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<SEC-DOCUMENT>0001050502-05-000237.txt : 20050415
<SEC-HEADER>0001050502-05-000237.hdr.sgml : 20050415
<ACCEPTANCE-DATETIME>20050415164126
ACCESSION NUMBER:		0001050502-05-000237
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20041231
FILED AS OF DATE:		20050415
DATE AS OF CHANGE:		20050415

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INTEGRATED SURGICAL SYSTEMS INC
		CENTRAL INDEX KEY:			0000894871
		STANDARD INDUSTRIAL CLASSIFICATION:	SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
		IRS NUMBER:				680232575
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-12471
		FILM NUMBER:		05754126

	BUSINESS ADDRESS:	
		STREET 1:		1850 RESEARCH PARK DR
		CITY:			DAVIS
		STATE:			CA
		ZIP:			95616-4884
		BUSINESS PHONE:		5307922600

	MAIL ADDRESS:	
		STREET 1:		1850 RESEARCH PARK
		CITY:			DAVIS
		STATE:			CA
		ZIP:			95616-4884
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>iss1204.txt
<DESCRIPTION>10KSB
<TEXT>

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

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


                                   FORM 10-KSB

     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 2004

   [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

             For the transition period from __________ to __________

                         Commission file number 1-12471

                        INTEGRATED SURGICAL SYSTEMS, INC.
                        ---------------------------------
                 (Name of small business issuer in its charter)

               Delaware                               68-0232575
               --------                               ----------
     (State or other jurisdiction        (I.R.S. Employer Identification No.)
   of incorporation or organization)

  1850 Research Park Drive, Davis, CA                 95616-4884
  -----------------------------------                 ----------
(Address of principal executive Offices)              (Zip Code)

                                 (530) 792-2600
                                 --------------
                           (Issuer's telephone number)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of each Class
                               -------------------
                          Common Stock, $0.01 Par Value
                         Common Stock Purchase Warrants

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $2,359,839

The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing price of the common stock on
April 11, 2005 was $871,948.

As of April 11, 2005, the issuer had 45,084,089 shares of common stock, $0.01
par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

================================================================================
<PAGE>
<TABLE>
<CAPTION>

                                        Integrated Surgical Systems, Inc.
                                                  Form 10-KSB
                                   For the fiscal year ended December 31, 2004
                                               Table of Contents
<S>      <C>                                                                                                      <C>
Part I.                                                                                                           Page
         Item 1.     Description of Business                                                                       2
         Item 2.     Description of Property                                                                       6
         Item 3.     Legal Proceedings                                                                             7
         Item 4.     Submission of Matters to a Vote of Security Holders                                           7
Part II.
         Item 5.     Market for Common Equity and Related Stockholder Matters and Small Business Issuer            8
                     Purchases of Equity Securities
         Item 6.     Management's Discussion and Analysis or Plan of Operation                                     9
         Item 7.     Financial Statements                                                                          20
         Item 8.     Changes In and Disagreements With Accountants on Accounting and Financial Disclosure          20
         Item 8 A.   Control and Procedures                                                                        20
         Item 8 B.   Other Information                                                                             20
Part III.
         Item 9.     Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
                     16(a) of the Exchange Act                                                                     20
         Item 10.    Executive Compensation                                                                        23
         Item 11.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder        26
                     Matters
         Item 12.    Certain Relationships and Related Transactions                                                27
         Item 13.    Exhibits                                                                                      28
         Item 14.    Principal Accountant Fees and Services                                                        31
         Signatures                                                                                                54




                                                      1
</TABLE>
<PAGE>

                                     Part I

Item 1. Description of Business

Integrated Surgical Systems, Inc. (the "Company") designs, manufactures, sells
and services image-directed, computer-controlled robotic software and hardware
products for use in orthopaedic and neurosurgical procedures. The Company was
incorporated in Delaware in 1990.

In 1997, the Company acquired 100% interest in a French company, Innovative
Machines International, S.A., involved in the manufacturing and servicing of
neurosurgical products and changed the name to Integrated Surgical Systems, S.A.
("ISS-SA"). Under French law, a company whose net assets are less than 50% of
its capital stock may come under the supervision and control of a regional
administrative tribunal. On September 30, 2003, the Tribunal de Commerce (the
"Tribunal") in Lyon, France appointed an administrator to manage the Company's
operations and the administrator exercised control over all aspects of ISS-SA's
operations including employee retention, purchasing, sales and inventory
management. Effective with the administrator's appointment, the Company no
longer had access to the assets, personnel or records of ISS-SA. As a result, in
the fourth quarter of 2003, the Company recorded a loss of $1,516,519 in
connection with the liquidation of its investment in ISS-SA and closure of the
Company's European operation.

Orthopaedic Applications

The Company's principal orthopaedic product, the ROBODOC(R) Surgical Assistant
System ("ROBODOC"), integrates the ORTHODOC(R) Presurgical Planner ("ORTHODOC")
with a computer-controlled robot for use in joint replacement surgeries. The
surgeon uses ORTHODOC, a computer workstation with the Company's proprietary
software, for preoperative surgical planning. ORTHODOC converts a computerized
tomography ("CT") scan data of the patient's joint into three-dimensional bone
images. The surgeon selects a prosthesis from the ORTHODOC prosthesis software
library, and manipulates the three-dimensional prosthesis models against the
bone image. The ORTHODOC then allows the surgeon to preoperatively visualize the
possible results of the surgical outcome. The Company offers software for
several lines of prostheses in its software library. Implant manufacturers
contract with the Company for the development of prosthesis software. After the
surgeon selects the optimal bone cuts and a prosthesis, ORTHODOC creates a
surgical plan, which is then up-loaded to the surgical robot. The surgical plan
guides the robot as it mills the bone in the operating room. Both hip and knee
replacement surgeries involve removing a portion of the bone at the joint,
referred to as "milling," to properly replace it with a prosthesis. For hip
replacement surgery, a cavity is milled by the robot into which the selected
prosthesis is inserted. In the case of knee replacement surgery, ROBODOC mills
both the upper and lower leg bone ends for precise and accurate prosthesis
placement according to the plan.

Neurosurgical Applications

The Company entered the neurosurgical equipment sector with the acquisition of
Innovative Medical Machines International, S.A., of Lyon, France, in September
1997. This wholly-owned subsidiary, which was renamed Integrated Surgical
Systems, S.A. ("ISS-SA"), designed, manufactured, sold and serviced the
NeuroMate(TM) System ("NeuroMate"). The Company continues to market NeuroMate,
although no sales have occurred since the end of the second quarter of 2003.
Based on its experience of over five years in commercializing the NeuroMate
System on a worldwide basis, the Company has developed a new strategy for the
neurosurgery market. It consists of consolidating different robotic platforms to
increase overall functionality while lowering the costs. The Company is planning
to offer a new proprietary product to the neurosurgical market on a worldwide
basis.

Specialized Product Development

The Company develops specialized presurgical planning software for several major
implant manufacturing companies. These implant manufacturers contract with the
Company for the development of software for particular lines of new prostheses
to be used with the ROBODOC system.

Utilizing its many years of experience in presurgical planning in the 3D mode,
the Company has entered the presurgical planning software market for
orthopaedics on an OEM basis. The Company offers presurgical planning software
for use in stand-alone systems, as well as an integral part of PACS (Picture,
Archiving and Communication Systems) commercialized worldwide by all major
imaging corporations.

                                       2
<PAGE>

Marketing, Sales and Distribution

As further discussed in "Government Regulations," ROBODOC cannot be marketed in
the United States until it has been cleared by the U.S. Food and Drug
Administration (the "FDA"). Accordingly, substantially all of the Company's
sales are made to customers located in foreign countries. The Company markets
the ROBODOC system to orthopaedic and trauma surgeons and hospitals in Europe
through direct sales and through distributors in Japan, Korea and India.

The Company promotes the ROBODOC system through presentations at trade shows,
advertisements in professional journals and technical and clinical publications,
and direct mail campaigns. Presentations to potential customers focus on the
clinical benefits to the patient and the potential financial and marketing
benefits to hospitals and surgeons.

Manufacturing

The Company's manufacturing process primarily consists of the assembly of
purchased components, integration of proprietary software, product testing and
packaging. The Company's manufacturing facility is located in Davis, California.
The surgical components of the ROBODOC consist of readily available commercial
parts, a customized robot arm, a robot base and a control cabinet. Upon receipt,
these and other components are tested and assembled into a complete system. The
final assembled product is tested once again before shipment to a customer.

One of the key components of the ROBDOC system, a customized Robotic arm, has
been manufactured by a Japanese manufacturer, Sankyo Seiki, per ISS
specifications. The specifications for this component are the proprietary
property of the Company and cannot be used by anyone else to build or supply
robot arms. The manufacturer has discontinued their medical robot business, and
will not manufacture new robot arms for the Company. This situation does not
create immediate risk as the Company has supplies in inventory to meet
anticipated demand through December 31, 2005, the Company is redesigning the
robot arm and is securing a new vendor for alternative vendor manufacture. Any
significant delay in securing a new vendor for this component could have a
material adverse effect on the financial condition, results of operations, or
cash flow of the Company.

