Edgar Filing: COMPUTER MOTION INC

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

COMMISSION FILE NUMBER 000-22755

COMPUTER MOTION, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified on in its charter)

DELAWARE 77-0458805
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

130-B CREMONA DRIVE
GOLETA, CA 93117
--------------------------------------------------------------------------------
(Address of principal executive offices)

(805) 968-9600
(Registrant's telephone number, including area code)

Indicate by check /X/ whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.

Yes [X] No
----- ----

As of August 10, 2001 there were 10,215,954 shares of the Registrant's Common
Stock outstanding.

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COMPUTER MOTION, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 2001

INDEX PAGE
----- ----

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Statements of Operations 3

Condensed Balance Sheets 4

Condensed Statements of Cash Flows 5

Notes to Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9

Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16

PART II. - OTHER INFORMATION

Item 1. Litigation 16

Item 2. Changes in Securities and Use of Proceeds 17

Item 4. Submissions of Matters to Vote of the Security Holders 18

Item 6. Exhibits and Reports on Form 8-K 18

SIGNATURE 19

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share amounts)

Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- ------- -------- --------

Revenue $ 4,003 $ 5,962 $ 9,719 $ 7,330

Cost of revenue 1,882 2,382 4,322 3,071
-------- ------- -------- --------
Gross profit 2,121 3,580 5,397 4,259
-------- ------- -------- --------
Gross profit % 53% 60% 56% 58%

Research and development expense 2,506 3,353 5,640 5,569
Selling, general and administrative expense 4,993 3,716 9,338 7,269
-------- ------- -------- --------
Total operating expense 7,499 7,069 14,978 12,838
-------- ------- -------- --------
Loss from operations (5,378) (3,489) (9,581) (8,579)

Interest income 36 10 76 89
Interest expense (3) (72) (50) (74)
Foreign currency transaction gain (loss) 60 (25) 86 (25)
Other income/(expense) (9) (26) (19) (27)
-------- ------- -------- --------
84 (113) 93 (37)

Loss before income taxes (5,294) (3,602) (9,488) (8,616)

Income tax provision 6 7 12 12
-------- ------- -------- --------
Net loss (5,300) (3,609) (9,500) (8,628)

Dividend to preferred shareholders 61 -- 2,694 --
-------- ------- -------- --------
Net loss available to common shareholders $ (5,361) $(3,609) $(12,194) $ (8,628)
======== ======= ======== ========

Weighted average common shares outstanding
used to compute net loss per share - basic
and diluted 10,179 8,831 10,177 8,806

Net loss available to common shareholders
per share - basic and diluted $ (0.53) $ (0.41) $ (1.20) $ (0.98)
======== ======= ======== ========

See notes to condensed financial statements.

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COMPUTER MOTION, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands, except par value)

June 30, 2001 December 31, 2000
Unaudited (1)
------------- -----------------

ASSETS

Current assets:
Cash and cash equivalents $ 2,539 $ 1,551
Restricted cash 80 --
Accounts receivable 5,664 12,117
Inventories 7,223 4,681
Prepaid Expenses 462 440
-------- --------
Total current assets 15,968 18,789

Property and equipment, net 4,086 4,232
Other assets 65 68
-------- --------

Total assets $ 20,119 $ 23,089
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Note payable to shareholder $ -- $ 3,000
Accounts payable 4,461 4,431
Accrued expenses 2,661 3,486
Deferred revenue 2,457 2,185
-------- --------
Total current liabilities 9,579 13,102

Deferred revenue, net of current portion 1,610 1,400
Other liabilities 56 75
-------- --------
Total liabilities 11,245 14,577
-------- --------

Mandatory redeemable Series B convertible preferred stock (Note 4) 10,116 --
-------- --------

Shareholders' equity (deficit):

Preferred stock, authorized 5,000,000 shares (Note 4) -- --
Common stock, $.001 par value, authorized 50,000,000 shares
outstanding - at June 30, 2001; 10,186 - at December 31,
2000; 10,151 shares 10 10
Additional paid-in capital 76,325 73,445
Deferred compensation (935) (605)
Accumulated deficit (76,479) (64,284)
Other comprehensive loss (163) (54)
-------- --------
Total shareholders' equity (deficit) (1,242) 8,512
-------- --------

Total liabilities & equity (deficit) $ 20,119 $ 23,089
======== ========

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

(1) Derived from audited financial statements as of December 31, 2000

See notes to condensed financial statements.

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COMPUTER MOTION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)

Six Months Ended
June 30,
---------------------
2001 2000
------- -------

Cash flows from operating activities:
Net loss $(9,500) $(8,628)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 826 642
Provision for doubtful accounts and sales allowances 100 550
Amortization of deferred compensation 259 68
Other (17) --

Decrease/(increase) in:
Accounts receivable 6,353 (3,007)
Inventories (2,541) (4)
Prepaid expenses (22) (185)

Increase/(decrease) in:
Accounts payable 30 90
Accrued expenses (825) 88
Deferred revenue 482 900
------- -------
Net cash used in operating activities (4,855) (9,486)
------- -------

Cash flows from investing activities:
Purchases of property and equipment (674) (1,721)
Decrease in marketable securities -- 3,224
Increase in restricted deposits (80) --
------- -------
Net cash provided by (used in) investing activities (754) 1,503
------- -------

Cash flows from financing activities:
Net proceeds from preferred stock issuance 9,666 --
Repayment of note payable to shareholder (3,000) --
Proceeds from common stock and warrant issuance 40 4,603
Proceeds from stock options -- 406
Comprehensive loss (109) (143)
------- -------
Net cash provided by financing activities 6,597 4,866
------- -------

Increase (decrease) in cash and cash equivalents 988 (3,117)

Cash and cash equivalents at beginning of period 1,551 4,297
------- -------

Cash and cash equivalents at end of period $ 2,539 $ 1,180
======= =======

See notes to condensed financial statements.

