sons Incorporated................................................... 100,000
Deutsche Morgan Grenfell Inc. .................................................... 100,000
Donaldson, Lufkin & Jenrette Securities Corporation............................... 100,000
A.G. Edwards & Sons, Inc. ........................................................ 100,000
Robertson, Stephens & Company LLC................................................. 100,000
Smith Barney Inc. ................................................................ 100,000
UBS Securities LLC................................................................ 100,000
Fahnestock & Co. Inc. ............................................................ 60,000
Pennsylvania Merchant Group Ltd. ................................................. 60,000
Raymond James & Associates, Inc. ................................................. 60,000
Wedbush Morgan Securities Inc. ................................................... 60,000
Wessels, Arnold & Henderson....................................................... 60,000
Cruttenden Roth Incorporated...................................................... 30,000
Hampshire Securities Corporation.................................................. 30,000
H.C. Wainwright & Co., Inc. ...................................................... 30,000
---------
Total................................................................... 2,500,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters may
allow to selected dealers a concession of not more than $0.55 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the offering, the price,
concessions and reallowances to dealers may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,500,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table.

The Representatives have advised the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.

56
<PAGE> 59

The holders of approximately 94% of the shares of the Company's Common
Stock, including all of the Company's directors and executive officers, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Montgomery Securities, directly
or indirectly, sell, offer to sell or otherwise dispose of any shares of Common
Stock or any options owned directly by such holders or with respect to which
they have the power of disposition. The Company has agreed not to sell, offer to
sell, contract to sell, grant any options to purchase or otherwise dispose of
any shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for shares of Common Stock or any rights to acquire Common Stock
for a period of 180 days after the date of this Prospectus, other than the
issuance of shares of Common Stock upon the exercise of outstanding options, and
the grant of options to purchase shares or the issuance of shares of Common
Stock under the Company's Tandem Plan, Stock Incentive Plan and Purchase Plan.
The lock-up agreements may be released at any time as to all or any portion of
the shares subject to such agreements at the discretion of Montgomery
Securities.

Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
negotiated between the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, are the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California. Certain shareholders of Stradling, Yocca, Carlson &
Rauth, and an investment partnership, certain partners of which are affiliated
with Stradling, Yocca, Carlson & Rauth, own 19,450 shares of the Company's
Common Stock and warrants to purchase an additional 19,450 shares of the
Company's Common Stock at an exercise price equal to $7.71 per share.

Certain legal matters in connection with this offering will be passed upon
for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.

EXPERTS

The financial statements and schedules of the Company as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.

Portions of this Prospectus entitled "Risk Factors -- Dependence on Patents
and Proprietary Technology" and "Business -- Patents and Proprietary Rights"
have been reviewed and approved by Blakely, Sokoloff, Taylor & Zafman, patent
counsel to the Company, as experts in such matters, and are included herein in
reliance on their review and approval.

57
<PAGE> 60

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement (including any
amendments thereto) on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, and such exhibits and schedules
filed therewith, which may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained at prescribed
rates from the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois. The Registration
Statement and such exhibits and schedules are also available through the
Commission's Website: http://www.sec.gov. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.

The Company intends to furnish to its stockholders annual reports
containing audited financial statements, with an opinion thereon expressed by an
independent certified public accounting firm, and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.

58
<PAGE> 61

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996, and March 31, 1997 (unaudited)....... F-3
Statements of Operations for each of the three years in the period ended December 31,
1996, and the three month periods ended March 31, 1996 and 1997 (unaudited)......... F-4
Statements of Shareholders' Equity (Deficit) for each of the three years in the period
ended December 31, 1996, and the three month period ended March 31, 1997
(unaudited)......................................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1996, and the three month periods ended March 31, 1996 and 1997 (unaudited)......... F-7
Notes to Financial Statements......................................................... F-9
</TABLE>

The financial statements as of March 31, 1997, and for the three month
periods ended March 31, 1996 and 1997, are unaudited.

The information required by the applicable financial statement schedules
has been disclosed in the financial statements and notes thereto and,
accordingly, the schedules have been omitted.

F-1
<PAGE> 62

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Computer Motion, Inc.:

We have audited the accompanying balance sheets of Computer Motion, Inc. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. 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 financial position of Computer Motion, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Los Angeles, California
August 7, 1997

F-2
<PAGE> 63

COMPUTER MOTION, INC.

