Integrated Surgical Systems Inc – ‘DEFS14A’ for 11/9/99

On:  Wednesday, 10/6/99   ·   For:  11/9/99   ·   Accession #:  950123-99-9141   ·   File #:  1-12471

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Definitive Proxy Solicitation Material — Special Meeting   —   Schedule 14A
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Document/Exhibit                   Description                      Pages   Size 

 1: DEFS14A     Definitive Proxy Materials - Special Meeting          99    552K 

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SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT 
SCHEDULE 14A INFORMATION

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

Filed by the Registrant [X]                                                     

Filed by a Party other than the Registrant [ ]                                  

Check the appropriate box:                                                      

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

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

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

Payment of Filing Fee (Check the appropriate box):                              

[X]  No fee required.                                                           

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

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

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

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

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

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

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

(4)  Proposed maximum aggregate value of transaction:                 

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

(5)  Total fee paid:                                                  

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

[ ]  Fee paid previously with preliminary materials.                            

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

(1)  Amount Previously Paid:                                          

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

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

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

(3)  Filing Party:                                                    

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

(4)  Date Filed:                                                      

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

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

To the Stockholders of Integrated Surgical Systems, Inc.:                       

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

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

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

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

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

                                      By Order of the Board of Directors

                MARK W. WINN
             Secretary

Davis, California                                                               

October 5, 1999                                                                 

IMPORTANT:

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE PROMPTLY
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF  
DIRECTORS OF THE COMPANY, AND RETURN IT TO THE COMPANY. THE PROXY MAY BE REVOKED
AT ANY TIME BEFORE IT IS VOTED, AND STOCKHOLDERS EXECUTING PROXIES MAY ATTEND   
THE MEETING AND VOTE IN PERSON SHOULD THEY SO DESIRE.                           

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INTEGRATED SURGICAL SYSTEMS, INC. 
1850 RESEARCH PARK DRIVE
DAVIS, CALIFORNIA 95616-4884
(530) 792-2600
------------------------

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

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

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

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

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

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

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

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TABLE OF CONTENTS 

                                                                [Download Table]

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

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

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

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

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

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

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PROPOSAL TO APPROVE SALE OF SHARES AND WARRANTS 

GENERAL                                                                         

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

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

                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

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

CHANGE IN CONTROL                                                               

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

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

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

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

                                                        [Enlarge/Download Table]

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

INTEREST OF CERTAIN PERSONS IN THE SALE                                         

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

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

REASONS FOR THE SALE                                                            

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

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

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

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

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

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

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DISCUSSIONS LEADING TO THE SALE                                                 

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

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

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

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

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

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

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

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

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

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

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

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

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

RECOMMENDATION OF THE BOARD OF DIRECTORS                                        

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

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

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

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

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

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

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

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

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

The negative factors considered by the Board were as follows:                   

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

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

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

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

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

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

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

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

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

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

CONSEQUENCES OF FAILURE TO APPROVE THE SALE                                     

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

NO DISSENTER'S APPRAISAL RIGHTS                                                 

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

PURCHASE AGREEMENT                                                              

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

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

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

WARRANTS                                                                        

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

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

REGISTRATION RIGHTS                                                             

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

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

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

DISTRIBUTION AGREEMENT                                                          

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

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

PREFERRED STOCK FINANCINGS                                                      

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

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AMOUNT OF INVESTMENT IN PREFERRED STOCK 

                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

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

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

CAPITALIZATION                                                                  

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

                                                        [Enlarge/Download Table]

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

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                                                        [Enlarge/Download Table]

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

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

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

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

EFFECT ON BOOK VALUE PER SHARE                                                  

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

                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

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

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

DILUTION                                                                        

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

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The table below indicates certain dilutive effects of the Sale.       