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COMPUTER MOTION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.

The operating results of the interim periods presented are not
necessarily indicative of the results expected for the year ending December 31,
2001 or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 2000 included in the Computer
Motion, Inc. ("the Company") Annual Report on Form 10-K/A, filed on August 9,
2001, for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission ("SEC") including all amendments thereto.

The Company applies the provisions of Staff Accounting Bulletin No. 101
(SAB 101) when recognizing revenue. SAB 101 states that revenue generally is
realized or realizable and earned when all of the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred or the
services have been rendered, c) the seller's price to the buyer is fixed or
determinable, and d) collectibility is reasonably assured.

The Company recognizes revenue from the sale of products to end-users,
including supplies and accessories, once shipment has occurred, (as the
Company's general terms are FOB shipping point. In those few cases where the
customers terms are FOB their plant, revenue is not recognized until the Company
receives a signed delivery and acceptance certificate), and all of the
conditions of SAB 101 (items a), through d), as identified above) have been met.
Revenue is recognized from the performance of services as the services are
performed.

The Company recognizes revenue from the sale of products to
distributors, including supplies and accessories, once shipment has occurred,
(as the Company's general terms are FOB shipping point), and all of the
conditions of SAB 101 have been met. The Company's distributors do not have
rights or return or cancellation. Revenue from distributors which does not meet
all of the requirements of SAB 101 are deferred and recognized upon the sale of
the product to the end user.

Revenues from product sales to financing institutions are not recognized
by the Company until a purchase order is received, the product has been shipped
and the funding by the financing institution has been approved.

The Company defers revenue from the sale of extended warranties, product
upgrades and other contractual items and recognizes them over the life of the
contract or upon shipment to the customer, as applicable.

Shipments of products to be used for demonstration purposes or prototype
products used in development programs are reflected as consigned inventory and
are included in the property and equipment balance in the accompanying
consolidated balance sheets. Revenue recognized on the rental of this equipment
is recognized as development revenue over the term of the agreement.

The Company records revenue net of commissions paid to agents in
accordance with Emerging Issues Task Force (EITF) No. 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent."

The Company believes that Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), is not applicable to the sale of the Company's products
in accordance with the guidance in paragraphs 2 and 4 of SOP 97-2. The software
sold is considered by the Company to be incidental to the products sold and is
not a significant focus of the marketing efforts of the Company nor is the
software sold separately. In addition, post contract customer support is not
sold by the Company in conjunction with the software. As such, the Company does
not separately account for the sale of the software.

NOTE 2. NET LOSS PER SHARE

Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share," requires presentation of both basic and diluted net loss per share
in the financial statements. The Company's basic net loss per share is the same
as its diluted net loss per share because inclusion of outstanding stock options
and warrants in the calculation is antidilutive. Basic and diluted loss per
share is calculated by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding for the period.

The net loss per share for the six (6) months ended June 30, 2001 has
been adjusted to include the fair value of 554,831 additional warrants provided
to the shareholders of the Company's Mandatory Redeemable Series B Convertible
Preferred Stock of $1,536,000, a beneficial conversion feature of $1,066,000 and
a dividend of $92,000. The Company is required to recognize these items as a
dividend in the net loss computation for loss per share. This is a non-cash
transaction involving the charging of $2,694,000, to accumulated deficit and
crediting additional paid-in capital. The dividend feature of the Mandatory
Redeemable Series B Convertible Preferred Stock Agreement includes a cumulative
4.9% dividend provision which resulted in a $92,000 dividend for the six (6)
months ended June 30, 2001 (See Note 4 of notes to condensed financial
statements). Loss per share information is as follows:

Six months ended
June 30, 2001
Unaudited
-----------------

Unaudited per share data - basic and diluted:

Pro forma net loss before dividend to preferred
shareholders per share $ (0.93)
Dividend to warrant preferred shareholders per share (0.27)
--------

Net loss per share $ (1.20)
========

NOTE 3. SHAREHOLDER RIGHTS

On June 14, 1999, the Board of Directors of the Company approved the
adoption of a Shareholder Rights Plan and declared a dividend distribution of
one (1) right for each outstanding share of the Company's Common Stock to
shareholders of record on the close of business on June 28, 1999. Reference is
made to the Company's registration statement on Form 8-A filed with the SEC on
June 18, 1999.

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NOTE 4. MANDATORY REDEEMABLE SERIES B CONVERTIBLE PREFERRED STOCK

On February 16, 2001, the Company, sold and issued 10,024 shares of its
Mandatory Redeemable Series B Convertible Preferred Stock at a purchase price of
$1,000 per share for an aggregate amount of $10,024,000 and concurrently
therewith issued warrants for the purchase of up to 554,831 shares of the
Company's Common Stock, in a private placement with several investors, ($3
million of which was used to repay the note payable to Robert W. Duggan, the
Company's Chairman and Chief Executive Officer). The Preferred Stock has a three
(3) year maturity and is initially convertible into shares of the Company's
Common Stock at $5.77 per share. The initial conversion price is subject to
adjustment on the six (6) month and nine (9) month anniversaries of the closing
date of the private placement, whereupon the conversion price shall be subject
to reset to the average of the ten (10) lowest closing prices for the Company's
Common Stock as quoted on the National Association of Stock Dealers Automated
Quotation ("NASDAQ") National Market during the twenty (20) consecutive dates
immediately prior to each adjustment date if such average is lower than the
initial conversion price; provided, however, that the conversion price shall not
be reset below $2.72 per share. The investors shall receive a preferred annual
dividend payable in stock or cash, at the Company's option, at a rate of 4.90%.
In addition, the investors were granted five (5) year warrants to purchase an
aggregate of approximately 554,831 shares of the Company's Common Stock at an
exercise price of $8.12 per share.