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ---------------------------
-------------------------- PRO FORMA
1995 1996 HISTORICAL (NOTE 2)
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 64,048 $ 432,518 $ 3,986,339 $ 3,986,339
Accounts receivable, net of allowance for doubtful
accounts of $5,000 in 1995, $75,000 in 1996 and
$53,467 in 1997..................................... 350,909 1,151,733 939,102 939,102
Inventories........................................... 728,566 645,311 683,441 683,441
Prepaid expenses...................................... 55,887 88,493 187,479 187,479
----------- ------------ ------------ ------------
1,199,410 2,318,055 5,796,361 5,796,361
----------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures................................ 146,257 185,656 250,985 250,985
Computer equipment.................................... 209,657 400,818 424,015 424,015
Machinery and equipment............................... 863,548 836,671 851,136 851,136
----------- ------------ ------------ ------------
1,219,462 1,423,145 1,526,136 1,526,136
Less: Accumulated depreciation........................ (484,588) (814,378) (904,629) (904,629)
----------- ------------ ------------ ------------
734,874 608,767 621,507 621,507
----------- ------------ ------------ ------------
DEFERRED FINANCING COST AND OTHER ASSETS................ 82,665 629,613 634,053 634,053
----------- ------------ ------------ ------------
Total assets................................... $ 2,016,949 $ 3,556,435 $ 7,051,921 $ 7,051,921
=========== ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 223,860 $ 901,731 $ 526,201 $ 526,201
Accrued expenses...................................... 280,314 761,652 758,328 758,328
Deferred revenue...................................... 32,350 74,219 168,787 168,787
Current portion of capital lease obligations.......... 13,446 60,349 75,464 75,464
Line of credit........................................ -- 185,500 -- --
Current portion of long-term debt..................... 693,200 1,000,000 -- --
Convertible subordinated debt......................... -- -- 3,167,000 --
----------- ------------ ------------ ------------
1,243,170 2,983,451 4,695,780 1,528,780
----------- ------------ ------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion..... 34,510 75,734 100,477 100,477
Long-term debt, net of current portion................ 500,000 3,250,000 3,250,000 3,250,000
Deferred rent......................................... 70,659 59,381 57,764 57,764
----------- ------------ ------------ ------------
605,169 3,385,115 3,408,241 3,408,241
----------- ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, SERIES D
At redemption value, 545,971 shares outstanding....... 5,437,686 5,881,686 6,001,686 --
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A, B, C and E --
Authorized -- 9,415,000 shares
Outstanding -- 1,393,114 shares, 1,474,545 shares and
1,704,317 shares in 1995, 1996 and 1997,
respectively, and none on a pro forma basis......... 2,606,094 3,715,702 5,930,702 --
Common stock --
Authorized -- 25,000,000 shares
Issued and outstanding -- 1,695,173 shares in 1995,
1,734,289 shares in 1996 and 1,744,207 shares in
1997 and 4,526,710 shares on a pro forma basis at
$.001 par value................................... -- 385,932 431,254 4,526
Additional paid-in capital............................ -- 153,536 1,103,566 16,629,682
Deferred compensation................................. -- (515,000) (555,000) (555,000)
Accumulated deficit................................... (7,875,170) (12,433,987) (13,964,308) (13,964,308)
----------- ------------ ------------ ------------
(5,269,076) (8,693,817) (7,053,786) 2,114,900
----------- ------------ ------------ ------------
Total liabilities and shareholders' equity
(deficit).................................... $ 2,016,949 $ 3,556,435 $ 7,051,921 $ 7,051,921
=========== ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-3
<PAGE> 64

COMPUTER MOTION, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Products and product
development.................... $ 477,316 $ 2,001,375 $ 3,842,195 $ 619,291 $ 1,312,441
Grant............................. 130,000 269,839 214,696 56,751 60,818
----------- ----------- ----------- ----------- -----------
607,316 2,271,214 4,056,891 676,042 1,373,259
COSTS AND EXPENSES:
Cost of revenue -- products and
product development............ 369,999 1,703,348 2,412,582 387,091 590,432
Cost of revenue -- grant.......... 130,000 269,839 214,696 56,751 60,818
Research and development.......... 630,143 739,093 1,358,970 335,577 558,104
Selling, general and
administrative................. 2,784,450 3,158,298 4,143,544 745,602 1,337,573
----------- ----------- ----------- ----------- -----------
3,914,592 5,870,578 8,129,792 1,525,021 2,546,927
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS................ (3,307,276) (3,599,364) (4,072,901) (848,979) (1,173,668)
INTEREST INCOME..................... 74,959 63,714 14,355 2,601 8,183
INTEREST EXPENSE.................... (10,953) (15,380) (475,420) (39,585) (357,076)
OTHER EXPENSE....................... -- (37,943) (23,651) (3,742) (7,460)
----------- ----------- ----------- ----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME
TAXES............................. (3,243,270) (3,588,973) (4,557,617) (889,705) (1,530,021)
PROVISION FOR INCOME TAXES.......... 800 800 1,200 300 300
----------- ----------- ----------- ----------- -----------
NET LOSS............................ $(3,244,070) $(3,589,773) $(4,558,817) $ (890,005) $(1,530,321)
=========== =========== =========== =========== ===========
PRO FORMA NET LOSS PER COMMON SHARE,
giving effect to the conversion of
Series A, B, C, D and E preferred
stock upon completion of the
initial public offering as if
converted on the first day of
each period....................... $ (0.88) $ (0.18) $ (0.28)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, used to
compute pro forma net loss per
common share...................... 5,155,381 5,045,420 5,463,578
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 65

COMPUTER MOTION, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ -------------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993.......... 422,718 $107,500 586,446 $1,277,652 -- $ -- -- $ --
Common stock issued for cash.......... -- -- -- -- -- -- -- --
Preferred stock issued for cash, net
of expenses......................... -- -- -- -- 296,920 1,188,150 -- --
Preferred stock issued as repayment of
debt................................ -- -- -- -- 97,403 400,000 -- --
Exercise of stock options............. -- -- -- -- -- -- -- --
Common stock issued for services...... -- -- -- -- -- -- -- --
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- -- --
------- --------- ------- ---------- ------- ---------- ------- --------
Balance -- December 31, 1994.......... 422,718 $107,500 586,446 $1,277,652 394,323 $1,588,150 -- $ --
------- --------- ------- ---------- ------- ---------- ------- --------
Common stock issued for cash.......... -- -- -- -- -- -- -- --
Exercise of options................... -- -- -- -- -- -- -- --
Common stock repurchase from
employees........................... -- -- -- -- -- -- -- --
Common stock redeemed for note
payable............................. -- -- -- -- -- -- -- --
Preferred stock repurchase............ -- -- -- -- (10,373) (42,600) -- --
Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (12,985) -- (139,581) -- (172,042) -- --
Net loss.............................. -- -- -- -- -- -- -- --
------- --------- ------- ---------- ------- ---------- ------- --------
Balance -- December 31, 1995.......... 422,718 $ 94,515 586,446 $1,138,071 383,950 $1,373,508 -- --
------- --------- ------- ---------- ------- ---------- ------- --------

<CAPTION>
NET

COMMON STOCK ADDITIONAL SHAREHOLDERS'

--------------------- PAID-IN DEFERRED (ACCUMULATED EQUITY

SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) (DEFICIT)