ORTHODOC consists of a pre-surgical planning computer workstation and associated
data peripherals incorporating the Company's proprietary software.

Surgical supplies, including sterile drapes and cutters, are manufactured to the
Company's specification by outside vendors. These vendors are inspected
periodically by the Company and samples are evaluated to ensure that these
specifications are consistently met. The Company and the Company's authorized
distributors purchase these items in quantity and distribute them to customers
as needed.

The Company's production facilities are subject to periodic inspection by the
FDA for compliance with Good Manufacturing Practices. The Company is also
subject to European manufacturing standards for European sales, and is routinely
audited to ensure compliance to the EC Medical Device Directives. All products
are shipped bearing the CE Mark, certifying that they meet the European Union's
marketing requirement.

Research and Development

Since inception, the Company's engineering activities have focused on the
development of innovative image-directed, pre-surgical planning and
computer-controlled robotic products for surgical applications, along with
specialized operating software and hardware systems to support these products.
The Company incurred research and development expenses of approximately $994,000
during the year ended December 31, 2004, and $1,664,000 in the year ended
December 31, 2003.

                                       3
<PAGE>

Competition

The principal competition for ROBODOC comes from manual surgery performed by
orthopaedic surgeons using surgical power tools, navigated instrumentation and
manual devices. These tools and devices are manufactured and/or distributed by
major orthopaedic companies, including Striker/Howmedica Osteonics (a division
of Stryker Corporation), Zimmer, Inc., DePuy, Inc. (a subsidiary of Johnson &
Johnson), Smith and Nephew, and Biomet, Inc.

Navigational instrumentation systems, offered by the major manufacturers of
orthopaedic devices, are an intermediate step between unaided free hand and
robotic surgery. Navigational systems use a tracking device affixed to the end
of traditional cutting tools to assist the surgeon in visualizing tool positions
for bone preparation and implant placement.

Since URS GmbH, a German medical robotics company, ceased its operations in
2002, there is no direct competition to the Company's product.

Warranty and Service

The Company offers a one-year warranty for parts and labor on all ROBODOC
systems commencing upon the completion of training and installation, except when
the sales contract requires formal customer acceptance. In most cases, the
Company's customers purchase service contracts, which include extended warranty
coverage (parts and labor), unspecified product maintenance updates, customer
support services and various consumables required during surgical procedures.
Customers not covered by warranties or service contracts are billed on a time
and materials basis for service, and on a per unit basis for consumable
products.

The Company's technical staff trains medical professionals in its use of the
product and provides field service. Additional technical support is provided by
the Company's engineering department. In Europe, the Company has entered into an
arrangement with a third party under which it provides warranty and extended
warranty services to the Company's customers. For these customers, the Company
may receive a royalty payment if the cost of providing such service meets
certain threshold levels.

Patents and Proprietary Rights

The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect the
Company's proprietary rights in its products and to maintain a competitive
position.

ROBODOC and ORTHODOC are registered trademarks of the Company. The Company has
been issued five U.S. patents, has four U.S. patents pending, and has filed
additional patent applications covering various aspects of the technology in
Europe and in the United States. U.S. issued patents include:

     o    Computer aided system for revision total hip replacement surgery;

     o    Computer system and method for finish cutting bone cavities;

     o    Computer system and method for positioning a surgical robot;

     o    Computer system and method for cavity generation for surgical planning
          and initial placement of a bone prosthesis; and

     o    Computer system and method for performing image directed robotic
          orthopaedic procedures without a fiducial reference system.

Significant portions of ORTHODOC and ROBODOC software are protected by
copyrights. IBM has granted the Company a perpetual royalty-free license for the
underlying software code utilized in ROBODOC. In addition, IBM has agreed not to
assert infringement claims against the Company with respect to an IBM patent
relating to robotic medical technology, to the extent that this technology is
used in its products. The Company has registered the marks ROBODOC and ORTHODOC.

                                       4
<PAGE>

The Company cannot guarantee that it will have the necessary working capital to
enforce and/or defend its patents, copyrights or trademarks if challenged.

Government Regulations

The medical devices the Company manufactures and markets are subject to
extensive regulation by the FDA and other federal and foreign governmental
authorities.

The ROBODOC system is approved for use in Europe and carries the European
Union's CE Mark. The ORTHODOC is cleared by the FDA for marketing in the United
States of America. While ROBODOC has not yet been approved for use by the
Japanese regulatory agency, the Ministry of Health, Labor and Welfare ("MHLW"),
Japanese hospitals and surgeons are able to purchase and use the systems while
approval is pending. The Company completed clinical trials in Japan and
submitted a petition for approval in 2002. Although no assurance can be offered,
the Company believes the approval can reasonably be expected in late 2005.
However, there can be no assurance that the determination will be favorable, or
that any determination will not include unfavorable limitations or restrictions.

U.S. clinical trials designed to secure FDA clearance to market the ROBODOC
system in the U.S. began in December 2000. This trial strategy calls for
performing pinless hip (latest version) replacement surgeries on up to 181
subjects. Upon completion, the Company will submit the application to the FDA
for clearance to market this ROBODOC product in the United States. At December
31, 2004, a total of 111 patients have been enrolled in this study. In 2003, the
Company added a third clinical study site in Buffalo, N.Y., and, with this
additional study site, the Company anticipates the completion of clinical trials
by the end of 2005, although no assurances can be given.

In the fourth quarter of 2004, the principal investigator at the University of
Arkansas Medical Science Department in Little Rock, Arkansas passed away. The
ROBODOC system has been removed from this clinical site and final preparations
are being made to relocate this system to a new clinical site.

Products manufactured or distributed pursuant to FDA clearances or approvals are
subject to pervasive and continuing regulation by the FDA, including quality
system requirements, documentation and reporting of adverse experiences with the
use of the device. Device manufacturers are required to register their
facilities and list their devices with the FDA and with certain state agencies
and are subject to periodic compliance inspections by the FDA and others.

Labeling and promotion activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The Company is also subject
to a variety of state laws and regulations in those states or localities where
the products are or will be marketed. As is the case with other manufacturers,
the Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances.

Although the Company has not been cleared to market the ROBODOC System in the
U.S., the Company is permitted to export the system provided certain
requirements are met. Products approved for use by European Union member
countries, as well as Australia, Canada, India, Israel, Japan, Korea, New
Zealand, Switzerland and South Africa, do not require FDA export approval. FDA
export approval, when it is required, is granted when certain requirements are
met including documentation demonstrating that the product is approved for
import into the country to which it is to be exported and, in some instances,
safety data from animal or human studies.

                                       5
<PAGE>

The introduction of products in foreign markets has subjected the Company, and
will continue to subject the Company, to foreign regulatory clearances that vary
from country to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on medical devices.
In addition, each country has its own tariff regulations, duties and tax
requirements.

ROBODOC satisfies international electromedical standard IEC 601-1 and the
protection requirements of the Electromagnetic Compatibility Directive
(89/336/EEC). The Company has also received ISO 9001 registration, EN 46001
certification, and ED Directive 93/42/EEC Annex II, Article 3 approval. Meeting
these standards and requirements, and receiving these certifications and
approvals, allows the Company to apply the CE Mark to its products. ROBODOC
meets the relevant provisions of the Medical Device Directive for Class IIb
Medical Devices.

Product Liability

Prior to June 2004, the Company maintained product liability insurance in the
amount of $10 million per occurrence and $10 million in aggregate. This coverage
was cancelled by the insurance carrier in June 2004, due to the Company's
financial inability to pay the requisite insurance premiums. Effective March 4,
2005, the Company secured a new product liability insurance policy in the amount
of $2 million per occurrence and $2 million in aggregate.

The Company is subject to legal proceedings and claims that arise in the normal
course of business as is discussed in Item 3 "Legal Proceedings" in this report.

Major Customers

The Company sells its robotic systems to international distributors, who in turn
resell the product to specific international hospitals and clinics. The
Company's international distributors are Imatron (KTEC) in Japan, ROCOM Frontier
in Korea and Paramount Impex in India.

A significant portion of the Company's sales are to a limited number of
customers located in foreign countries. Three major foreign customers of the
Company accounted for 45%, 24% and 22% of the Company's revenue during the year
ended December 31, 2004, and three major foreign customers accounted for 22%,
14% and 13% for the year ended December 31, 2003. At December 31, 2004, two
foreign customers accounted for 98% of accounts receivable, and at December 31,
2003, two customers accounted for 100% of accounts receivable.