NOTE 5. EQUITY-BASED LINE OF CREDIT

On March 30, 2001 the Company entered into the Equity Line Agreement
with Societe Generale, under which the Company may issue and sell, from time to
time, shares of its Common Stock for cash consideration up to an aggregate of
$12 million. Pursuant to the requirements of Equity Line Agreement, the Company
must file a registration statement on Form S-2 with the SEC in order to permit
Societe Generale to resell to the public any shares that it acquires pursuant to
the Equity Line Agreement. Commencing as of the effective date of this
registration statement and continuing for twenty-four (24) months thereafter,
the Company may from time to time at its sole discretion, and subject to certain
restrictions set forth in the Equity Line Agreement, sell, or "draw down",
shares of its Common Stock to Societe Generale at an initial purchase price
equal to 91% of the daily volume weighted average of the price of the Company's
Common Stock for each day during the specified purchase period. A draw down can
be made after five trading days have elapsed from the date of the delivery of
the last draw down notice in amounts ranging from a minimum of $75,000 to a
maximum of $250,000, depending on the trading volume and the market price of the
Common Stock at the time of each draw down. As of June 30, 2001, the Company had
not sold any shares of Common Stock under this Equity Line Agreement.

NOTE 6. SEGMENTS OF BUSINESS

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to shareholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
making group, as defined under SFAS 131 is the Executive Staff. To date, the
Executive Staff has viewed the Company's operations as principally one (1)
market: proprietary robotic and computerized surgical systems for the medical
device industry. Sales by product lines within this market are as follows:

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Revenue by product line
For the three months ended
----------------------------------------------------------
(Amounts in thousands)

Dec. 31, Mar. 31, Mar. 31, Jun. 30, Jun. 30,
2000 2001 2000 2001 2000
-------- -------- -------- -------- --------

ZEUS robotic and surgical systems $5,415 $1,495 $ (48) $1,359 $2,779
AESOP robotic and surgical systems 1,306 1,962 696 1,359 1,798
SOCRATES telementoring systems -- 55 -- 88 --
HERMES voice control center 535 1,093 (113) 352 588
Development revenue 147 303 365 69 373
Recurring revenue 788 808 468 776 424
------ ------ ------- ------ ------
$8,191 $5,716 $ 1,368 $4,003 $5,962
====== ====== ======= ====== ======

Units sold by product line
For the three months ended
----------------------------------------------------------

Dec. 31, Mar. 31, Mar. 31, Jun. 30, Jun. 30,
2000 2001 2000 2001 2000
-------- -------- -------- -------- --------

ZEUS robotic and surgical systems 10 2 -- 2 5
AESOP robotic and surgical systems 26 25 12 22 31
SOCRATES telementoring systems -- 1 -- 1 --
HERMES voice control center 56 106 -- 42 59

Export sales are made by the United States operations to the following
geographic locations:

For the three months ended
----------------------------------------------------------
(Amounts in thousands)

Dec. 31, Mar. 31, Mar. 31, Jun. 30, Jun. 30,
2000 2001 2000 2001 2000
-------- -------- -------- -------- --------

Canada $ 260 $ -- $ -- $ -- $ --
Europe and the Middle East 1,330 1,353 348 449 280
Asia 2,128 195 48 24 2,448
South America 242 -- -- 97 --
------ ------ ------- ------ ------
$3,960 $1,548 $ 396 $ 570 $2,728
====== ====== ======= ====== ======

NOTE 7. LITIGATION

On May 10, 2000, the Company filed suit against Intuitive Surgical, Inc.
alleging that the Intuitive Surgical da Vinci surgical robot system infringes on
the Company's United States Patent Nos. 5,878,193; 5,524,180; 5,762,458;
6,001,108; 5,815,640; 5,907,664; 5,855,583. On June 1, 2000, the Company filed
an amended complaint alleging that Intuitive Surgical, Inc. has also infringed
the Company's recently issued United States Patent No. 6,063,095. On November 1,
2000, the Company filed another amended complaint further alleging that
Intuitive Surgical, Inc. is infringing on the Company's recently issued United
States Patent No. 6,102,850. The Company's complaint seeks damages for lost
profits, injunctive relief enjoining any future infringement of its patent
rights, treble damages and attorneys fees.

On June 30, 2000, Intuitive Surgical, Inc. served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability. Other than a request for attorney's fees, Intuitive
Surgical, Inc. has not requested any damages. The Company has served discovery
requests seeking a statement of the facts that support Intuitive Surgical,
Inc.'s defenses. Intuitive Surgical, Inc. has provided partial responses to the
Company's discovery. Some of Intuitive Surgical, Inc.'s discovery responses have
been served under seal and the Company is therefore not privy to that
information.

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On or about December 7 and 8, 2000, the United States Patent Office
granted three (3) of Intuitive Surgical, Inc.'s petitions for a declaration of
an interference relating to the Company's 5,878,193, 5,907,664 and 5,855,583
patents.

On February 13, 2001, the District Court issued an order staying the
infringement action for up to one (1) year pending decision on preliminary
motions that the parties have brought in the interferences.

On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that the Company's ZEUS(TM) Robotic Surgical System ("ZEUS") platform
infringes upon Brookhill-Wilk's United States Patent Nos. 5,217,005 and
5,368,015. Brookhill-Wilk's complaint seeks damages, attorney's fees and
increased damages alleging willful patent infringement. The Company does not
believe that its ZEUS platform currently infringes either patent and that both
patents are invalid. On March 21, 2001, the Company served its Answer and
Counterclaim alleging non-infringement of each patent-in-suit, patent invalidity
and unenforceability.

On March 30, 2001, Intuitive Surgical, Inc. and IBM Corporation filed
suit alleging that the Company's AESOP(R) robotic endoscope positioning system
("AESOP"), HERMES(TM) Control Center ("HERMES") and ZEUS products infringe upon
United States Patent No. 6,201,984 which was recently issued on March 13, 2001.
The complaint seeks damages, a preliminary injunction, a permanent injunction,
costs and attorneys fees. A preliminary review of the claims of this patent
reveals that each claim is limited to a surgical system employing voice
recognition for control of a surgical instrument. As this patent was only
recently issued and as the Company has not had prior notice of this patent or
the claims of this patent, the Company is currently evaluating the allegations
of patent infringement and the validity of the patent. The parties have
currently served discovery requests of each other and the Company expects to
receive responses to its discovery sometime at the end of August or early
September 2001.