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

<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993.......... 1,642,733 $ 127,398 $ -- $ -- $(1,041,327) $ 471,223

Common stock issued for cash.......... 6,743 9,750 -- -- -- 9,750

Preferred stock issued for cash, net
of expenses......................... -- -- -- -- -- 1,188,150

Preferred stock issued as repayment of
debt................................ -- -- -- -- -- 400,000

Exercise of stock options............. 571 1,551 -- -- -- 1,551

Common stock issued for services...... 56,405 81,562 -- -- -- 81,562

Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (139,000) -- -- -- (139,000)

Net loss.............................. -- -- -- -- (3,244,070) (3,244,070)

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

Balance -- December 31, 1994.......... 1,706,452 $ 81,261 $ -- -- $(4,285,397) $(1,230,834)

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

Common stock issued for cash.......... 59,899 273,700 -- -- -- 273,700

Exercise of options................... 7,832 16,567 -- -- -- 16,567

Common stock repurchase from
employees........................... (24,298) (35,136) -- -- -- (35,136)

Common stock redeemed for note
payable............................. (54,712) (250,000) -- -- (250,000)

Preferred stock repurchase............ -- -- -- -- -- (42,600)

Accrued mandatory redemption premium
on redeemable preferred stock Series
D................................... -- (86,392) -- -- -- (411,000)

Net loss.............................. -- -- -- -- (3,589,773) (3,589,773)

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

Balance -- December 31, 1995.......... 1,695,173 $ -- $ -- -- $(7,875,170) $(5,269,076)

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

</TABLE>

F-5
<PAGE> 66

COMPUTER MOTION, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of options............... -- -- -- -- -- -- -- --
Common stock warrants issued for
cash............................ -- -- -- -- -- -- -- --
Fair market value of warrants
issued with bridge financing
debt............................ -- -- -- -- -- -- -- --
Common stock issued for
services........................ -- -- -- -- -- -- -- --
Common stock issued for inventory
and other asset................. -- -- -- -- -- -- -- --
Preferred stock Series E issued
for cash........................ -- -- -- -- -- -- 81,431 785,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- -- -- -- -- -- --
Accrued mandatory redemption
premium on redeemable preferred
stock Series D.................. -- 12,985 -- 139,581 -- 172,042 -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------
-
------- -------- ---------- ------- ---------- ------- -------
Balance -- December 31, 1996...... 422,718 $107,500 586,446 $1,277,652 383,950 $1,545,550 81,431 $ 785,000
--------
-
------- -------- ---------- ------- ---------- ------- -------
Exercise of options (unaudited)... -- -- -- -- -- -- -- --
Common stock warrants issued for
cash (unaudited)................ -- -- -- -- -- -- -- --
Preferred Stock Series E issued
for cash (unaudited)............ -- -- -- -- -- -- 229,772 2,215,000
Accrued mandatory redemption
premium on redeemable preferred
stock Series D (unaudited)...... -- -- -- -- -- -- -- --
Interest cost for fixed conversion
of subordinated convertible debt
(unaudited)..................... -- -- -- -- -- -- -- --
Issuance of stock options at
exercise prices below fair
market value.................... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- --
Net loss (unaudited).............. -- -- -- -- -- -- -- --
--------
-
------- -------- ---------- ------- ---------- ------- -------
Balance -- March 31, 1997
(unaudited)..................... 422,718 $107,500 586,446 $1,277,652 383,950 $1,545,550 311,203 $3,000,000
======= ======== ========= ========== ======= ========== ======= =======

<CAPTION>
NET
COMMON STOCK ADDITIONAL SHAREHOLDERS'
--------------------- PAID-IN DEFERRED (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) (DEFICIT)
--------- --------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of options............... 13,226 42,240 -- $ -- -- 42,240
Common stock warrants issued for
cash............................ -- -- 1,366 -- -- 1,366
Fair market value of warrants
issued with bridge financing
debt............................ -- -- 631,170 -- -- 631,170
Common stock issued for
services........................ 5,017 22,922 -- -- -- 22,922
Common stock issued for inventory
and other asset................. 20,873 95,378 -- -- -- 95,378
Preferred stock Series E issued
for cash........................ -- -- -- -- -- 785,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- 515,000 (515,000) -- --
Accrued mandatory redemption
premium on redeemable preferred
stock Series D.................. -- 225,392 (994,000) -- -- (444,000)
Net loss.......................... -- -- -- -- (4,558,817) (4,558,817)

--------- --------- -------- -------- ----------- -----------
Balance -- December 31, 1996...... 1,734,289 $ 385,932 $ 153,536 $ (515,000) $(12,433,987) $(8,693,817)

--------- --------- -------- -------- ----------- -----------
Exercise of options (unaudited)... 9,918 45,322 -- -- -- 45,322
Common stock warrants issued for
cash (unaudited)................ -- -- 4,030 -- -- 4,030
Preferred Stock Series E issued
for cash (unaudited)............ -- -- -- -- -- 2,215,000
Accrued mandatory redemption
premium on redeemable preferred
stock Series D (unaudited)...... -- -- (120,000) -- -- (120,000)
Interest cost for fixed conversion
of subordinated convertible debt
(unaudited)..................... -- -- 1,000,000 -- -- 1,000,000
Issuance of stock options at
exercise prices below fair
market value.................... -- -- 66,000 (66,000) -- --
Amortization of deferred
compensation.................... -- -- -- 26,000 -- 26,000
Net loss (unaudited).............. -- -- -- -- (1,530,321) (1,530,321)

--------- --------- -------- -------- ----------- -----------
Balance -- March 31, 1997
(unaudited)..................... 1,744,207 $ 431,254 $ 1,103,566 $ (555,000) $(13,964,308) $(7,053,786)
========= ========= ======== ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 67