                                                                [Download Table]

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

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

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

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

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

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

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

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

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

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

TAX CONSEQUENCES TO THE COMPANY                                                 

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

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

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

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

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

RESULTS OF OPERATIONS                                                           

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES                                             

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

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

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

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

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

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

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

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

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

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

   The net proceeds from the Series A Preferred Stock financing were used to
fund the operations of the Company during the fourth quarter of 1998 and first  
quarter of 1999. In the first half of 1999, the Company received net proceeds   
from the Series B, C, and D Preferred Stock financings of approximately         
$3,400,000. Of this amount, approximately $700,000 was used to pay bank loans,  
approximately $600,000, together with approximately $1,000,000 of the remaining 
net proceeds from the Series A Preferred Stock financing carried over into 1999,
and was the Net Cash Used in Operating Activities in the first half of 1999. The
$1,500,000 Net Cash Used in Operating Activities in the first half of 1999      
represents approximately $4,000,000 in cash operating losses, offset by         
$2,500,000 positive cash change in operating assets and liabilities.            

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

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

YEAR 2000 COMPLIANCE                                                            

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

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

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

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

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

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

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EMPLOYEES                                                                       

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

                                                                [Download Table]

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

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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GENERAL INFORMATION 

INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES                     

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

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

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

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

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

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EXECUTIVE COMPENSATION                                                          

SUMMARY COMPENSATION TABLE

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

                                                        [Enlarge/Download Table]

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

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

STOCK OPTIONS                                                                   

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

OPTION GRANTS IN LAST FISCAL YEAR 
(INDIVIDUAL GRANTS) 

                                                        [Enlarge/Download Table]

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

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

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

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

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

                                                        [Enlarge/Download Table]

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

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

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

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

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

REPRICING OF OPTIONS

                                                        [Enlarge/Download Table]

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

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

CERTAIN TRANSACTIONS                                                            

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

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

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

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

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

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

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

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

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

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

INDEPENDENT AUDITORS                                                            

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

OTHER MATTERS 

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

                                      By Order of the Board of Directors

                           Mark W. Winn, Secretary

Davis, California                                                               

October 5, 1999                                                                 

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INTEGRATED SURGICAL SYSTEMS, INC. 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 

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

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

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

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

                                                               ERNST & YOUNG LLP

Sacramento, California                                                          
February 12, 1999                                                               

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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1998 

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

See accompanying notes. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS 

                                                        [Enlarge/Download Table]

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

See accompanying notes. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 

                                                        [Enlarge/Download Table]

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



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

See accompanying notes. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

                                                        [Enlarge/Download Table]

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

See accompanying notes. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998 

1.  DESCRIPTION OF BUSINESS                                                     

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

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

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

2.  SIGNIFICANT ACCOUNTING POLICIES                                             

CONSOLIDATION                                                                   

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

FOREIGN CURRENCY TRANSLATION                                                    

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

REVENUE RECOGNITION                                                             

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

RESEARCH AND DEVELOPMENT                                                        

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

CONCENTRATION OF CREDIT RISK                                                    

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

FINANCIAL STATEMENT ESTIMATES                                                   

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

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS                                     

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

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

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

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

FAIR VALUES OF FINANCIAL INSTRUMENTS                                            

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

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

INTANGIBLE ASSETS                                                               

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

PROPERTY AND EQUIPMENT                                                          

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

NET INVESTMENT IN SALES-TYPE LEASES                                             

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

                                                                [Download Table]
                                                                       
Total minimum lease payments receivable.....................  $388,904 
Less unearned interest......................................   (38,828)
                                                              -------- 
Net investment in sales type leases.........................   350,076 
Less current portion........................................   (87,742)
                                                              -------- 
Long-term net investment in sales-type leases...............  $262,334 
                                                              ======== 

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

                                                                [Download Table]
                                                                    
1999......................................................  $106,667
2000......................................................   106,667
2001......................................................   106,667
2002......................................................    68,903
                                                            --------
                                                            $388,904
                                                            ========

OPERATING LEASES                                                                

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

INVENTORY                                                                       

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

                                                                [Download Table]
                                                                          
Raw materials...............................................    $1,057,141
Work-in process.............................................       763,624
Finished goods..............................................     1,184,893
                                                                ----------
                                                                $3,005,658
                                                                ==========

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

OTHER CURRENT LIABILITIES                                                       

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

                                                                [Download Table]
                                                                  