During the first nine months of 2003, the Company sold its products in Europe
through its wholly owned subsidiary, ISS-SA. In the fourth quarter of 2003, the
Company recorded a loss of $1,516,519 in connection with the liquidation of the
Company's European operation. Since December 23, 2003, the Company's Davis,
California headquarters office has assumed the sales responsibility for its
products in Europe.

The Company also develops specialized pre-surgical planning software for several
major customers, including DePuy International Limited, Fujifilm Medical Systems
USA, Inc, Stryker and Zimmer Inc.

Employees

On December 31, 2004, the Company had a total of 15 employees: 10 in
engineering, 2 in manufacturing and 3 in sales and administration. None of the
employees is covered by a collective bargaining agreement and the Company
believes that the relationship with its employees is satisfactory.

Item 2. Description of Property

The Company's executive offices and production facility are located in Davis,
California. The Company occupies the facility in Davis under a lease that
expires in June 2005, which is currently being renegotiated. The Company can

                                       6
<PAGE>

give no assurance that the lease will be extended. If the lease were not
extended, the Company would be unable to conduct business until another facility
was leased, and there is no assurance That the company will be able to obtain a
lease extension or a new lease on terms as favorable to the Company as are
provided in the current lease. The Company's failure to secure a lease could
have material effect on the business, financial condition, cash flows and
results of operations.

During the third quarter of 2004, the Company renegotiated this lease to reduce
the square footage from approximately 30,500 square feet to approximately 16,000
square feet, with a corresponding per month reduction in monthly rent expense
from approximately $32,500 per month to approximately $18,000 per month. Prior
to the renegotiations of the lease, the Company paid utilities and maintenance
fees directly to the providers of these services. These utility and maintenance
fees are now paid by the lessor and billed back to the Company, along with
property taxes, on a pro-rated percentage based on the Company's occupancy.

Item 3. Legal Proceedings

The Company is subject to legal proceedings and claims that arise in the normal
course of business. The Company cannot assure that it would prevail in such
matters nor can it assure that any remedy could be reached on mutually agreeable
terms, if at all. Due to the inherent uncertainties of litigation, the Company
would not be able to accurately predict their ultimate outcome.

On December 17, 2004, the Company was served with a summons and complaint
commenced in Yolo County (California) Superior Court, styled Bischoff, et al.
vs. Integrated Surgical Systems, Inc. et al. The plaintiffs' in the litigation,
all from Germany, and all of whom were subject to medical treatment which
utilized the ROBODOC System, allege that the Company's ROBODOC System is
defective and dangerous, both in its manufacture and design and, as a result of
such defect and dangerous condition, the plaintiffs sustained injury. The
plaintiffs are seeking class status for this matter.

The Company believes the plaintiff's allegations are without merit. The Company
intends to conduct a vigorous defense against the allegations contained in the
complaint. However, the Company did not have any product liability insurance
from June 2004 through March 3, 2005, due to its financial inability to pay the
requisite insurance premiums. Effective March 4, 2005 the Company secured a new
product liability insurance policy in the amount of $2 million per occurrence
and $2 million in aggregate.

This case is at its incipient stages. The Company has retained competent counsel
to represent it in this matter. The amount of damages, if any, are
indeterminable at this juncture.

Defending against a product liability action can be expensive and time consuming
to management personnel. The Company currently does not have the funds, which
may be necessary to defend against the plaintiffs' allegations. The failure to
properly defend the Company against the allegations could result in a material
judgement against the Company, which could adversely affect our financial
condition, results of operation and cash flows. The Company may also currently
not have the funds necessary to satisfy any judgement rendered against it. The
Company's failure to successfully defend against the allegations could result in
our seeking protection under the United States Bankruptcy Code. Such action
could have a material adverse effect on the market price of the Company's common
stock, business, financial condition, cash flow and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None

                                       7
<PAGE>

                                    Part II.

Item 5. Market for Common Equity and Related Stockholder Matters and Small
        Business Issuers Purchase of Equity

Market Information for Common Stock

On May 24, 2004, the OTC Bulletin Board discontinued the quotation of the
Company's stock on its system due to our failure to file our annual report on a
timely basis. The Company's stock then began to be quoted, and continues to be
quoted on the pink sheets, under the trading symbol "RDOC." The following table
sets forth the high and low sales prices, as reported on the by the NASDAQ
on-line web site www.NASDAQ. com, for shares of the Company's common stock for
the periods indicated. Such prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

                                               Common Stock
                                                  (RDOC)
                                          ----------------------
        Fiscal Year Ended                  High            Low
        December 31, 2004                 ------          ------
        -----------------

        First Quarter                     $0.130          $0.060
        Second Quarter                    $0.115          $0.050
        Third Quarter                     $0.080          $0.050
        Fourth Quarter                    $0.070          $0.035

        Fiscal Year Ended
        December 31, 2003
        -----------------

        First Quarter                     $0.055          $0.022
        Second Quarter                    $0.044          $0.025
        Third Quarter                     $0.055          $0.038
        Fourth Quarter                    $0.190          $0.040

As of April 11, 2005 there were 268 holders of record of the common stock.


Dividends

The Company has never paid dividends on its common stock and its present policy
is to retain anticipated future earnings for use in its business.

Recent Sale of Unregistered Securities

During the twelve-month period ended December 31, 2004, the Company issued
300,000 warrants, which have been valued at $12,000, to outside legal counsel
for such firm foregoing demand for immediate payment to said firm. The Company
believes that the issuance of such warrants was exempt from the registration
requirements of the Securities Act pursuant to the provisions of Section 4(2) of
the Securities Act.

Equity Compensation Plans

The following table provides information as of the fiscal year ended December
31, 2004 with respect to the Company's compensation plans (including individual
compensation arrangements).

                                       8
<PAGE>
<TABLE>
<CAPTION>

                                EQUITY COMPENSATION PLAN INFORMATION TABLE

                                          (a)                          (b)                         (c)

Plan Category                   Number of securities to be   Weighted-average exercise    Number of securities
                                issued upon exercise of      price of outstanding         remaining available for
                                outstanding options,         options, warrants and        future issuance under
                                warrants and rights          rights                       equity compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column (a))

<S>                                  <C>                            <C>                          <C>
Equity compensation plans
approved by security holders         2,203,192 (1)                  $0.83                        438,953

Equity compensation plans not
approved by security holders         1,360,000 (2)                  $0.06                      1,040,000
                                     ---------                                                 ---------

Total                                3,563,192                      $0.54                      1,478,953
                                     =========                                                 =========

(1)  Includes the Company's 1995 and 1998 Stock Option Plans and its 2000 Stock
     Award Plan and 2004 Long-Term Performance Plan.

(2)  Consists of: (i) 100,000 warrants issued for consulting services which
     expire in May 2007 and have an exercise price of $0.06 per share; (ii)
     300,000 warrants for consulting which expire in July 2014 and have an
     exercise price of $0.0625 per share; (iii) 960,000 options to purchase
     shares for the Company's 2004 Long-Term Performance Plan, which has yet to
     be approved by the stockholders of the Corporation.

Item 6. Management's Discussion and Analysis or Plan of Operation

The following discussion and analysis relates to the consolidated operations of
the Company and should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, appearing elsewhere in
this report.

Results of Operations (2004 vs. 2003)

Revenue of $2.4 million for the year ended December 31, 2004 was down 60% when
compared to $5.8 million for the year ended December 31, 2003 primarily due to
the decrease in product sales. Cost of revenue of $0.9 million for the year
ended December 31, 2004 was down $3.1 million when compared to $4.0 million for
the year ended December 31, 2003, primarily due to the decreased level of
product sales. Operating expenses of $2.1 million for the year ended December
31, 2004 decreased by $3.5 million when compared to the year ended December 31,
2003. This decrease of $3.5 million in operating expenses was comprised of $1.3
million decrease in selling, general and administrative expense, $0.7 million
decrease in research and development expense, and a $1.5 million decrease in
non-recurring charges. The $1.5 million decrease in non-recurring charges was
related to the one-time loss on disposal of subsidiary resulting from the
liquidation of the Company's investment in ISS-SA and closure of its European
operations in the fourth quarter 2003. Other income, net for the year ended
December 31, 2004, decreased by $0.4 million when compared to $0.5 million for
the year ended December 31, 2003, primarily due to non-recurring events,
including the forgiveness of a $0.1 million loan and a gain of $0.2 million for
the reversal of a reserve for clinical robots. These changes in revenue and
expenses resulted in a net loss of $0.6 million for the period ended December
31, 2004 as compared to a loss of $3.3 million in the prior year. The decrease
in revenue of approximately $3,471,000 in 2004 from 2003 is presented in the
following table:

                                       9
<PAGE>

                                     2004                   2003           Increase (Decrease)
                              -------------------   --------------------   --------------------
                              Units                 Units                  Units
                               Sold     Revenues     Sold      Revenues     Sold      Revenues
                              -----   -----------   -----    -----------   -----    -----------
ROBODOC System                    2   $   793,000       4    $ 2,547,000      (2)   $(1,754,000)
ROBODOC Modules                   3       262,000    --             --         3        262,000
NeuroMate Systems              --            --         4        827,000      (4)      (827,000)
                              -----   -----------   -----    -----------   -----    -----------
  Total Systems and Modules       5     1,055,000       8      3,374,000      (3)    (2,319,000)
                              -----   -----------   -----    -----------   -----    -----------

Service contracts, parts
and consumables                           547,000              1,907,000             (1,360,000)

Development revenues                      758,000                550,000                208,000
                                      -----------            -----------            -----------
  Total Revenues                      $ 2,360,000            $ 5,831,000            $(3,471,000)
                                      ===========            ===========            ===========
</TABLE>

The decrease in ROBODOC systems of two units in 2004, compared to four units in
2003, and the decrease in revenues from service contracts and consumables of
approximately $1,360,000 in 2004 when compared to 2003 is directly related to
the negative publicity in Germany concerning routine surgical complications in
which the ROBODOC was used starting in late 2002, 2003 and 2004, that lead to
the current law suit. Although no NeuroMate units have been sold since the
second quarter of 2003, the Company continues to market this product.
Development revenue of approximately $758,000 for the year ended December 31,
2004 was up 38% when compared to approximately $550,000 for the year ended
December 31, 2003, due to completion of a greater number of projects.

The FDA allows the Company to market NeuroMate as described in the Company's
510(k) pre-market notification.

The gross margin for 2004 was 62% compared to 32% in 2003. The increase was
primarily due to a reduction in manufacturing costs and overhead charged to cost
of revenue, an increase in revenue from higher margin development projects, the
sale of two refurbished ROBODOC Systems. The Company charges its manufacturing
expense and overhead directly to cost of revenue due to its low manufacturing
volume. During 2004, the Company reduced its work force and operating costs and,
as a result, manufacturing expenses and overhead were reduced. The cost to
manufacture a refurbished system is considerably less than the cost to
manufacture a new system. For the year ended December 31, 2004, ROBODOC and
NeoroMate systems generated 45% of revenues compared to 58% for the year ended
December 31, 2003. Service contracts, parts, consumables and development
revenues were 55% for the year ended December 31, 2004 as compared to 42% for
the year ended December 31, 2003. The Company's margins for its service
contracts, parts, consumables and development projects are substantially higher
than margins on ROBODOC and NeuroMate systems.

Selling and general and administrative expenses are comprised of salaries,
commissions, travel expenses and costs associated with trade shows as well as
its finance, legal and human resources functions. Selling and general
administrative expenses for the year ended December 31, 2004 decreased 53% to
$1,140,000 from $2,439,000 for the year ended December 31, 2003. The decrease in
selling, general and administrative expenses was primarily due to a decrease in
average staffing levels in the year ended December 31, 2004 due to attrition and
the inability to replace employees due to the lack of working capital.

Research and development expenses are comprised of the engineering and related
costs associated with the development of innovative image-directed
computer-controlled robotic products for surgical applications, along with
specialized operating software and hardware systems to support these products,
quality assurance and testing. Research and development expenses decreased 40%
to $994,000 during the year ended December 31, 2004 as compared to $1,664,000
for the year ended December 31, 2003. The decrease in the year ended December
31, 2004 is due to decreased staffing and staffing related expenses due to
attrition and the inability to replace employees due to the lack of working
capital.

Restatement of Interim Financial Information

In conjunction with the audit of its financial statements for the year ended
December 31, 2004, the Company determined that it had overstated accounts
receivable and unearned income as of September 30, 2004 due to prematurely or
incorrectly recording certain service contracts with its customers. Accounts

                                       10
<PAGE>

receivable and unearned income as of September 30, 2004 were overstated by
$287,897 and $253,933, respectively. In the third quarter of 2004, net revenue
was overstated by $33,964 and net loss understated by a similar amount, as a
result of the amortization related to these service contracts. There was no
impact on the reported amount of basic or diluted net loss per common share as a
result of the correction. (See Note. 13. Unaudited Interim Financial Information
(Restated) in Notes to Consolidated Financial Statements)

Liquidity

The reports of the Company's Independent Registered Public Accounting Firm on
the 2004 and 2003 consolidated financial statements included explanatory
paragraphs stating that there is substantial doubt with respect to the Company's
ability to continue as a going concern. The Company believes that it has a plan
to address these issues which will enable the Company to continue to operate
through December 31, 2005. This plan includes obtaining additional equity or
debt financing, increasing sales of the products in existing markets, increasing
sales of system upgrades, and reducing operating expenses as necessary. Although
the Company believes that the plan will be realized, there is no assurance that
these events will occur. In the event that the Company is unsuccessful, it is
possible that it will cease operations or seek bankruptcy protection. The
consolidated financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from an inability on
the Company's part to continue as a going concern.

Through December 31, 2004, the Company has been funded through cash from
operations and sales of equity securities (see, "Capital Resources"). At
December 31, 2004, the "quick ratio" (cash and accounts receivable divided by
current liabilities), a conservative liquidity measure designed to predict the
Company's ability to pay bills, was only .18. It has been difficult for the
Company to meet financial obligations, including payroll, as they come due, and
the Company expects this situation to continue through 2005.

Net cash provided by operating activities was $1,079,000 for the year ended
December 31, 2004. This resulted from the net loss of $556,000, adjusted for non
cash transactions of $21,000 for depreciation and $21,000 for stock compensation
for non-employees. The primary changes in operating assets and liabilities were
decreases in accounts receivable and other current assets of $133,000, increases
in accounts payable of $211,000, accrued payroll and related expenses of
$425,000 and other income of $1,074,000 offset by an increase in inventory of
$159,000 and a decrease in accrued liabilities of $95,000.

The increase in unearned income was primarily due to a December 2004 software
license agreement with a customer. The increase in inventory was due to the
capitalization of development project costs and the increase in accounts payable
and accrued payroll and related expense is directly related to the lack of cash.
Accrued liabilities decreased primarily as the result of accrued expenses
transitioning to accounts payable.

The increase in cash from financing activities of $96,000 was primarily due to
the receipt of $150,000 received per a securities agreement (as defined in Item
6. Capital Resources) offset by repayment of loans which had been advanced by
the officers of $56,000. The Company also received $3,000 from the exercising of
stock options by former employees.

The cash balance of $1,324,000 at December 31, 2004 was the result of a late
December 2004 cash receipt for software development and licensing, and was
mostly disbursed during the first quarter of 2005 to pay down existing
liabilities. The Company expects to derive most of the cash required to support
operations through sales of ROBODOC systems, continued conversion of the
inventory balance into cash, collection of accounts receivable and through
additional financing. It is critical for the Company to obtain cash from these
sources. There can be no assurance given that the Company can continue to
convert inventory, collect receivables or raise additional funds on acceptable
terms or at all.

                                       11
<PAGE>

The Company has the following contractual obligations and commercial commitments
at December 31, 2004:

                                            less than               greater than
                                 Total        1 year     1-3 years     3 years
                                 -----        ------     ---------     -------

   Facility operating leases    $90,017      $90,017         $0           $0

The Company will require substantial funds for operating activities, further
product development, future clinical trials, regulatory approvals, litigation
expenses and marketing of its products. The Company's future capital
requirements will depend upon the progress of its research and development
programs; the time and costs involved in securing regulatory approvals; the cost
of filing, defending and enforcing intellectual property rights; and competing
technology and market developments. Future expenditures for product development
and clinical trials are discretionary and, accordingly, can be adjusted, as can
certain selling, general and administrative expenses, based on the availability
of cash.

At December 31, 2004, the Company had an aggregate amount due to executive
officers of approximately $1,013,000. These amounts due are in the form of
deferred salaries and unreimbursed travel expenses. Of such amounts, $460,000
and $276,000 are included in accrued payroll and related expense and accounts
payable and accrued liabilities, respectively, and are due to Ramesh C. Trivedi,
president and chief executive officer of the Company; $141,000 and $27,000 are
included in accrued payroll and related expense and accounts payable,
respectively, and are due to Leland Witherspoon, vice president of engineering
of the Company; and $109,000 is included in accrued payroll and related expense
and is due to Charles J. Novak, chief financial officer of the Company. At
December 31, 2004, the Company had accrued payroll and accrued payroll taxes of
$479,000 for all other employees.

Capital Resources

On April 11, 2005, there were 45.1 million shares of the Company's common stock
outstanding, and is listed on the pink sheets at $0.02 a share, giving the
Company a market capitalization of $0.9 million. In the first quarter of 2001,
the Company's common stock and warrants were delisted by the Nasdaq because the
stock did not maintain the market's minimum bid price of $1.00 per share. On May
24, 2004, the OTC Bulletin Board ceased quoting the Company's stock due to the
failure of the Company to file its annual report on Form 10-KSB on a timely
basis. Securities traded at less than $5.00 and not traded on a national
securities exchange or quoted on the Nasdaq are called "penny stocks". The
Securities and Exchange Commission rules require brokers to provide specified
information to purchasers of penny stocks, and these disclosure requirements and
the requirement that brokers must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction in advance may have the effect
of reducing trading activity in the common stock and making it more difficult
for investors to sell the shares of the Company's stock.