COMPUTER MOTION, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ $(3,244,070) $(3,589,773) $(4,558,817) $ (890,005) $(1,530,321)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization.... 146,083 330,686 345,858 82,185 91,809
Provision for doubtful
accounts....................... 5,000 -- 70,000 -- (21,533)
(Gain)/loss on sale of fixed
assets......................... 47,482 (1,804) 8,434 (600) --
Common stock issued for
services....................... 81,562 -- 22,922 -- --
Amortization of warrant costs
with long-term debt............ -- -- 189,351 -- 63,117
Amortization of fixed discount on
convertible subordinated
debt........................... -- -- -- -- 167,000
Compensation for stock options
issued below fair market
value.......................... 52,006 24,000 -- -- 26,000
Changes in:
Accounts receivable.............. (168,434) (187,475) (870,824) (59,154) 234,164
Inventories...................... (725,918) (2,648) 148,633 132,733 (38,130)
Prepaid expenses................. (95,435) 82,243 (32,606) (18,151) (98,986)
Other assets..................... (41,679) -- -- -- --
Accounts payable................. 591,884 (420,541) 677,871 79,801 (375,529)
Accrued expenses................. 281 145,434 481,338 14,581 (3,324)
Deferred revenue................. 10,598 21,752 41,869 123,544 94,568
Deferred rent.................... 79,233 (8,574) (11,278) (20,538) (1,617)
----------- ----------- ----------- --------- -----------
Net cash used in operating
activities.......................... (3,261,407) (3,606,700) (3,487,249) (555,604) (1,392,782)
----------- ----------- ----------- --------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (710,101) (347,146) (116,330) (27,344) (45,410)
Proceeds from sale of property and
equipment........................ 3,125 2,605 14,350 7,000 --
Net proceeds from (purchases of)
short-term investments........... (2,874,785) 2,874,785 -- -- --
----------- ----------- ----------- --------- -----------
Net cash provided by (used in)
investing activities................ (3,581,761) 2,530,244 (101,980) (20,344) (45,410)
----------- ----------- ----------- --------- -----------
</TABLE>

F-7
<PAGE> 68

COMPUTER MOTION, INC.

STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt............................. $ 400,000 $ 1,011,370 $ 4,155,000 $1,327,000 $ 4,150,000
Repayment of long-term debt......... -- (68,170) (1,098,200) (429,500) (1,150,000)
Proceeds from line of credit........ -- -- 513,532 -- 76,979
Repayment of line of credit......... -- -- (328,032) -- (262,479)
Repayment of capital lease
obligations...................... (9,419) (12,234) (33,165) (3,125) (17,723)
Proceeds from common stock and
warrant issuance................. 11,301 290,267 43,606 -- 49,352
Proceeds from preferred stock
issuance......................... 6,075,836 -- 785,000 -- 2,215,000
Repurchase of preferred stock....... -- (42,600) -- -- --
Repurchase of common stock.......... -- (35,136) -- -- --
Investment in sales-type leases..... -- (14,649) (80,042) (88,153) (69,116)
----------- ----------- ----------- ---------- -----------
Net cash provided by financing
activities.......................... 6,477,718 1,128,848 3,957,699 806,222 4,992,013
----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (365,450) 52,392 368,470 230,274 3,553,821

CASH AND CASH EQUIVALENTS, beginning
of period........................... 377,106 11,656 64,048 64,048 432,518
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 11,656 $ 64,048 $ 432,518 $ 294,322 $ 3,986,339
=========== =========== =========== ========== ===========

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for --
Income taxes..................... $ 800 $ 800 $ 1,700 $ -- $ --
Interest......................... $ 10,953 $ 15,380 $ 270,958 $ 32,532 $ 71,017

SCHEDULE OF NON-CASH TRANSACTIONS:
Capital lease obligations incurred
for certain equipment............ $ 64,781 $ 1,995 $ 121,292 $ 10,443 $ 57,581
Accretion of dividend on Series D
preferred stock.................. $ 139,000 $ 411,000 $ 444,000 $ 111,000 $ 120,000
Common stock redeemed for note
payable.......................... $ -- $ 250,000 $ -- $ -- $ --
Common stock issued for inventory... $ -- $ -- $ 65,378 $ -- $ --
Common stock issued for other
asset............................ $ -- $ -- $ 30,000 $ -- $ --
Additional Paid-In Capital for
issuance of warrants with debt... $ -- $ -- $ 631,170 $ 350,542 $ --
Debt exchanged for 97,403 shares of
Series C preferred stock......... $ 400,000 $ -- $ -- $ -- $ --
Additional Paid-In Capital for
conversion of convertible
subordinated debt................ $ -- $ -- $ -- $ -- $ 1,000,000
Deferred compensation for stock
options issued with exercise
prices below fair market value... $ -- $ -- $ 515,000 $ -- $ 66,000
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-8
<PAGE> 69

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS

1. LINE OF BUSINESS AND RISKS

Computer Motion, Inc. (the "Company"), a Delaware corporation, develops and
markets proprietary robotic and computerized surgical systems that enhance a
surgeon's performance and centralize and simplify a surgeon's control of the
operating room. The Company has developed AESOP, the first surgical robotics
assistant used in minimally invasive surgery. AESOP became commercially
available in October 1994. The Company's primary efforts are now directed to the
development of the market for AESOP, rollout of the Company's next generation
medical robot, continued development of new medical robots which will enable
high-volume, low cost minimally invasive procedures and commercializing
intuitive interface modalities which will enhance the surgical team's overall
productivity. The Company's objective is to become the leading provider of
robotic and computerized surgical systems. Like other companies at this stage of
development, it is subject to numerous risks including the uncertainty of its
chosen markets, its ability to obtain regulatory approvals and to develop its
markets, uncertainty of acceptance of its products, its ability to finance its
operations, limited operating history, the absence of profitability,
competition, and other risks.

Through December 31, 1996, the Company raised approximately $9.3 million
from private placements of preferred and common stock and approximately $4.0
million of bridge financing debt obtained primarily from officers and
shareholders of the Company (see Notes 6 and 8).