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16. "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
We will adopt SFAS 141 for all business combinations initiated after June 30,
2001.

Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142. "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This
pronouncement addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Goodwill would no longer be amortized but would be
assessed at least annually for impairment using a fair value methodology. We
will adopt this statement for all goodwill and other intangible assets acquired
after June 30, 2001 and for all existing goodwill and other intangible assets
beginning January 1, 2002. We do not anticipate the adoption of SFAS 142 will
have a significant effect on our financial position or the results of our
operations.

NOTE 9. SUBSEQUENT EVENTS:

On July 24, 2001, the Company raised through a private placement
$2,000,000 from the sale of 580,384 shares of Common Stock to its officers
to help fund clinical trials toward FDA approval of the Company's ZEUS product.

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

This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially due to factors
that include, but are not limited to, the risks discussed herein under "Risk
Factors That May Affect Future Results" as well as those discussed in the "Risk
Factors That May Affect Future Results" section of the Company's Annual Report
on Form 10-K/A filed on August 9, 2001 for the year ended December 31, 2000.

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OVERVIEW

The Company develops and markets proprietary robotic and computerized
surgical systems that are intended to enhance a surgeon's performance and
centralize and simplify a surgeon's control of the operating room ("OR"). The
Company believes that its products will provide surgeons with the precision and
dexterity necessary to perform complex, minimally invasive surgical procedures,
as well as enable surgeons to control critical devices in the OR through simple
verbal commands. The Company believes that its products 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 AESOP is Food and Drug Administration ("FDA") cleared.
AESOP allows direct surgeon control of the endoscope through simple verbal
commands, eliminating the need for a member of a surgical staff to manually
control the camera and providing a more stable and sustainable endoscopic image.
The Company believes that AESOP is the world's first FDA-cleared robot and first
voice control interface for a surgical device. Six hundred (600) AESOP units
have been sold worldwide, which the Company believes have been used to perform
over 150,000 procedures.

The Company's 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 also provides 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. Ten (10) 510(k) submissions relating
to HERMES have been cleared by the FDA and Stryker Corporation's Endoscopy
Division is currently marketing HERMES under an Original Equipment Manufacturing
("OEM") agreement with the Company. The HERMES technology has been integrated
into the AESOP(R) HERMES-Ready(TM) and is being added to the ZEUS.

The Company's ZEUS is designed to fundamentally improve a surgeon's
ability to perform complex surgical procedures and enable new, minimally
invasive surgical procedures, including fully endoscopic coronary artery bypass
grafts ("E-CABG(TM)") on a beating heart, which are currently very difficult or
impossible to perform endoscopically. ZEUS is comprised of three (3)
surgeon-controlled robotic arms, one (1) of which positions the endoscope and
two (2) of which manipulate 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 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 procedures will ultimately result in
lower overall healthcare costs to providers, payors and patients. The Company
has completed feasibility clinical trials for both ZEUS-based tubal
reanastomosis procedures and ZEUS-based cardiac procedures under Investigational
Device Exemptions ("IDE") and is currently enrolling patients. The Company has
commenced multi-center randomized control trials for coronary artery bypass
("CABG"), thorascopic surgery, and general laparoscopic surgery. The Company is
conducting a feasibility clinical trial in which ZEUS is being used in mitral
valve repair and replacement surgery. In addition, the Company is pursuing
approval for ZEUS in limited atraumatic surgical tasks such as blunt dissection,
retraction, and atraumatic grasping. This approval should come soon, as no
clinical studies are required to get FDA-clearance for these uses in
laparoscopic and thorascopic procedures.

The Company's SOCRATES(TM) ("SOCRATES") Telementoring System enables
remote access to HERMES networked devices via proprietary software and
teleconferencing components. SOCRATES allows an operative surgeon to virtually,
cost effectively, and on an as-needed basis, communicate with a remote surgeon.
SOCRATES also enables the remote surgeon to help direct a surgical procedure
thereby augmenting the operative surgeon's prior training experience.

SOCRATES enhances the utility of the HERMES with the AESOP(R)
HERMES-Ready(TM) system by providing shared-remote control capability of the
endoscope. In addition, SOCRATES provides the remote

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surgeon with an interface to the HERMES-Ready AESOP(R) system, enabling the
remote surgeon to share control of the endoscope with the operative surgeon.
AESOP's precision and stability ensure the remote surgeon's views are
tremor-free and accurately positioned. It is common for surgeons to remotely
collaborate, however, without SOCRATES a remote surgeon is typically only able
to view video of a procedure and provide feedback through video overlay and
verbal commands. SOCRATES enhances this collaboration by making it more
interactive and is currently pending 510(k) clearance.

The Company has sustained significant losses since inception and for the
three years ended December 31, 2000 and the six (6) months ended June 30, 2001,
the Company has incurred net losses of $16,349,000, $13,375,000 $11,545,000 and
$9,500,000, respectively. In addition, the Company has incurred net losses from
operations since inception and has an accumulated deficit of $76,479,000 as of
June 30, 2001. We expect to incur additional losses as we continue spending for
research and development efforts, clinical trials, manufacturing capacity and
sales force improvement. As a result, we will need to generate significant
revenues to achieve and maintain profitability. We cannot assure you that we
will ever achieve significant commercial revenues, particularly from sales of
our ZEUS product line, which is still under development and awaiting
FDA-clearance, or that we will become profitable. In the first quarter of 2001,
we initiated a number of cost reductions including layoffs, changes in our
salary structure, and reductions in travel, which we believe will eliminate
approximately $4,000,000 in expenses in 2001, thus lowering our breakeven point.
If we are able to increase our revenues in the fourth quarter of 2001 over the
same quarter in 2000 at a similar or lower rate than in the previous years, the
Company should be able to be profitable in that quarter. It is possible that we
may encounter substantial delays or incur unexpected expenses related to the
market introduction and acceptance of the ZEUS platform, or any future products.
If the time required to generate significant revenues and achieve profitability
is longer than anticipated, we may not be able to continue our operations.