To obtain funding for the Company's ongoing operations, the Company entered into
a securities purchase agreement (the "Agreement") with an accredited investor on
June 15, 2004 with respect to the sale by the Company for aggregate
consideration of $150,000 of (i) a convertible debenture in the principal amount
of $150,000 and (ii) warrants to purchase 1,500,000 shares of Company common
stock. The Agreement contemplates the sale of additional convertible debentures
and warrants upon the occurrence of specific events. The Company is obligated to
register under the Securities Act for resale by the investor the common stock
underlying the debenture and warrants issued pursuant to the Agreement.

In connection with the sale of the original $150,000 convertible debenture and
1.5 million warrants the investor provided the Company with funds as follows:

     o    $100,000 was disbursed to the Company on June 15, 2004;

     o    $50,000 was disbursed to the Company on October 19, 2004; and

     o    $50,000 has been retained by the investor for disbursement to various
          professionals in payment for services to be provided to the Company.

                                       12
<PAGE>

The convertible debenture bears interest at 6 3/4%, matures two years from the
date of issuance, and is convertible into, at the investor's option, into the
number of shares of Company common stock equal to the principal amount of the
debenture being converted multiplied by 11, less the product of the conversion
factor multiplied by ten times the dollar principal amount of the debenture
being converted. The conversion factor for the convertible debenture is the
lesser of (i) $0.25 or (ii) eighty percent of the average of the five lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is no limit on the number of shares into which
the debenture may be converted. In addition, the investor is obligated to
proportionately exercise, concurrently with the submission of a conversion
notice by the selling stockholder, the warrants. The warrants are at an exercise
price of $1.00 per share.

The investor has contractually agreed to restrict its ability to convert or
exercise its warrants and receive shares of Company common stock such that the
number of shares of common stock held by it and its affiliates after such
conversion and exercise does not exceed 4.9% of the then issued and outstanding
shares of Company common stock.

The issuance of more than 51.5 million shares of common stock upon conversion of
the convertible debenture and exercise of the warrants issued pursuant to the
Agreement would require the Company to issue shares of common stock in excess of
the Company's currently authorized shares of its common stock. The Company
intends to seek stockholder approval to amend the Company's certificate of
incorporation to increase the Company's authorized common stock from 100,000,000
to 300,000,000 shares. Such solicitation will be made pursuant to a proxy
statement conforming to the rules and regulations of the Securities and Exchange
Commission. This Annual Report on Form 10-KSB should not be considered, in any
manner, a solicitation for voting in favor of such an increase in the Company's
authorized common stock.

The issuance of the convertible debenture and warrants to the investor is
contingent upon stockholder approval of the increase in the Company's authorized
common stock. If such approval is not received, the Agreement will terminate and
the Company will be obligated to repay the proceeds received to date and other
funds disbursed by the investor to professionals in payment of services rendered
on behalf of the Company. As a result, the Company recorded such proceeds in
other current liabilities.

On December 14, 2004, the Company entered into a $2.5 million agreement with
Fujifilm Medical Systems, USA ("Fuji") under which Fuji will license the
Company's orthopedic surgical planning technology for its use solely in the
Picture Archiving and Communications Systems ("PACS") market. Under the terms of
the license agreement the Company received $2.1 million in December 2004.
Additional milestone payments totaling $0.4 million will be paid to the Company
over a two-year period, assuming all such milestones are met.

At December 31, 2004, the Company had 168 shares of convertible preferred stock
outstanding. Each share of preferred stock has a stated value of $1,000 and is
convertible into common stock at a conversion price equal to 80% of the lowest
sale price of the common stock over the five trading days preceding the date of
conversion. Because there is no minimum conversion price, there is no limit on
the number of shares of common stock that holders of preferred stock may acquire
upon conversion.

The holders of the preferred stock could also engage in short sales of the
common stock after delivering a conversion notice to the Company, which could
contribute to a decline in the market price of the Company's common stock and
give them the opportunity to profit from that decrease by covering their short
position with the converted shares acquired at a 20% discount to the prevailing
market price. This activity, or the possibility of such activity, could
exacerbate any decline or impede any increase in the market price of the
Company's common stock.

                                       13
<PAGE>

Critical Accounting Policies and Estimates

The Company's discussion and analysis of the financial condition and results of
operations are based upon the Company's audited consolidated financial
statements included elsewhere in this Form 10-KSB and have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of such audited consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of the Company's assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates the estimates, including those related to bad debts,
inventories, impairment of assets, warranties, contingencies and litigation. The
Company bases these estimates on historical experience and on other assumptions
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The Company has discussed its
critical accounting policies with the audit committee of the Company. Actual
results may differ from these estimates under different assumptions or
conditions.

The Company believes the following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation of
the consolidated financial statements:

     The Company recognizes revenue from sales of its products upon the
     completion of equipment installation and training at the end-user's site,
     except when the sales contract requires formal customer acceptance.
     Equipment sales with contractual customer acceptance provisions are
     recognized as revenue upon written notification of customer acceptance,
     which generally occurs after the completion of installation and training.
     Furthermore, due to business customs in Japan and the interpretation of
     Japanese law, all equipment sales to Japan are recognized after customer
     acceptance, which generally occurs after the completion of installation and
     training. Revenue related to maintenance and service contracts is
     recognized ratably over the duration of the contracts. Development projects
     are accounted for under the provisions of Statement of Position ("SOP")
     81-1, "Accounting for Performance of Construction-Type and Certain
     Production-Type Contracts," using the completed contract and percentage of
     completion method of accounting.

     The Company maintains allowances for doubtful accounts for estimated losses
     resulting from the inability of the Company's customers to make required
     payments. If the financial condition of the customers were to deteriorate,
     resulting in an impairment of their ability to make payments, additional
     allowances may be required.

     Where the Company's products are not covered by separate service
     agreements, the Company reserves against the estimated cost of product
     warranties at the time revenue is recognized. The warranty obligation is
     affected by product failure rates, material usage and service delivery
     costs incurred in correcting a product failure. Should actual product
     failure rates, material usage or service delivery costs differ from these
     estimates, revisions to the estimated warranty liability would be required.

     The Company writes down the inventory for estimated obsolescence or
     unmarketable inventory equal to the difference between the cost of
     inventory and the estimated market value based upon assumptions about
     future demand and market conditions. If actual market conditions are less
     favorable than those the Company projected, additional inventory
     write-downs may be required.

     Property, plant and equipment are amortized over their useful lives. Useful
     lives are based on estimates of the period that the assets will generate
     revenue. Property and equipment are reviewed for impairment whenever events
     or changes in circumstances indicate that the carrying amount of an asset
     may not be recoverable.

                                       14
<PAGE>

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 151, "Inventory Costs--An
Amendment of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS No. 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for fiscal years beginning after June 15, 2005. The Company
is currently evaluating the effect that the adoption of SFAS No. 151 will have
on its consolidated results of operations and financial condition but does not
expect SFAS No. 151 to have a material impact.

In December 2004, the FASB issued SFAS No. 123R (revised 2004),"Share-Based
Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supercedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period that begins after December 15,
2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS No. 123 no longer will be an alternative to financial
statement recognition. The Company is required to adopt SFAS No. 123R beginning
January 1, 2006. As of the effective date, the Company will be required to
expense all awards granted, modified, cancelled or repurchased as well as the
portion of prior awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards as calculated for
pro forma disclosures under SFAS No. 123. The Company will apply SFAS No. 123R
using a modified version of prospective application. Under this method,
compensation cost is recognized on or after the required effective date for the
portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated under
SFAS No. 123 for either recognition or pro forma disclosures.

Under SFAS No. 123R, the Company must determine the appropriate fair value model
to be used for valuing share-based method to be used at date of adoption. The
Company is evaluating the requirements of SFAS No. 123R and expects that the
adoption of SFAS No. 123R will have a material impact on the Company's
consolidated results of operations and earnings per share. The Company has not
yet determined the method of adoption or the effect of adopting SFAS No. 123R,
and it has not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS No. 123.

Risk Factors and Cautionary Statement Regarding Forward-Looking Information

The Company cautions that this Form 10-KSB contains "forward-looking
statements," within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. The Company's plans, strategies,
objectives, expectations and intentions are subject to change at any time at the
discretion of management and the board of directors. The plans and results of
operations will be affected by the Company's ability to manage any growth and
working capital and the ability to finance future operations, none of which is
assured. In addition, the risk factors that follow may affect the actual results
and may cause actual results to differ materially from those expressed in or
implied by any forward-looking statement. These risk factors are not an
exhaustive list. Additional factors are discussed elsewhere in this Form 10-KSB
and also from time to time in the Company's filings with the Securities and
Exchange Commission. The Company undertakes no obligation to update such factors
in the future.