Accrued warranty expenses...............................  $209,247
Accrued liability for property and equipment............   173,136
Accrued taxes payable...................................    68,902
Other accrued U.S. expenses.............................   227,998
Other accrued European expenses.........................    53,311
                                                          --------
                                                          $732,594
                                                          ========

STOCK-BASED COMPENSATION                                                        

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

INCOME TAXES                                                                    

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

NET LOSS PER SHARE                                                              

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

SIGNIFICANT CUSTOMERS AND FOREIGN SALES                                         

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

NEW ACCOUNTING PRONOUNCEMENTS                                                   

As of January 1, 1998, the Company adopted Statement 130, Reporting   
Comprehensive Income. Statement 130 establishes new rules for the reporting and 
display of comprehensive income and its components. Statement 130 requires      
unrealized gains or losses on the Company's available-for-sale securities and   
the foreign currency translation adjustments, which prior to adoption were      
reported separately in                                                          

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

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

RECLASSIFICATIONS                                                               

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

3.  ACQUISITION OF IMMI                                                         

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

The purchase price consists of the following:                         

                                                                [Download Table]
                                                                          
619,355 shares of ISS common stock..........................    $3,889,549
Liabilities assumed.........................................       883,044
Acquisition costs...........................................       266,085
                                                                ----------
                                                                $5,038,678
                                                                ==========

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

                                                                [Download Table]
                                                                          
Tangible assets acquired....................................    $  573,302
Identified intangible assets................................     4,133,698
In-process research and development.........................       331,678
                                                                ----------
                                                                $5,038,678
                                                                ==========

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

                                                                [Download Table]

                                                           YEAR ENDED 
                                                          DECEMBER 31,
                                                              1997    
                                                          ------------
                                                          (UNAUDITED) 
                                                                      
Revenue...............................................    $ 5,554,000 
                                                          =========== 
Net loss..............................................    $(5,394,000)
                                                          =========== 
Basic net loss per share..............................    $     (1.24)
                                                          =========== 

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

4.  SHORT-TERM INVESTMENTS                                                      

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

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

5.  PROPERTY AND EQUIPMENT                                                      

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

                                                                [Download Table]
                                                                          
ROBODOC and NeuroMate System equipment......................  $ 1,039,261 
Other equipment.............................................    1,677,695 
Furniture and fixtures......................................      291,798 
Leasehold improvements......................................       49,448 
                                                              ----------- 
                                                                3,058,202 
Less accumulated depreciation...............................   (1,707,363)
                                                              ----------- 
                                                              $ 1,350,839 
                                                              =========== 

6.  INVESTMENT IN MARBELLA HIGH CARE B.V.                                       

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

7.  BANK LOANS AND NOTE PAYABLE                                                 

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

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

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

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

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

8.  STOCKHOLDERS' EQUITY                                                        

COMMON STOCK                                                                    

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

INITIAL PUBLIC OFFERING                                                         

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

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

EUROPEAN OFFERING                                                               

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

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

CONVERTIBLE PREFERRED STOCK                                                     

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

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

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

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

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

ISSUANCE OF STOCK AND STOCK WARRANTS                                            

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

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

STOCK OPTION PLANS                                                              

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

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

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

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

                                                                [Download Table]

                                                      1997            1998     
                                                   -----------    ------------ 
                                                                               
Pro forma net loss...............................  $(4,624,429)   $(10,997,076)
Pro forma basic net loss per share...............  $     (1.24)   $      (1.97)

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

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

                                                                [Download Table]

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

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

                                                        [Enlarge/Download Table]

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

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

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

9.  INCOME TAXES                                                                

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

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

                                                        [Enlarge/Download Table]

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

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

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

                                                        [Enlarge/Download Table]

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

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

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

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

10.  NET LOSS PER SHARE INFORMATION                                             

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

11.  COMMITMENTS                                                                

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

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

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

                                                                [Download Table]
                                                                     
1999...................................................    $  422,000
2000...................................................       440,000
2001...................................................       450,000
2002...................................................       457,000
2003...................................................       465,000
Thereafter.............................................       424,000
                                                           ----------
                                                           $2,658,000
                                                           ==========

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

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

                                                                [Download Table]
                                                                    