RESULTS OF OPERATIONS

Three months ended June 30, 2001 compared to the three months ended June 30,
2000.

Revenue. Revenue decreased $1,959,000 (33%) to $4,003,000 for the three
(3) months ended June 30, 2001 from $5,962,000 for the same period in 2000.
Except for recurring revenue and the SOCRATES product line, revenue decreased on
all of the other Company's product lines over the prior year. ZEUS revenue of
$1,359,000 for the quarter decreased $1,420,000 over last year's second quarter
of $2,779,000 due to fewer systems shipped. AESOP revenue of $1,359,000 for the
quarter decreased $439,000 over last year's second quarter of $1,798,000 due to
fewer systems shipped. HERMES revenue of $352,000 for the quarter decreased
$236,000 over last year's second quarter of $588,000 as our OEM partner, Stryker
Corporation, ordered fewer units than the previous year. SOCRATES revenue of
$88,000 for the three (3) months ended June 30, 2001 compares to no revenue for
this product line for last year's first quarter. Development revenues of $69,000
declined $304,000 over last year's second quarter of $373,000. These revenues
will decrease over time, as the agreements begin to expire through 2001.
Recurring revenues of $776,000 for the quarter increased $352,000 over last
year's second quarter, as the installed base of robotic systems increased
leading to more demand for parts, accessories, supplies and service.

Gross Profit. Gross profit decreased $1,459,000 (41%) to $2,121,000 for
the three (3) months ended June 30, 2001 from $3,580,000 for the same period in
2000. Gross profit percentage decreased to 53% in the second quarter 2001 from
60% in the second quarter 2000. Gross profit was unfavorably impacted by lower
sales volume, fixed costs charged to operations and shipments of third-party
components at lower margins.

Research and Development. Research and development expense decreased
$847,000 (25%) to $2,506,000 for the three (3) months ended June 30, 2001 from
$3,353,000 for the same period in 2000, primarily as a result of the transfer of
the clinical development specialists from research and development to selling
expense. This transfer was made in the second quarter of 2001 due to the fact
that the duties of the clinical development specialist had changed from a
product development role to a clinical support role. This transfer accounted for
approximately $600,000 of the reduced expenses in the second quarter. Decreased
spending over prior years for initial patent filings and professional fees
account for the remaining decreased expenditures. The Company expects research
and development expenditures to increase over the remaining

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year as the increased cost for accelerated clinical trials are only partially
offset by the Company's plan to reduce the other research and development
expenses.

Selling, General and Administrative. Selling general and administrative
expense increased $1,277,000 (34%) to $4,993,000 for the three (3) months ended
June 30, 2001 from $3,716,000 for the same period 2000. The increase was due
mainly to the addition of sales personnel and commissions as the Company
expanded its worldwide sales, service and training capability, and, includes the
transfer of the clinical development specialists explained above. Professional
fees increased substantially related to the patent infringement lawsuit the
Company has filed against a competitor and certain claims filed against the
Company that are also related to patent infringement. The Company expects
selling, general and administrative expense to decrease as a result of the
Company's plan to reduce the cost of operating and decrease expanding the
business.

Other Expense (Income). Other income increased $197,000 to $84,000 for
the three (3) months ended June 30, 2001, compared to other expense of $113,000
for the three (3) months ended June 30, 2000. Decreases in interest expense,
foreign currency transaction loss and other expense account for change over the
prior year.

Income Taxes. Minimal provisions for state franchise taxes have been
recorded on the Company's pre-tax losses to date. As of December 31, 2000, the
Company had federal and state net operating loss ("NOL") carryforwards of
approximately of $52,747,000 and $9,085,000, respectively which are available to
offset future carryforwards expire seven (7) years after the year of loss. The
Company has provided a full valuation allowance on the deferred tax asset
because of the uncertainty regarding its realization.

Net Loss. The net loss for the second quarter 2001 was $5,300,000 ($.53
per share) compared to $3,609,000 ($.41 per share) for the first quarter 2000 as
decreased gross profit derived from decreased revenue combined with increased
operating expenses partially offset by other income. Weighted average shares
increased from 8,831,000 to 10,179,000 mainly as a result of the exercise of
stock options, issuance of shares of under the Company's employee stock purchase
plan and Company's private placement and warrant exercise.

Six months ended June 30, 2001 compared to the six months ended June 30, 2000.

Revenue. Revenue increased $2,389,000 (33%) to $9,719,000 for the six
(6) months ended June 30, 2001 from $7,330,000 for the same period in 2000.
Except for the decrease in development revenue all of the other company's
product lines had increased revenues over the prior year. HERMES revenue
increased $970,000 (204%), AESOP revenue increased $827,000 (33%), recurring
revenue increased $692,000 (78%) and ZEUS increased $123,000 over the same
period in 2000. SOCRATES revenue of $143,000 for the six (6) months compares to
no revenue for this product line for the same period in 2000.

Gross Profit. Gross profit increased $1,138,000 (27%) to $5,397,000 for
the six (6) months ended June 30, 2001 from $4,259,000 for the same period in
2000. Gross profit as a percentage of sales decreased slightly to 56% from 58%
between the two periods.

Research and Development. Research and development expense increased
$71,000 (1%) to $5,640,000 for the six months ended June 30, 2001 from
$5,569,000 for the same period in 2000, primarily as a result of increased
development efforts for pre-clinical and clinical trials related to ZEUS during
the first quarter and the transfer of the clinical development specialists from
research and development to selling expense in the second quarter.