The reports of the Company's Independent Registered Public Accounting Firm on
the 2004 and 2003 consolidated financial statements included explanatory
paragraphs stating that there is substantial doubt with respect to the Company's
ability to continue as a going concern. The Company has a plan to address these
issues which it believes will enable the Company to continue to operate through
December 31, 2005. This plan includes obtaining additional equity or debt
financing, increasing sales of the products in existing markets, increasing
sales of system upgrades, and reducing operating expenses as necessary. Although
the Company believes that the plan will be realized, there is no assurance that
these events will occur. In the event that the Company is unsuccessful, it is
possible that the Company will cease operations or seek bankruptcy protection.

                                       15
<PAGE>

The consolidated financial statements do not include any adjustments to reflect
the uncertainties related to the recoverability and classification of assets or
the amounts and classification of liabilities that may result from an inability
on the Company's part to continue as a going concern.

The Company's facility lease expires on June 2, 2005. The Company's seven-year
lease, of its executive offices and production facility located in Davis,
California, will expire on June 2, 2005. The Company is currently negotiating
with the lessor of the facility to extend the lease beyond June 2, 2005. The
Company can give no assurance that the lease will be extended. If the lease were
not extended, the Company would be unable to conduct business until another
facility was leased, and there is no assurance That the company will be able to
obtain a lease extension or a new lease on terms as favorable to the Company as
are provided in the current lease. The Company's failure to secure a lease could
have material effect on the business, financial condition, cash flows and
results of operations.

The Company's future financial performance will depend almost entirely on sales
of the ROBODOC system. The Company expects to derive most of its near-term
revenue from sales of the ROBODOC System. Having recognized revenue on two
ROBODOC systems in 2004 and four ROBODOC systems in 2003, the Company must
develop an effective sales and marketing organization and expend sufficient
funds to inform potential customers of the distinctive characteristics and
advantages of using the system instead of traditional surgical tools and
procedures.

Because the ROBODOC system employs innovative technology rather than an
improvement of existing technology, and because it represents a substantial
capital expenditure, the Company expects to encounter resistance to change,
which it must overcome if the system is to achieve significant market
acceptance.

Furthermore, the Company's ability to market the ROBODOC System in the U.S. is
dependent upon clearance by the FDA. The Company can give no assurance that it
will receive FDA clearance, or that the ROBODOC System will achieve the market
acceptance in the U.S. and foreign markets to generate sufficient revenue to
secure profitability.

The Company is dependent on foreign sales. Most of the sales have been to
customers in Europe and Asia. Until such time, if ever, as the Company receives
clearance from the FDA to market the ROBODOC System in the U.S., it will
continue to be subject to the risks of foreign sales. These risks include
economic or political instability, shipping delays, fluctuations in foreign
currency exchange rates, changes in regulatory requirements, customs duties and
export quotas and other trade restrictions. Any of these risks could have a
material adverse effect on the Company's business.

The Company's quarterly revenue and results of operations may fluctuate and may
not be indicative of expected revenue and results of operations for the full
year. The level of revenue and results of operations fluctuate with the number
of ROBODOC Systems sold and development project revenue recognition. The number
and timing of the systems sold may cause revenue and earnings to vary
significantly on a quarterly basis and a quarter's results may not be indicative
of revenue and earnings for the full year.

The Company may not be able to secure the regulatory approvals needed to expand
the sales of the products to new foreign markets. The introduction of the
products in foreign markets has subjected and will continue to subject the
Company to foreign regulatory approvals. These approvals may be unpredictable
and uncertain and may impose substantial additional costs and burdens. Many
countries also impose product standards, packaging requirements, labeling
requirements and import restrictions on medical devices. The Company can give no
assurance that any of the products will receive further approvals.

The Company needs, but has not yet secured, clearance from the FDA under 510(k)
petition to market the ROBODOC System in the U.S. In December 2000, the Company
began U.S. clinical trials designed to demonstrate that the ROBODOC System is
safe and effective for its intended use as an alternative to other surgical
power tools and manual devices used in hip replacement surgery. The trials
anticipate the completion of hip replacement surgeries in a total of up to 181

                                       16
<PAGE>

subjects performed at up to four clinical trial sites. The Company has
established three sites, Sutter General Hospital in Sacramento, California, the
University of Arkansas in Little Rock, Arkansas and Buffalo General Hospital in
Buffalo, New York. In the fourth quarter of 2004, the principal investigator at
the University of Arkansas Medical Science Department in Little Rock, Arkansas
passed away. The ROBODOC system has been removed from this clinical site and
final preparations are being made to relocate this system to a new clinical
site. As of December 31, 2004, approximately 61% of the mandated total surgeries
have been performed.

The Company can provide no assurance that, at the completion of the clinical
trials, the FDA will grant clearance to market the system in the U.S. and that
such clearance will not include unfavorable limitations or restrictions. In
addition, FDA clearance gives no assurance of market acceptance or that the
Company will generate gross margins to obtain profitability.

Even after receipt of any FDA clearance to market, the Company expects that the
FDA may consider any new ROBODOC surgical applications to be new indications for
use, which generally require FDA clearance prior to marketing. The FDA may
require additional trials before allowing the Company to incorporate new imaging
modalities (such as ultrasound and MRI) or other different technologies in the
ROBODOC System. The FDA may require new clinical data to support new indications
and may require new clinical data for clearance of enhanced technological
characteristics.

The Company may not be able to comply with quality system and other FDA
reporting and inspection requirements. Although the Company believes it is in
full compliance with the regulatory requirements in the markets in which it
participates, there can be no assurance that the Company will be able to
continue to comply with these requirements. Assuming that the Company secures
the necessary FDA clearances for the products, in order to maintain these
clearances the Company must, among other things, register its establishment and
list the devices with the FDA and with certain state agencies. The Company must
maintain extensive records, report any adverse experiences on the use of the
products and submit to periodic inspections by the FDA and state agencies. The
Food, Drug and Cosmetic Act also requires devices to be manufactured in
accordance with the quality system regulation, which sets forth good
manufacturing practices requirements with respect to manufacturing and quality
assurance activities.

Noncompliance with FDA requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of marketing clearances or
approvals, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device the Company manufactures
or distributes.

The manufacture and sale of medical products exposes the Company to the risk of
significant damages from product liability claims. On December 17, 2004, the
Company was served with a summons and complaint commenced in Yolo County
(California) Superior Court, styled Bischoff, et al. vs. Integrated Surgical
Systems, Inc. et al. The plaintiffs, in the litigation, all from Germany, allege
that the Company's ROBODOC System is defective and dangerous, both in its
manufacture and design and, as a result of such defect and dangerous condition,
the plaintiff, all of whom were subject to medical treatment utilized the
ROBODOC System, sustained injury. The plaintiffs are seeking class status for
this matter.

The Company believes the plaintiff's allegations are without merit. The Company
intends to conduct a vigorous defense against the allegations contained in the
complaint. However, the Company did not have any product liability insurance
from June 2004 through March 3, 2005, due to its financial inability to pay the
requisite insured premiums. Effective March 4, 2005, the Company secured a new
product liability insurance policy in the amount of $2 million per occurrence
and $2 million in aggregate.

This case is at its incipient stages. The Company has retained counsel to
represent it in this matter. The amount of damages, if any, are indeterminable
at this juncture.

                                       17
<PAGE>

Defending against a product liability action can be expensive and time consuming
to management personnel. The Company currently does not have the funds which may
be necessary to defend against the plaintiffs' allegations. The failure to
properly defend the Company against the allegations could result in a material
judgement against the Company which could adversely affect our financial
condition and results of operation. The Company also may currently not have the
funds necessary to satisfy any judgement rendered against it. The Company's
failure to successfully defend against the allegations could result in our
seeking protection under the United States Bankruptcy Code. Such action could
have a material adverse effect on the market price of the Company's Common
Stock.

The Company has produced a limited number of commercial ROBODOC Systems and may
not be able to manufacture the systems at a cost or in such quantity as will be
necessary for profitable operation. Manufacturers often encounter difficulties
in scaling up for manufacturing new products, including problems involving
product yields, quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with FDA regulations, and the need for further FDA
approval of new manufacturing processes and facilities. The Company can give no
assurance that production yields, costs or quality will not be adversely
affected as the Company seeks to increase production, and any such adverse
effect could have a material adverse effect on the business, financial
condition, cash flows and results of operations.