1999.....................................................    $48,000
2000.....................................................     33,000
2001.....................................................      4,000
2002.....................................................         --
                                                             -------
                                                             $85,000
                                                             =======

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

12.  CONTINGENCIES                                                              

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

13.  NIST GRANT                                                                 

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

14.  ANVAR GRANT                                                                

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

15.  EMPLOYEE STOCK PURCHASE PLAN                                               

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED BALANCE SHEET
(UNAUDITED) 

                                                                [Download Table]

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

See notes to consolidated financial statements. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED) 

                                                        [Enlarge/Download Table]

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

See notes to consolidated financial statements
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INTEGRATED SURGICAL SYSTEMS, INC. 

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

                                                        [Enlarge/Download Table]

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

See notes to consolidated financial statements. 
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INTEGRATED SURGICAL SYSTEMS, INC. 

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

NOTE A -- BASIS OF PRESENTATION                                                 

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

NOTE B -- INVENTORIES                                                           

The components of inventory consist of the following:                 

                                                                [Download Table]

                                                              JUNE 30, 1999
                                                              -------------
                                                                           
Raw Materials...............................................   $1,325,052  
Work in process.............................................      869,810  
Finished goods..............................................    1,695,339  
                                                               ----------  
                                                               $3,890,201  
                                                               ==========  

NOTE C -- CONVERTIBLE PREFERRED STOCK                                           

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

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

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

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

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE D -- NET LOSS PER SHARE                                                    

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

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

NOTE E -- ACCUMULATED OTHER COMPREHENSIVE LOSS                                  

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

The following table sets forth the computation of comprehensive loss: 

                                                        [Enlarge/Download Table]

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

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                                                                      APPENDIX I

INTEGRATED SURGICAL SYSTEMS, INC. 

STOCK AND WARRANT PURCHASE AGREEMENT

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

RECITALS

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

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

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

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

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

1.  Agreement to Sell and Purchase                                    

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

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

2.  Closing; Delivery and Payment                                     

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

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

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

3.  Representations, Warranties and Covenants of the Company          

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

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

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

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

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

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

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

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

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3.7  Agreements; Action.                                    

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(i) Any labor organization activity;                  

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

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

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

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

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

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

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

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

3.12  Compliance with Other Instruments.                    

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

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

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

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

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

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

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

3.18  Registration Rights and Voting Rights.                

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

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

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

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

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

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

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

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

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

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

4.  Representations and Warranties of the Purchasers.                 

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

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

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

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

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

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

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

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

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

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

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

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

5.  Conditions to Closing.                                            

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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6.  Termination.                                                      

6.1  This Agreement may be terminated prior to the Closing:           

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

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

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

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

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

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

7.  Miscellaneous.                                                    

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

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

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

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

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

7.6  Amendment and Waiver.                                            

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                                        [Enlarge/Download Table]

                      COMPANY:                                            PURCHASERS:                     
                                                                                                          
INTEGRATED SURGICAL SYSTEMS, INC.                    ILTAG INTERNATIONAL LICENSING HOLDING S.A.L.         

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

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

                                                                       /s/ URS WETTSTEIN                  
                                                       -------------------------------------------------  
                                                                         URS WETTSTEIN                    

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                                                                [Download Table]
                                                            
LIST OF EXHIBITS                                            

SCHEDULE OF PURCHASERS                             Exhibit A
FORM OF WARRANT                                    Exhibit B
REGISTRATION AND STOCKHOLDER RIGHTS AGREEMENT      Exhibit C

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                                                                       EXHIBIT A

SCHEDULE OF PURCHASERS

                                                        [Enlarge/Download Table]

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

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                                                                       EXHIBIT B

                                                             NO. PW-

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

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

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

This Warrant is subject to the following terms and conditions:        

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ATTEST:                                                                         

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

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                                                                       EXHIBIT A

SUBSCRIPTION FORM 

                                                        Date: ____________, ____

Integrated Surgical Systems, Inc.                                               

1850 Research Park Drive                                                        

Davis, California 95616-4884                                                    

Attn: President                                                                 

Ladies and Gentlemen:                                                           

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

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

                     Very truly yours,

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

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

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

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                                                                       EXHIBIT C

INTEGRATED SURGICAL SYSTEMS, INC. 