The Company expects to raise additional funds to meet its 1997 cash needs.
Subsequent to December 31, 1996, the Company has raised $2,215,000 from private
placement of preferred stock, $4,000,000 from the issuance of convertible debt,
and borrowed $150,000 from a director (see Note 14). The Company also plans to
raise additional funds through an initial public offering of its common stock.

2. METHODS OF ACCOUNTING

a. Revenue Recognition

The Company's revenue has been derived primarily from the manufacture and
sale of AESOP systems. In addition, the Company also leases its systems under
sales-type leases. Supplies for all AESOP systems are also available for sale.

Revenues from sales-type leases are recognized when the systems are
installed, the customer accepts the system, and the lease term becomes
noncancellable. Outright systems and supplies sales are recognized upon
shipment. Unearned finance income on sales-type leases is recognized using the
interest method. Collections may be accelerated if the lease contracts are sold
to third parties, generally without recourse. Revenues from service contracts
are recognized on a straight-line basis over the life of the maintenance or
support services agreement, generally 48 months.

The Company has entered into agreements with several health care
institutions to jointly research, develop and test the Company's next generation
medical robot. The Company has recognized $645,000 of revenues in 1996 for
prototype robots delivered under these contracts. The contracts also provide
quarterly development revenues to the Company for support services which totaled
approximately $100,000 in 1996. These contracts are terminable at will by the
parties involved or will terminate upon achieving commercial production of the
robot which is planned for the second quarter of 1999. Management expects
development revenue under these agreements to approximate $100,000 per quarter
in 1997.

Grant income is recognized by the percentage-of-completion method, measured
by the percentage of cost incurred to date to estimated total cost for each
grant. This method is used because management considers total cost to be the
best available measure of the grants. The grants' proceeds are generally a
reimbursement of the related costs incurred.

F-9
<PAGE> 70

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

b. Inventories

Inventories are stated at the lower of cost or market and consist of
finished AESOP systems and component parts as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Component parts................................................ $522,805 $553,157
Finished systems............................................... 205,761 92,154
-------- --------
$728,566 $645,311
======== ========
</TABLE>

c. Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under SFAS No. 109, deferred income tax assets or liabilities are computed based
on the temporary difference between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate in effect for the
year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.

d. Loss Per Common Share

Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the related
periods. For purposes of computing pro forma net loss per share, all shares of
outstanding preferred stock are assumed converted into common stock. For all
periods presented, per share information was computed pursuant to the rules of
the Securities and Exchange Commission, which require that the dilutive effect
of common shares issued by the Company during the 12 months immediately
preceding the Company's initial public offering plus the number of common shares
issuable pursuant to the issue of warrants or the grant of options during the
same period, be included in the calculation of the shares outstanding from the
beginning of all periods presented.

A summary of the shares used to compute loss per share is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDING
YEAR ENDING DECEMBER 31, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding.................... 1,706,184 1,691,173 1,706,319 1,695,173 1,744,081
Dilutive effect of common stock
equivalents.................... -- -- -- -- --
Additional dilutive effect of
shares, options and warrants
issued within 12 months of
initial public offering........ 1,131,468 1,131,468 1,128,484 1,131,468 1,111,714
--------- --------- --------- --------- ---------
Weighted average common shares
used to compute loss per
share.......................... 2,837,652 2,822,641 2,834,803 2,826,641 2,855,795
========= ========= ========= ========= =========
Conversion of preferred stock.... 1,952,711 1,850,922 2,239,926
Conversion of subordinated
debt........................... 363,743 363,743 363,743
--------- --------- ---------
Weighted average common shares
used to compute pro forma net
loss per share................. 5,151,257 5,041,306 5,459,464
========= ========= =========
Net loss per share............... $ (1.14) $ (1.27) $ (1.61) $ (.31) $ (.53)
========= ========= ========= ========= =========
Pro forma net loss per share..... $ (.88) $ (.18) $ (.28)
========= ========= =========
</TABLE>

F-10
<PAGE> 71

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Pro forma net loss per share has been presented to provide meaningful
disclosure of the effect on net loss per share of the conversion of all
preferred shares and the conversion of subordinated debt. The preferred shares
will automatically convert into common shares upon the closing of the offering
contemplated by this prospectus and the subordinated debt converted in May 1997.

e. Patents

Patents, which are included in other assets, consist primarily of legal
fees and are stated at cost. Patent cost is amortized on a straight-line basis
over 17 years.

f. Use of 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

g. New Authoritative Pronouncements

In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. Both standards will be adopted in the
fourth quarter of fiscal 1997. Management does not expect the adoption of these
standards to have a material effect on the Company's financial position or
results of operations.

h. Unaudited Pro Forma Balance Sheet Presentation

The unaudited pro forma balance sheet is presented to show the effects on
the unaudited March 31, 1997 balance sheet of the conversion of all outstanding
shares of preferred stock into 2,414,646 shares of common stock which will occur
upon the completion of the offering (see Note 6) and the conversion of the
$3,167,000 of convertible debt, net of value assigned to related warrants, into
367,857 shares of common stock which occurred in May 1997 (see Note 14) as if
both conversions took place on March 31, 1997.

3. SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

4. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
the straight-line and double-declining balance methods over the following
estimated useful lives:

<TABLE>
<S> <C>
Furniture and fixtures............................................ 7 years
Computer equipment................................................ 5 years
Machinery and equipment........................................... 3-7 years
</TABLE>

Depreciation expense related to property and equipment was approximately
$142,000, $326,000 and $341,000 for the years ended December 31, 1994, 1995 and
1996, respectively.