Selling, General and Administrative. Selling general and administrative
expense increased $2,069,000 (28%) to $9,338,000 for the six (6) months ended
June 30, 2001 from $7,269,000 for the same period in 2000. The increase was due
mainly to the addition of sales personnel and commissions as the Company
expanded its worldwide sales, service and training capability, and, includes the
transfer of the clinical development specialists. Professional fees increased
substantially related to the patent infringement lawsuit the Company has filed
against a competitor and certain claims filed against the Company that are also
related to patent infringement.

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Other Expense (Income). Other income increased $130,000 to $93,000 for
the six (6) months ended June 30, 2001, compared to other expense of $37,000 for
the same period in 2000. The increase is due mainly to foreign currency
transaction income in 2001 verses foreign currency transaction loss in the prior
year.

Net Loss. The net loss for the first six (6) months of 2001 was
$9,500,000 ($1.20 per share) compared to $8,628,000 ($.98 per share) for the
first quarter 2000 as increased gross profit derived from increased revenue was
more than offset by the sum of increased operating expenses. Weighted average
shares increased from 8,806,000 to 10,177,000 mainly as a result of the exercise
of stock options, issuance of shares of under the Company's employee stock
purchase plan and Company's private placement and warrant exercise.

Revenue for the three months ended March 31, 2001 compared to the three months
ended December 31, 2000.

Revenue decreased $2,475,000 (30%) to $5,716,000 for the three (3)
months ended March 31, 2001 from $8,191,000 for the forth quarter 2000. The
Company's ZEUS product line was responsible for the revenue decrease. ZEUS
revenue of $1,495,000 for the quarter decreased $3,920,000 over the previous
quarter due to reduced demand resulting in two (2) systems shipped in the
quarter. AESOP revenue of $1,962,000 for the quarter increased $656,000 over the
prior quarter mainly as a result of an increase in the systems average sales
price. HERMES revenue of $1,093,000 for the quarter increased $558,000 from
prior quarter due to increased demand from our HERMES alliance partner, Stryker
Corporation. During the first quarter of 2000 the Company received approximately
$200,000 development revenue associated with a procedure development project.

Revenue for the three months ended June 30, 2001 compared to the three months
ended March 31, 2001.

Revenue decreased $1,713,000 (30%) to $4,003,000 for the three months
ended June 30, 2001 from the prior quarter. Except for SOCRATES product line all
of the Company's other product lines revenues were lower than the previous
quarter. ZEUS revenue of $1,359,000 for the quarter decreased $136,000 from
prior quarter as a result of a lower average selling price based on the same
number of systems shipped. AESOP revenue of $1,359,000 for the quarter decreased
$603,000 over the previous quarter mainly as a result of a lower average selling
price on three less systems shipped. HERMES revenue of $352,000 for the quarter
decreased $741,000 from prior quarter due to decreased demand from our HERMES
alliance partner, Stryker Corporation. Development revenues of $ 69,000 declined
$234,000 from the prior quarter, and these revenues will decrease over time, as
the agreements begin to expire through 2001 and there are no added development
revenue projects as in the prior quarter. SOCRATES revenue of $88,000 and
recurring revenues of $776,000 remained relatively constant quarter to quarter.

FINANCIAL CONDITION

Since its inception, the Company's expenses have exceeded its revenues,
resulting in an accumulated deficit of $76,479,000 as of June 30, 2001. Other
than its initial public offering, the Company had primarily relied on proceeds
from issuance of Preferred and Common Stock and bridge debt financing to fund
its operations.

At June 30, 2001, the Company's current ratio (current assets divided by
current liabilities) was 1.7 to 1 versus 1.4 to 1 at December 31, 2000,
reflecting the increase in cash and cash equivalents from the Series B
Convertible Preferred Stock private placement offset by the repayment of a
promissory note payable to Robert W. Duggan, the Company's Chairman and Chief
Executive Officer, and cash used in operating activities.

For the six (6) months ended June 30, 2001, the Company's use of cash in
operating activities of $4,855,000 was primarily attributable to the net loss,
increase in inventories of $2,541,000 offset by the decreases in accounts
receivable of $6,353,000.

Cash outflow from purchases of plant and equipment was $674,000 for the
six (6) months ended June 30, 2001. The Company currently has no material
commitments for capital expenditures. For the six (6) months ended June 30,
2001, net cash provided by financing activities of $6,597,000 was primarily the
result of the Series B Convertible Preferred Stock issuance offset by the
repayment of the promissory note payable to Mr. Duggan.

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The Company's operations to date have consumed substantial amounts of
cash, and the Company expects its capital and operating expenditures to continue
to exceed proceeds from ongoing sales at least through 2001. 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,
the costs of training physicians to become proficient in the use of the
Company's products and procedures, the cost of developing appropriate sales and
marketing capabilities, and the cost and outcome of current litigation brought
by and brought against the Company. To the extent that existing resources are
insufficient to fund the Company's activities, the Company will seek to raise
additional funds through public or private financing. As part of this plan in
February 2001, the Company raised $10,024,000, ($3 million of which was used to
repay the promissory note payable to Mr. Duggan) in a private placement
transaction (see Note 4). On March 30, 2001, the Company secured an equity-based
line of credit from Societe Generale. Under the terms of this line of credit the
Company may draw down as much as $12,000,000 in exchange for registered shares
of the Company's Common Stock (see Note 5). The Company believes that its
current cash and cash equivalents, together with available borrowings under its
equity line of credit, will be sufficient to meet its anticipated cash
requirements for working capital and capital expenditures for at least twelve
(12) months. If the Company requires further capital to grow its business,
execute its operating plan or obtain FDA approvals at any time in the future or
any other reasons the Company may seek to sell additional equity or debt
securities, which may result in additional dilution to the shareholders. There
is no assurance that adequate funds would be available on acceptable terms, if
at all. On July 24, 2001, the Company raised through a private placement
$2,000.000 from the sale of 580,384 shares of Common Stock to its officers to
help fund clinical trials toward FDA approval of the Company's ZEUS product.