The Company is dependent on the suppliers of robots. Although the Company has
multiple sources for most of the components, parts and assemblies used in the
systems, one of the key components of the ROBDOC system has been manufactured by
a Japanese manufacturer, Sankyo Seiki, per ISS specification. The
specifications, for this component, are the proprietary property of the Company
and can not be used by anyone else to build or supply robot arms. The
manufacturer has discontinued their medical robot business, and will not
manufacture new robot arms for the Company. This situation does not create
immediate risk as the Company has supplies in inventory to meet anticipated
demand through December 31, 2005 and, the Company is redesigning the robot arm
and is securing a new vendor for alternative vendor manufacture. Any significant
delay in securing a new vendor for this component could have a material adverse
effect on the financial condition, results of operations, or cash flow of the
Company.

The Company depends heavily on the principal members of its management team and
engineers. The Company's growth and future success will depend in large part on
the continued contributions of key technical and senior management personnel.
Dr. Ramesh Trivedi, the Company's President and Chief Executive Officer, Charles
J. Novak, the Company's Chief Financial Officer and Leland Witherspoon, the
Company's Vice President, Engineering, are employed pursuant to employment
agreements terminable by the Company or by such officer at any time. None of the
executives or technical personnel, other than Dr. Trivedi, Mr. Novak and Mr.
Witherspoon are employed pursuant to an employment agreement. The loss of the
services of Dr. Trivedi, Mr. Novak, Mr. Witherspoon or other senior management
or key technical personnel could have a material adverse effect on the business,
financial condition, cash flows and results of the Company's operations.

The Company's success may depend, in part, on its ability to defend its
intellectual property. The Company has secured patent and other proprietary
right protection for the technologies and relies on trade secrets, proprietary
know-how and continuing technological innovation to develop the products. Any
defense of the intellectual property could be costly and require significant
time and the attention of the management and technical personnel.

Purchases of the Company's shares are subject to the SEC's penny stock rules.
Securities traded at less than $5.00 and not traded on a national securities
exchange or quoted on the Nasdaq are called penny stocks. The Securities and
Exchange Commission rules require brokers to provide information to purchasers
of penny stocks, and these disclosure requirements and the requirement that
brokers must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written

                                       18
<PAGE>

agreement to the transaction in advance may have the effect of reducing trading
activity in the common stock and make it more difficult for investors to sell.
On May 24, 2004, the OTC Bulletin Board ceased quoting the Company's stock due
to the Company's failure to file its annual report on a timely basis. Since that
time, the Company's common stock has traded on the pink sheets (symbol "RDOC").
As a result, the market liquidity for the Company's securities is severely
adversely affected by limiting the ability of broker-dealers to sell our
securities and the ability of stockholders to sell their securities in the
secondary market.

Impact of issuing additional shares. The Company is seeking additional financing
that may require issuing additional common or preferred shares of the Company.
Although the dilution factor cannot be determined until the amount of shares are
known, there will be a dilution of some unknown magnitude. Additional financing
also could result in a change of control of the Company.

To obtain funding for the Company's ongoing operations, the Company entered into
a securities purchase agreement (the "Agreement") with an accredited investor on
June 15, 2004 with respect to the sale by the Company for aggregate
consideration of $150,000 of (i) a convertible debenture in the principal amount
of $150,000 and (ii) warrants to purchase 1,500,000 shares of Company common
stock. The Agreement contemplates the sale of additional convertible debentures
and warrants upon the occurrence of specific events. The Company is obligated to
register under the Securities Act for resale by the investor the common stock
underlying the debenture and warrants issued pursuant to the Agreement.

In connection with the sale of the original $150,000 convertible debenture and
1.5 million warrants the investor provided the Company with funds as follows:

          o    $100,000 was disbursed to the Company on June 15, 2004;

          o    $50,000 was disbursed to the Company on October 19, 2004; and

          o    $50,000 has been retained by the investor for disbursement to
               various professionals in payment for services to be provided to
               the Company.

The convertible debenture bears interest at 6 3/4%, matures two years from the
date of issuance, and is convertible, at the investor's option, into the number
of shares of Company common stock equal to the principal amount of the debenture
being converted multiplied by 11, less the product of the conversion factor
multiplied by ten times the dollar principal amount of the debenture being
converted. The conversion factor for the convertible debenture is the lesser of
(i) $0.25 or (ii) eighty percent of the average of the five lowest volume
weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is no limit on the number of shares into which
the debenture may be converted. In addition, the investor is obligated to
proportionately exercise, concurrently with the submission of a conversion
notice by the selling stockholder, the warrants. The warrants are at an exercise
price of $1.00 per share.

The investor has contractually agreed to restrict its ability to convert or
exercise its warrants and receive shares of Company common stock such that the
number of shares of common stock held by it and its affiliates after such
conversion and exercise does not exceed 4.9% of the then issued and outstanding
shares of Company common stock.

The issuance of more than 51.5 million shares of common stock upon conversion of
the convertible debenture and exercise of the warrants issued pursuant to the
Agreement would require the Company to issue shares of common stock in excess of
the Company's currently authorized shares of its common stock. The Company
intends to seek stockholder approval to amend the Company's certificate of
incorporation to increase the Company's authorized common stock from 100,000,000
to 300,000,000 shares. Such solicitation will be made pursuant to a proxy
statement conforming to the rules and regulations of the Securities and Exchange
Commission. This Annual Report on Form 10-KSB should not be considered, in any
manner, a solicitation for voting in favor of such an increase in the Company's
authorized common stock.

                                       19
<PAGE>

The issuance of the convertible debenture and warrants to the investor is
contingent upon stockholder approval of the increase in the Company's authorized
common stock. If such approval is not received, the Agreement will terminate and
the Company will be obligated to repay the proceeds received to date and other
funds disbursed by the investor to professionals in payment of services rendered
on behalf of the Company. As a result, the Company recorded such proceeds in
other current liabilities.

Item 7. Financial Statements

The financial statements follow Item 14 of this report.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

The Company did not have any changes in or disagreements
with the accountants on accounting and financial disclosure.

Item 8A. Controls and Procedures

An evaluation was performed, as of December 31, 2004, under the supervision and
with the participation of the Company's management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on such evaluation, the Company's management has concluded that its disclosure
controls and procedures were effective as of December 31, 2004, except as
described in the following paragraph.

In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 2004, the Company's independent registered public
accounting firm identified weakness relating to the Company's documentation of
its sales contracts with some of its customers. The Company has encountered
difficulties in some instances in dealing with the cultural nuances involved in
conducting business with some foreign customers. The Company will endeavor to
resolve this issue by December 31, 2005. We expect that these efforts will, over
time, positively address the weakness noted by our independent auditors.

There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to December 31, 2004.

Item 8B. Other Information

None

                                    Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

The Company's executive officers and directors are listed below:

    Name                    Age    Position with the Company
    ----                    ---    -------------------------

    Ramesh C. Trivedi       65     President, Chief Executive Officer, Director
    Charles J. Novak        57     Chief Financial Officer, Treasurer, Secretary
    Leland Witherspoon      52     Vice President
    Falah Al-Kadi           54     Chairman of the Board of Directors
    Jack W. Moorman         57     Director
    Paul A.H. Pankow        74     Director

                                       20
<PAGE>

The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Board of
Directors elects the officers at its annual meeting immediately following the
shareholders annual meeting and hold office until they resign or are removed
from office. There are no family relationships that exist between any director,
executive officer, significant employee or person nominated or chosen by the
Company to become a director or executive officer. The Company has established
audit and incentive compensation committees, consisting of the independent
directors.

Biographical Information on Officers, Directors and Control Persons

Ramesh C. Trivedi has been president, chief executive officer and a director of
Integrated Surgical Systems since 1995. Prior to that time, Dr. Trivedi was a
principal of California Biomedical Consultants, an international consulting
firm, and he served as the president and chief executive officer of DigiRad
Corporation, a medical imaging company. Dr. Trivedi received his Ph.D. in
chemical engineering from Lehigh University, and holds an MBA from Pepperdine
University.

Charles J. Novak has been the chief financial officer since joining Integrated
Surgical Systems in July 2002. From September 2001 to December 2001, Mr. Novak
was the vice president of finance and administration and CFO for Realty Plus
Online, a real estate software transaction system company. From January 2001 to
September 2001, he was the vice president of finance and administration and CFO
for WebRaiser Technologies, Inc., an integration and professional services firm.
From February 1999 to January 2001, Mr. Novak was the director of operations for
MRI Sierra International Group, Inc., an executive search firm. From September
1995 to February 1999, he was the assistant corporate controller for USCS
International, Inc., a supplier of customer management software and open billing
solutions. Prior to that, Mr. Novak served in executive management positions for
Describe, Inc. and HealthTek, Inc. and he served in various management positions
with the Hewlett-Packard Company. Mr. Novak earned his BS in Accounting from
Lewis University in Lockport, Illinois.