F-11
<PAGE> 72

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN

The Company has stock option plans (the "Plans") for which it is authorized
to issue up to 2,593,361 shares of common stock. Under the Plans, options are
generally issued to employees at an exercise price equal to fair market value,
as determined by the Board of Directors. The options generally vest at five
percent per quarter. During the last quarter of 1996, the Company issued options
to purchase approximately 425,000 shares of common stock at prices which
included approximately $515,000 of a compensation element. The $515,000 is being
recognized as expense over the vesting periods of the related options and has
been presented as a reduction of shareholders' equity in the accompanying
balance sheets.

The Company has also established the Employee Stock Purchase Plan (the
"ESPP") to provide employees the opportunity to purchase shares of the Company's
common stock up to a maximum of 10% of annual compensation. The Company has
reserved 129,668 shares of common stock for purchase under the ESPP. As of June
16, 1997, no shares have been issued under the ESPP.

A summary of activity under the Plans is as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
COMMON EXERCISE PRICE OPTION PRICE
SHARES PER SHARE PER SHARE
--------- ---------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1993.......... 228,477 $ 1.10 $ .02 to 1.45
Granted.............................. 338,926 $ 2.20 $1.45 to 4.57
Exercised............................ (571) $ 2.72 $ .02 to 2.72
Canceled............................. (90,977) $ 1.75 $ .02 to 4.57
--------- ----- -------------
Outstanding at December 31, 1994.......... 475,855 $ 1.75 $ .02 to 4.57
Granted.............................. 331,172 $ 4.49 $1.45 to 4.57
Exercised............................ (7,832) $ 2.12 $1.45 to 3.66
Canceled............................. (175,311) $ 3.51 $ .02 to 4.57
--------- ----- -------------
Outstanding at December 31, 1995.......... 623,884 $ 2.72 $ .02 to 4.57
Granted.............................. 961,859 $ 4.57 $ 4.57
Exercised............................ (13,226) $ 3.20 $1.45 to 4.57
Canceled............................. (230,757) $ 2.95 $1.45 to 4.57
--------- ----- -------------
Outstanding at December 31, 1996.......... 1,341,760 $ 4.01 $ .02 to 4.57
========= ===== =============
</TABLE>

As of December 31, 1994, 1995 and 1996, options for 148,522, 244,310 and
334,401 shares, respectively, were exercisable.

If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net loss would have
been increased as follows:

<TABLE>
<CAPTION>
NET LOSS
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
As reported............................................... $(3,589,773) $(4,558,817)
Pro forma................................................. $(3,630,947) $(4,798,099)
</TABLE>

For the above disclosure, the fair value of each option grant is estimated
on the date of grant using an option pricing model with the following weighted
average assumptions used in 1995 and 1996: risk-free interest rates of
approximately 6.0% to 7.5%; expected life of seven years; no expected dividend
yield; no expected volatility.

The option pricing 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. 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

F-12
<PAGE> 73

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

6. STOCK TRANSACTIONS

a. Preferred Stock

As of December 31, 1996, the Series A, B, C and E preferred shares carry
rights, preferences, privileges and restrictions as follows:

- Dividend preference over common stock is non-cumulative at a rate of
$.073 per share per annum if declared, except in the case of non-cash
dividends at which point a proportionate share will be paid as if the
number of preferred shares were common shares. This preference is
subordinate to Series D.

- Preferred shares are voting shares equivalent to common shares, and
are convertible to common shares on a one-for-one basis. Subsequent to
December 31, 1996, the Company did not complete minimum equity financing
detailed in the Series E offering, at which time all Series E became
convertible to common at a rate of 1.25 common shares per Series E share.

- Liquidation preference over common stock is at a rate of $.19 per
share for Series A, $2.18 for Series B, $4.11 for Series C and $9.64 for
Series E, plus an amount equal to all declared but unpaid dividends per
share. This preference is subordinate to Series D.

During 1994, the Company converted a note payable, due an officer and
shareholder, in the amount of $400,000 into 97,403 Series C preferred
shares at the then estimated fair market value of $4.11 per share.

As of December 31, 1996, the Series D preferred shares carry rights,
preferences, privileges and restrictions as follows:

- Dividend preference is cumulative on a daily basis from the date of
original issue at a rate of 8 percent per annum of the sum of $9.16 per
share plus all accumulated and unpaid dividends from prior years, as
applicable. This dividend is being accreted in the accompanying financial
statements.

- Upon the conversion of Series D stock to common shares, all
dividends accumulated or accrued shall be canceled.

- Preferred Series D shares are voting shares equivalent to common
shares, and are convertible at the option of the holder to common shares on
a one-to-one basis subject to certain anti-dilutive provisions.

- Liquidation preference is at a rate of $9.16 per share plus an
amount equal to all accumulated or accrued dividends.

The Series D preferred shares are redeemable by the shareholders beginning
in 2001, with a maximum redemption of 25% of the shares outstanding in each year
from 2001 to 2004. The redemption price will equal the original issuance price
plus accreted cumulative dividends. Additionally, the accrued mandatory
redemption premium will be cancelled and all shares of Series D preferred shares
will convert to common stock upon an initial public offering with proceeds in
excess of $15,000,000. Series D preferred stock has been reflected in the
accompanying balance sheets outside of shareholders' equity due to its
redemption feature.

The Company may not redeem, purchase or otherwise acquire directly or
indirectly any Series A, B, C or E preferred stock nor shall the Company pay or
declare any dividends or make distributions on Series A, B, C or E preferred
stock without prior approval of the Series D preferred shareholder.

The Series D preferred stock purchase agreement contains certain covenants
and restrictions. As of December 31, 1996 and 1995, the Company had borrowed
funds in excess of $500,000, which exceeds one of

F-13
<PAGE> 74

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

the restrictions set forth in the Series D preferred stock purchase agreement.
The holder of the Series D preferred shares has provided the Company with a
consent and waiver of its rights as they apply in the purchase agreement in
regards to these borrowings.