REGISTRATION AND STOCKHOLDER RIGHTS AGREEMENT 

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

RECITALS

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

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

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

SECTION 1.  GENERAL                                                             

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 2.  REGISTRATION; RESTRICTIONS ON TRANSFER                              

2.1  Restrictions on Transfer.                                        

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

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

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

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

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

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE  
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR    
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS       
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  AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN
  OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.                                         

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

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

2.2  Demand Registration.                                             

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2.8  Delay of Registration; Furnishing Information.                   

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 3.  COVENANTS OF THE COMPANY                                            

3.1  Basic Financial Information and Reporting.                       

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

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

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

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

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

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

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

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

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

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

SECTION 4.  MISCELLANEOUS                                                       

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

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

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

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

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

4.6  Amendment and Waiver.                                            

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

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

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

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

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

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

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

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

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

                                                                [Download Table]
                                                                    
COMPANY:                                                 PURCHASERS:

                                                        [Enlarge/Download Table]
                                                                                                        
INTEGRATED SURGICAL SYSTEMS, INC.                  ILTAG INTERNATIONAL LICENSING HOLDINGS S.A.L.        

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

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

                                                   -----------------------------------------------------
                                                   URS WETTSTEIN                                        

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                                                                       EXHIBIT A

                                                                [Download Table]

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

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INTEGRATED SURGICAL SYSTEMS, INC. 

1550 RESEARCH PARK DRIVE
DAVIS, CALIFORNIA 95616-4884

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

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

                                                                [Download Table]
                                                              
[    ] FOR            [    ] AGAINST            [    ] ABSTAIN

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

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

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(continued from other side) 

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

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

                                                        [Enlarge/Download Table]
                                                                                                        
Date:                               , 1999                                                              

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

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

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

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

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘DEFS14A’ Filing		Date		First		Last			Other Filings
		12/31/05		30		50			10KSB
		6/2/05		55					8-K
		12/29/03		62
		12/9/03		61
		6/30/02		61					10QSB
		6/10/02		60
		3/31/02		15					10QSB
		3/5/02		51
		8/24/01		51
		3/31/01		7		15			10QSB,  NT 10-Q
		12/31/00		30					10KSB,  NT 10-K
		3/31/00		7		15			10QSB
		12/31/99		60					10KSB,  10KSB/A
		12/30/99		61		62
		12/28/99		61
		12/10/99		61
		12/8/99		60
		11/30/99		14		74
		11/28/99		61
For Period End:		11/9/99		2		98
		11/8/99		60
		10/29/99		61
		10/9/99		60
Filed on:		10/6/99							PRES14A,  S-3/A
		10/5/99		2		99
		10/1/99		2		85
		9/30/99		11					10QSB
		9/29/99		61
		9/28/99		8		35
		9/22/99		2		30			S-3/A
		9/9/99		60
		8/20/99		15		36
		7/30/99		19
		6/30/99		8		62			10QSB
		6/16/99		60		61
		6/15/99		47		49
		5/25/99		10
		5/24/99		10		11
		5/19/99		11
		5/15/99		48
		4/28/99		25
		4/27/99		7		17			DEF 14A,  PRE 14A
		4/26/99		3		8			8-K
		3/9/99		25		51
		3/5/99		51
		2/12/99		38
		2/7/99		50
		1/11/99		11
		1/10/99		51
		1/8/99		50
		1/1/99		65
		12/31/98		8		65			10KSB40
		12/9/98		50
		11/21/98		50
		8/11/98		48
		6/30/98		25		37			10QSB
		4/28/98		50		56			DEF 14A,  PRE 14A
		1/1/98		46		62
		12/31/97		23		56			10KSB
		11/20/97		49		50
		10/29/97		50
		9/5/97		23		47			8-K,  8-K/A
		9/2/97		33
		1/1/97		48
		12/31/96		41		53			10KSB40
		12/21/95		22		54
		12/13/95		51
		12/31/94		52
		6/1/94		43
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