The Company's financial instruments include cash and short-term
investment grade debt securities. At June 30, 2001, the carrying values of the
Company's financial instruments approximated their fair values based on current
market prices and rates. It is the Company's policy not to enter into derivative
financial instruments. The Company does not currently have material foreign
currency exposure as the majority of its international transactions are
denominated in U.S. currency. Accordingly, the Company does not have significant
overall currency exposure at June 30, 2001.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond its control. A number of these risks
are listed below. These risks could affect actual future results and could cause
them to differ materially from any forward-looking statements the Company has
made.

1. The Company has had a history of losses and expects to incur losses in
the future, so the Company may never achieve profitability.

2. The Company's operating expenditures currently exceed its revenues,
failure to raise additional capital or generate required working capital
could reduce the Company's ability to compete and prevent the Company
from taking advantage of market opportunities.

3. If the Company's products do not achieve market acceptance, the Company
will not be able to generate the revenue necessary to support its
business.

4. If the Company does not obtain and maintain necessary domestic regulatory
approvals, the Company will not be able to market and sell its products
in the United States.

5. International sales of the Company's products account for a significant
portion of its revenues and the Company's growth may be limited if it is
unable to successfully manage these international activities.

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6. The Company may never sell enough of its products to be profitable
because its markets are highly competitive, and customers may choose to
purchase competitors' products or they may not accept the Company's
products.

7. If surgeons or institutions are unable to obtain reimbursement from
third-party payors for procedures using the Company's products, or if
reimbursement is insufficient to cover the costs of purchasing the
Company's products, the Company may be unable to generate sufficient
sales to support its business.

8. If the Company is unable to protect the intellectual property contained
in its products from use by third parties, the Company's ability to
compete in the market will be harmed.

9. The Company is involved in intellectual property litigation with
Intuitive Surgical, Inc. and Brookhill-Wilk which may hurt the Company's
competitive position, may be costly to the Company and may prevent the
Company from selling its products.

10. Because the Company's industry is subject to rapid technological change
and new product development, the Company's future success will depend
upon its ability to expand the applications of its products.

11. The Company may not be able to expand its marketing distribution
activities in order to market its products competitively.

12. Concentration of ownership among the Company's existing executive
officers, directors and principal stockholders may prevent new investors
from influencing significant corporate decisions.

13. If the Company loses key personnel or is unable to attract and retain
additional personnel, its ability to compete will be harmed.

14. The Company's future operating results may be below securities analysts'
or investors' expectations, which could cause its stock price to decline
and diminish the value of your investment.

15. The Company may incur substantial costs defending securities class action
litigation due to its stock price volatility.

16. The Company's reliance on sole or single source suppliers could harm its
ability to meet demand for its products in a timely manner or within its
projected budget.

17. The Company relies on a continuous power supply to conduct its business,
and California's current energy crisis could disrupt its operations and
increase its expenses.

18. The use of the Company's products could result in product liability
claims that could be expensive and harm its business.

19. The Company's continued growth will significantly strain its resources
and, if it fails to manage this growth, its ability to market, sell and
develop its products may be harmed.

20. Future sales of the Company's Common Stock could depress the market price
of its Common Stock.

21. Holders of the Company's Mandatory Redeemable Series B Convertible
Preferred Stock and the Party to its Equity Line Financing Agreement
could engage in short selling to increase the number of shares of its
securities issuable upon conversion of their shares of Series B
Convertible Preferred Stock or issuable pursuant to the terms of the
Equity Line Financing Agreement.

22. Conversion of the Company's Mandatory Redeemable Series B Convertible
Preferred Stock and exercise of certain warrants could adversely affect
the market price of its Common Stock and dilute existing stockholders.

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23. The Company's ability to successfully conduct business operations and
operate profitably could be limited if it is obligated to redeem a
substantial portion of its Mandatory Redeemable Series B Convertible
Preferred Stock.

A more detailed discussion of factors that could affect the Company's
future results can be found in the "Risk Factors" section of the Company's
Annual Report on Form 10-K/A filed August 9, 2001 for the year ended December
31, 2000. The Company strongly encourages you to review these risk factor
disclosures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's financial instruments include cash and short-term
investment grade debt securities. At June 30, 2001 the carrying values of the
Company's financial instruments approximated their fair values based on current
market prices and rates.

It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have material foreign currency
exposure as the majority of its international transactions are denominated in
U.S. currency. Accordingly, the Company does not have a significant currency
exposure at June 30, 2001.

PART II. OTHER INFORMATION

ITEM 1. LITIGATION

On or about December 7 and 8, 2000, the United States Patent Office
granted three (3) of Intuitive Surgical, Inc.'s petitions for a declaration of
an interference relating to the Company's 5,878,193, 5,907,664 and 5,855,583
patents.

On February 21, 2001, Brookhill-Wilk filed suit against the Company
alleging that the Company's ZEUS platform infringes upon Brookhill-Wilk United
States Patent Nos. 5,217,005 and 5,368,015. Brookhill-Wilk's complaint seeks
damages, attorney's fees and increased damages alleging willful patent
infringement. The Company does not believe that its ZEUS platform currently
infringes either patent and that both patents are invalid. On March 21, 2001,
the Company served its Answer and Counterclaim alleging non-infringement of each
patent-in-suit, patent invalidity and unenforceability.