All shares of preferred stock will convert into common stock (2,414,646
shares of common stock) in the event of an initial public offering with net
proceeds in excess of $15,000,000.

b. Common Stock Warrants

As of December 31, 1996, the Company had the following outstanding warrants
to purchase common stock:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
WARRANTS PRICE EXPIRATION
- ---------- -------- -------------------------------
<C> <C> <S>
1,064,645 $ 4.57 November 2002 through May 2003
155,602 $ 4.57 September 2003
81,432 $ 9.64 December 2003
</TABLE>

Subsequent to December 31, 1996, the Company adjusted the price per warrant
from $9.64 to $7.71 pursuant to the terms of the agreements relating to the
Series E offering.

7. INCOME TAXES

The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of minimum state income taxes.

Net deferred income tax assets at December 31, 1995 and 1996 consisted of
the following:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Allowance for doubtful accounts........................... $ 2,007 $ 30,104
Accrued liabilities....................................... 55,865 197,546
Deferred rent............................................. 28,361 23,834
Depreciation and amortization............................. 527 16,055
Uniform capitalization costs.............................. 80,276 80,276
Net operating loss carryforwards.......................... 2,570,000 4,039,000
Tax credits............................................... 180,000 219,000
Other..................................................... 45,294 11,048
----------- -----------
Total deferred income taxes.......................... 2,962,330 4,616,863
Valuation reserve......................................... (2,962,330) (4,616,863)
----------- -----------
Net deferred income tax assets....................... $ -- $ --
=========== ===========
</TABLE>

The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to loss before provision for income taxes as
follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected federal benefit............... $(1,102,712) $(1,220,251) $(1,549,590)
State income taxes, net of federal income tax
effect........................................ 800 800 1,200
Tax benefits not recognized..................... 1,102,712 1,220,251 1,549,590
----------- ----------- -----------
$ 800 $ 800 $ 1,200
=========== =========== ===========
</TABLE>

The Company had federal and state net operating loss (NOL) carryforwards of
approximately $11,000,000 and $4,900,000, respectively, as of December 31, 1996.
The Company also had research and

F-14
<PAGE> 75

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

development tax credit carryforwards of approximately $219,000 at December 31,
1996. The federal tax credit and NOL carryforwards expire after 15 years from
the year of loss and are restricted if significant changes in ownership occur.
The California NOL carryforwards expire in 5 to 7 years from the year of loss.

Realization of deferred tax assets is dependent on generating sufficient
taxable income during the periods in which the temporary differences will
reverse. The amount of the deferred tax assets considered realizable could be
adjusted if estimates of future taxable income during the reversal periods are
revised.

8. DEBT

The following is a summary of long-term debt as of December 31, 1995 and
1996:

<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Bridge financing debt, from officers and shareholders,
bearing interest at prime rate plus 1% (9.25% at December
31, 1996), interest payable monthly, principal due at
various maturities between July 1998 and November 1998... $ 500,000 $ 3,250,000
Note payable to corporation, bearing interest at 10%,
principal and interest due January 1997, collateralized
by certain tangible and intangible assets................ -- 1,000,000
Note payable to vendor, bearing interest at bank's prime
rate, principal and interest due monthly through May
1996..................................................... 477,365 --
Other...................................................... 215,835 --
---------- -----------
1,193,200 4,250,000
Less-current portion....................................... (693,200) (1,000,000)
---------- -----------
$ 500,000 $ 3,250,000
========== ===========
</TABLE>

The Company's debt obligations mature as follows:

<TABLE>
<S> <C>
Year ending December 31:
1997.............................................................. $1,000,000
1998.............................................................. 3,250,000
----------
$4,250,000
==========
</TABLE>

The bridge financing debt from officers and shareholders, with original
face maturities totaling $3,655,000 as of December 31, 1996, included the
granting of 1,064,645 warrants to purchase shares of the Company's common stock.
Under SFAS No. 123, the fair market value of these warrants at the date of grant
totaling $631,170 was recorded as additional paid-in capital and deferred
financing cost. During fiscal 1996, $189,351 of this financing cost was
amortized to interest expense. During fiscal 1997 and 1998, $252,468 and
$189,351, respectively, will be amortized to interest expense.

At December 31, 1996, the Company had drawn $185,500 against a $250,000
line of credit maintained with a bank. The line bears interest at prime rate
plus 1.5% (9.75% at December 31, 1996), with interest due monthly and
outstanding principal due at maturity in June 1997. The line is collateralized
by certain inventory and equipment and contains financial and non-financial
covenants. The maximum borrowing in 1996 under this line was approximately
$226,000, the average borrowing was approximately $103,000, and the weighted
average interest rate was 9.75%.

F-15
<PAGE> 76

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

a. Leases

As of December 31, 1996, the Company has the following minimum lease
payments for certain equipment and facilities under capital and operating
leases:

<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ----------
<S> <C> <C>
Year Ended December 31:
1997.................................................. $ 79,955 $ 309,000
1998.................................................. 69,193 322,000
1999.................................................. 25,934 329,000
2000.................................................. -- 337,000
2001.................................................. -- 316,000
-------- ----------
175,082 $1,613,000
==========
Less -- amount representing interest......................... (38,999)
--------
Present value of minimum capital lease payments.............. 136,083
Less -- current portion...................................... (60,349)
--------
$ 75,734
========
</TABLE>

Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $136,000, $211,000 and $214,000, respectively.

b. Legal Matters

The Company is party to various legal proceedings in the normal course of
business. In the opinion of management, the outcome of such proceedings will not
have a material adverse impact on the Company's financial position or results of
operations.

10. FINANCING ARRANGEMENTS

During 1994, the Company entered into an agreement with a third party
finance company, whereby the Company sells its sales-type leases with and
without recourse. The Company recognized approximately $140,000, $797,000 and
$494,000 in revenues from sales-type leases sold for the years ended December
31, 1994, 1995 and 1996, respectively. As of December 31, 1995 and 1996,
approximately $34,000 and $193,000, respectively, had not been collected on
leases sold with recourse for which the Company is contingently liable.

As of December 31, 1995 and 1996 and March 31, 1997, the future lease
payments to be received by the Company, unguaranteed residual values and
unearned income related to all leasing transactions were insignificant.

11. PROFIT SHARING PLAN

Effective January 1, 1996, the Company adopted a defined contribution
profit sharing plan (the "Plan"). All employees are eligible to participate in
the Plan after meeting certain minimum age and service requirements. Employees
may make discretionary contributions to the Plan subject to Internal Revenue
Service limitations. Employer contributions to the Plan are discretionary and
are determined by the Board of Directors annually. No employer contribution was
made during 1996. Plan participants are fully vested in all contributions to the
Plan.

F-16
<PAGE> 77

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. MAJOR CUSTOMERS AND VENDORS

As of December 31, 1996, one customer accounted for approximately 20% of
total accounts receivable. The Company's AESOP robot has three significant
components which are manufactured on an outsource basis. Three vendors act as
sole source providers of these components with each manufacturing a separate
component.

Sales to foreign countries represented 9%, 21% and 49% of the Company's
product revenues in 1994, 1995, and 1996, respectively. Foreign sales were as
follows:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Europe........................................................... 5% 6% 19%
Japan............................................................ 0% 13% 7%
Korea............................................................ 0% 1% 10%
Other............................................................ 4% 1% 13%
</TABLE>

13. REINCORPORATION

The Company reincorporated in Delaware and effected a reverse stock split
of its existing common and preferred stock of 1 for 1.928 shares in August 1997.
This reincorporation and reverse stock split have been retroactively reflected
in the accompanying financial statements.

14. UNAUDITED INFORMATION

a. Basis of Presentation

The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. These unaudited financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.

b. Inventories

Inventories are stated at the lower of cost or market and consist of
finished AESOP systems and component parts as follows:

<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
Component parts.......................................... $ 533,751
Finished systems......................................... 149,690
---------
$ 683,441
=========
</TABLE>

F-17
<PAGE> 78

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

c. Income Taxes

The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the loss before provision for income
taxes as follows:

<TABLE>
<CAPTION>
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
Expected federal tax benefit............................. $ (511,367)
State income taxes, net of federal income tax effect..... 300
Tax benefit not recognized............................... 511,367
----------
$ 300
==========
</TABLE>

d. Major Customers and Vendors

As of March 31, 1997, three customers accounted for approximately 44% of
total accounts receivable, with each individually exceeding 10% of total
accounts receivable. The Company also replaced one of its three inventory
component manufacturers, with the new manufacturer acting as the sole source
provider of the same component.

e. Placement of Debt

In March 1997, the Company borrowed $4,000,000 from a corporation, bearing
interest at bank's prime rate plus 1% (9.5% at March 31, 1997), principal and
interest due December 31, 1997, secured by certain intangible assets.
Outstanding principal and interest are convertible to common stock at a fixed
discount of 80% of initial offering price per share upon an initial public
offering by the Company. For the three month period ending March 31, 1997,
approximately $167,000 of interest expense related to the fixed discount
conversion has been recognized in the accompanying statements of operations, and
an additional $833,000 of deferred interest expense has been netted against
principal in the accompanying balance sheets.

Effective May 1997, the lender converted its note and all accrued interest
thereon into 363,743 shares of the Company's Common Stock.

An additional $150,000 was raised in the form of a short term, unsecured
note from a director and was repaid in the first quarter of 1997.

f. Preferred Stock

The Company secured an additional $2,215,000 from private placements of
preferred stock, closing out its Series E offering. Each share of Series E
preferred stock will convert into 1.25 shares of common stock upon completion of
an initial public offering in excess of $15,000,000.

F-18
<PAGE> 79

COMPUTER MOTION, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. STOCK OPTIONS

During the period from January 1, 1997 through June 16, 1997 the Company
issued 323,029 additional stock options. A summary of the options granted is as
follows:

<TABLE>
<CAPTION>
ESTIMATED FAIR
MARKET VALUE
OF COMMON STOCK
NUMBER OF EXERCISE AT DATE OF AGGREGATE
OPTIONS PRICE GRANT COMPENSATION
- --------- -------- --------------- ------------
<S> <C> <C> <C>
54,927 $ 4.57 $ 5.78 $ 66,462
260,477 $ 4.57 $ 11.20 $1,726,963
7,625 $ 9.93 $ 11.20 $ 9,684
</TABLE>

Certain options were granted at prices less than the estimated fair market
value of the common stock. The difference between the exercise price and
estimated fair market value at date of grant has been reflected as deferred
compensation in the accompanying balance sheets and is being recognized as
compensation expense over the vesting period of the options, generally five
years.

In June 1997, 5,187 shares of restricted common stock were granted to an
officer and vest over a 5 year period. Compensation expense of approximately
$58,000 will be recognized over the next 5 years as the restrictions lapse. In
addition, the same officer purchased 32,417 shares of common stock for $4.57 per
share and was issued warrants to purchase 32,417 shares at $4.57 per share. The
difference between the exercise price of 4.57 per share and the estimated fair
market value at date of grant will be a charge to operations of approximately
$430,000 in June 1997.

F-19
<PAGE> 80

======================================================

No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates, or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any time subsequent to
the date hereof.

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 18
Dividend Policy....................... 18
Investment by Medtronic............... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 26
Management............................ 42
Certain Transactions.................. 49
Principal Stockholders................ 51
Description of Capital Stock.......... 52
Shares Eligible For Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 58
Index to Financial Statements......... F-1
</TABLE>

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

Until September 5, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

======================================================
======================================================

2,500,000 SHARES

[COMPUTER MOTION LOGO]

COMMON STOCK

------------------------
PROSPECTUS
------------------------

MONTGOMERY SECURITIES

PIPER JAFFRAY INC.

August 11, 1997

======================================================