On March 30, 2001, Intuitive Surgical, Inc. and IBM Corporation filed
suit alleging that the Company's AESOP, ZEUS and HERMES products infringe United
States Patent No. 6,201,984 which was recently issued on March 13, 2001. The
complaint seeks damages, a preliminary injunction, a permanent injunction, costs
and attorneys fees. A preliminary review of the claims of this patent reveals
that each claim

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is limited to a surgical system employing voice recognition for control of a
surgical instrument. As this patent was only recently issued and as the Company
has not had prior notice of this patent or the claims of this patent, the
Company is currently evaluating the allegations of patent infringement and the
validity of the patent. The parties have currently served discovery requests of
each other and the Company expects to receive responses to its discovery
sometime at the end of August or early September 2001.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Mandatory Redeemable Series B Convertible Preferred Stock Offering

On February 16, 2001, the Company, entered into a Securities Purchase
Agreement with Societe Generale, Catalpa Enterprises, Ltd., Baystar Capital,
L.P., Baystar International, Ltd., Robert W. Duggan, the Company's Chairman of
the Board of Directors and Chief Executive Officer, Mahkam Zanganeh, the
Company's Vice President European, Middle East and African Operations, and
Jeffrey O. Henley, a member of the Company's Board of Directors. Under the
Purchase Agreement, the Company sold a total of 1,024 shares of its Preferred
Stock with certain conversion features discussed below and warrants to purchase
557,931 shares of the Company's Common Stock, for total consideration of
$10,024,000. The Mandatory Redeemable Series B Convertible Preferred Stock has a
three (3) year maturity and is initially convertible into shares of the
Company's Common Stock at $5.77 per share. The initial conversion price is
subject to adjustment on the six (6) month and nine (9) month anniversaries of
the closing date of the private placement, whereupon the conversion price shall
be subject to reset to the average of the ten (10) lowest closing prices for the
Company's Common Stock as quoted on the NASDAQ National Market during the twenty
(20) consecutive dates immediately prior to each adjustment date if such average
is lower than the initial conversion price; provided, however, that the
conversion price shall not be reset below $2.72 per share. The investors shall
receive a preferred annual dividend payable in stock or cash, at the Company's
option, at a rate of 4.90%. In addition, the investors were granted five (5)
year warrants to purchase an aggregate of approximately 554,831 shares of the
Company's Common Stock at an exercise price of $8.12 per share.

Under the rules of the NASDAQ National Market, the Company is required
to obtain shareholder approval for the sale, issuance or potential issuance of
the Company's Common Stock, or securities convertible into its Common Stock, if
the number of shares to be issued equals or exceeds 20% of its presently
outstanding stock and the purchase price is less than the greater of the book
value or market value of the stock. The Company anticipates the amount of Common
Stock issued upon the conversion of the Mandatory Redeemable Series B
Convertible Preferred Stock and the exercise of the warrants issued in
connection with the sale and issuance of the Mandatory Redeemable Series B
Convertible Preferred Stock may exceed 20% of the number of shares of the
Company's Common Stock outstanding on the closing date of the Mandatory
Redeemable Series B Convertible Preferred Stock private placement. In addition,
due to the reset provisions contained in the Mandatory Redeemable Series B
Convertible Preferred Stock, the final conversion price of the Mandatory
Redeemable Series B Convertible Preferred Stock may be reset to a price below
the market price on the closing date of the Mandatory Redeemable Series B
Convertible Preferred Stock private placement. Accordingly, the Company has
asked its shareholders to authorize the private placement at the regular
shareholders meeting to be held on May 31, 2001.

Equity Line of Credit

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Line Agreement, sell, or draw down, shares of its Common Stock Societe Generale
at an initial purchase price equal to 91% of the daily volume weighted average
of the price of the Company's Common Stock for each day during the specified
purchase period. A draw down can be made after five (5) trading days have
elapsed from the date of the delivery of the last draw down notice in amounts
ranging from a minimum of $75,000 to a maximum of $250,000, depending on the
trading volume and the market price of the Common Stock at the time of each draw
down. The maximum draw down amount may be increased, and the discount to the
daily volume weighted average price of the Company's Common Stock may be
decreased, if the trading volume of the Common Stock exceeds certain minimum
thresholds prior to the delivery of the draw down notice.

ITEM 4. SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS.

On May 31, 2001, the Company held its annual meeting of the shareholders
with shareholders holding 7,978,753 shares of Common Stock (representing (78.4%)
of the total number of shares outstanding and entitled to vote) present in
person or by proxy at the meeting. Proxies for the meeting were solicited
pursuant to Regulation 14A of the Securities Exchange Act of 1934. Daniel R.
Doiron, Robert W. Duggan, M. Jacqueline Eastwood, Jeffrey O. Henley, and Yulun
Wang were listed as management's nominees in the proxy statement and were
elected as directors at the meeting. The votes for each nominee were as follows:

Number of Number of
Name Affirmative Votes Negative Votes

Daniel R. Doiron 7,945,790 32,963
Robert W. Duggan 7,945,790 32,963
M. Jacqueline Eastwood 7,945,790 32,963
W Jeffrey O. Henley 7,945,790 32,963
Yulun Wang 7,945,790 32,963

Also at the meeting, the Company sought approval of the issuance of
shares of the Company's Common Stock upon conversion of Series B Convertible
Preferred Stock into shares of Common Stock and the exercise of Warrants for
Common Stock. The proposal was approved with 4,566,889 affirmative votes, 56,208
negative votes and 40,484 abstentions.

In addition, at the meeting, the Company sought approval of the issuance
of shares of the Company's Common Stock to Societe Generale. pursuant to the
terms of the Company's Equity Line of Credit. The proposal was approved with
4,304,103 affirmative votes, 347,033 negative votes and 12,445 abstentions.

In addition, at the meeting, the Company sought approval for the
ratification of the re-appointment of Arthur Andersen LLP as its independent
public accountants for the fiscal year ending December 31, 2001. This proposal
was approved with 7,960,008 affirmative votes, 11,600 negative votes and 6,845
abstentions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits:
None

b) No Reports on Form 8-K were filed during the quarter ended June 30,
2001.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DATE: August 14, 2001 COMPUTER MOTION, INC.

By: /s/ GORDON L. ROGERS
---------------------------------------------
GORDON L. ROGERS
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)