Leland Witherspoon has been vice president of engineering since joining ISS in
late 1997. From 1992 to 1997, Mr. Witherspoon was director of product research
and development for Sorin Biomedicals, Inc., a developer and manufacturer of
cardiopulmonary and cardiovascular hardware and software products. Prior to that
time, he served in various technical and management positions for Pfizer/Shiley,
Xerox Medical Systems and IBM. Mr. Witherspoon received his Bachelor of Science
from Rensselaer Polytechnic Institute.

Falah Al-Kadi has been chairman of the board of directors since January 2000 and
a director since December 1999. Mr. Al-Kadi is vice chairman of International
Licensing Holding sal ("ILTAG"), a position he has held since 1994. ILTAG is a
Lebanese holding company.

Jack W. Moorman has been a director of the Company since October 2002. Since
February 2004 Mr. Moorman has been a consultant and advisor to various companies
in the medical device, biotech instrumentation and semiconductor equipment
businesses. In February 2005 he was named Senior Director of Donations and
Facilities for The Enterprise Network of Silicon Valley, a nonprofit
organization. From August 2002 to February 2004, Mr. Moorman was president and
chief executive officer of Microbar Inc., a capital equipment manufacturer of
advanced chemical management systems, and acted as interim president of Microbar
Inc., from December 2001 to August 2002. From December 2000 to December 2001,

                                       21
<PAGE>

Mr. Moorman was a self-employed start-up consultant to various companies. From
July 1999 to December 2000, Mr. Moorman served as President of Vivant Medical
Incorporated, an early stage, venture capital funded, medical device company,
which merged with MCT Medical Inc., a liver tumor ablation medical device
company founded by Mr. Moorman in November 1998. From June 1999 to July 1999,
Mr. Moorman provided business and consulting services to the Company. From
December 1997 to July 1999, Mr. Moorman was self-employed as a business and
technical consultant in parallel with MCT Medical Inc. Mr. Moorman received his
BS in Ceramic Engineering from the University of Illinois and his MS in
Management from Stanford Graduate School of Business.

Paul A. H. Pankow has been a director of the Company since January 2003. Mr.
Pankow previously served as a director of the Company from May 1995 through
December 1999. Since March 1995, Mr. Pankow has been president of PAP
Consulting, a business and technical consulting firm. From September 1959 to
February 1995, he held various positions with 3M Corporation, most recently as a
vice president of its Imaging Systems Division, staff vice president of Digital
Imaging Application Center and staff vice president of special programs. He
currently serves as a member of several private boards. Mr. Pankow received his
B.S. in mechanical engineering and business administration from the University
of Minnesota.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors, and persons who own more than ten percent of a registered
class of the Company's equity securities within specified time periods to file
certain reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and ten- percent stockholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of copies of the reports the Company
received and written representations from persons concerning the necessity to
file these reports, the Company is not aware of any failure to file reports or
report transactions in a timely manner during the fiscal year ended December 31,
2004, except that Mr. Al-Kadi failed to timely file a report on form 3
disclosing his election to the board of directors and reports on Form 4
disclosing the acquisition of 100,000 stock options in September 2001, and
100,000 stock of options in July 2004. These events will be updated no later
than April 30, 2005.

Committees of the Board Of Directors

The Company has an Audit Committee and a Compensation Committee.

The Company's Audit Committee is composed of Mr. Jack Moorman (Director) and Mr.
Paul Pankow (Director). The duties of the Audit Committee are to review and
evaluate the scope of the quarterly reviews, to be performed, the adequacy of
services performed by, and the fees and compensation of the independent
auditors. The Audit Committee also reviews the Company's audited financial
statements with management and with the Company's independent auditors and
recommends approval of the audited financial statements to the Board of
Directors before publication in the Annual Report on Form 10-KSB; reviews and
considers matters which may have a bearing upon continuing auditor independence;
considers and recommends to the Board of Directors the selection of the
independent auditors to examine the Company's consolidated financial statements
for the next year; reviews and evaluates the scope and appropriateness of the
Company's system of internal control; reviews and evaluates the appropriateness
of the Company's accounting principles and practices and financial reporting
matters.

The Board of Directors has determined that under the rules of the SEC and within
the Nasdaq director independence standards, all members of the Audit Committee
are independent. The Board of Directors has also determined that Mr. Jack
Moorman meets the criteria for "audit committee financial expert" as defined by
the rules promulgated by the SEC."

The Company's Compensation Committee is composed of Mr. Jack Moorman (Director)
and Mr. Falah Al-Kadi, Chairman. The duties of the Compensation Committee are to
recommend to the Board of Directors remuneration for the Company's officers, 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 Company executives.

                                       22
<PAGE>

Terms of Office

The directors of the Company are appointed for a one-year term to hold office
until the next annual general meeting of the holders of the Company's common
stock or until removed from office in accordance with the Company's by-laws. The
officers of the Company are appointed by the Company's board of directors and
hold office until removed by the board of directors.

Code Of Ethics

A Code of Ethics that applies to our executive officers as well as to all
employees was approved and adopted by the Board of Directors on April 8, 2004
and it is attached to the Company's 10-KSB for the fiscal year ended December
31, 2003. Copies of the Code of Ethics may be obtained free of charge by written
request to Integrated Surgical Systems, Inc. attention Chief Financial Officer,
1850 Research Park Drive, Suite 300, Davis California, 95616.

Item 10. Executive Compensation

The following table sets forth, for the fiscal years ended December 31, 2004,
2003 and 2002, the compensation awarded to, earned by or paid to the Company's
Chief Executive Officer and each of the other executive officers whose total
salary and bonus exceeded $100,000 for the year ended December 31, 2004
(collectively, the "Named Executive Officers").

                           Summary Compensation Table

                                                                     Long-Term
                                 Annual Compensation                Compensation
                                 -------------------                ------------
                                                                     Securities
     Name and                                  Cash                  Underlying
Principal Position        Year   Salary (1)    Bonus    Other (2)      Options
- ------------------        ----   ----------    -----    ---------      -------

Ramesh C. Trivedi         2004    $302,226       $0      $13,862       100,000
President and Chief       2003     302,226        0       25,139       300,000
Executive Officer         2002     302,215        0       16,752         -0-

Leland Witherspoon        2004     142,600        0            0       100,000
Vice President,           2003     142,600        0            0       125,000
Engineering               2002     142,600        0            0         -0-

Charles J. Novak          2004     120,000        0            0       100,000
Chief Financial Officer   2003     120,000        0            0        80,000
                          2002      55,000        0            0        30,000

- ----------
(1)  The 2002 salary information for Charles J. Novak represents a partial year
     as his start date with the Company was in July 2002.
(2)  Represents expense allowances under the terms of Dr. Trivedi's employment
     agreement.




                                       23
<PAGE>

Compensation Owed to Officers

The following table discloses the salaries not paid, but owed to the officers of
the Company due to lack of working capital.

                                        Compensation Owed to Officers
                                             As of December 31,

                                Balance       Paid         Accrued      Balance
                                 2003                                    2004
                               ---------    ---------     ---------    ---------
Ramesh C. Trivedi
         2001                  $  56,325    $    --       $    --      $  56,325
         2002                     24,494         --            --         24,494
         2003                    120,234      (27,672)        3,414       95,976
         2004                       --           --         283,241      283,241
                               ---------    ---------     ---------    ---------
  Total Trivedi                  201,053      (27,672)      286,655      460,036
                               ---------    ---------     ---------    ---------
Leland Witherspoon
         2001                       --           --            --           --
         2002                     11,417         --            --         11,417
         2003                     42,187      (42,187)         --           --
         2004                       --           --         129,528      129,528
                               ---------    ---------     ---------    ---------
  Total Witherspoon               53,604      (42,187)      129,528      140,945
                               ---------    ---------     ---------    ---------
Charles J. Novak
         2001                       --           --            --           --
         2002                       --           --            --           --
         2003                     37,639      (37,639)         --           --
         2004                       --           --         109,000      109,000
                               ---------    ---------     ---------    ---------
 Total Novak                      37,639      (37,639)      109,000      109,000
                               ---------    ---------     ---------    ---------
Total Deferred                 $ 292,296    $(107,498)    $ 525,183    $ 709,981
                               =========    =========     =========    =========


Employment Agreements

Dr. Ramesh C. Trivedi serves as President and Chief Executive Officer of the
Company pursuant to an employment agreement with the Company dated December 8,
1995, as amended on March 31, 1998 and January 1, 2000, terminable at will by
either party. Pursuant to such employment agreement, as amended, Dr. Trivedi is
to receive a base salary of $25,186 per month and incentive compensation.
Pursuant to such employment agreement, Dr. Trivedi received a 10-year option to
purchase an aggregate of 100,000 shares of common stock of the Company at a
purchase price of $4.75 per share, the closing price of the Company's common
stock on February 19, 1998, all such shares being currently exercisable. Dr.
Trivedi's employment with the Company is for no specified period and constitutes
at-will employment. However, it is provided in the employment agreement that in
the event that Dr. Trivedi is terminated by the Company for reasons other than
for Cause (as defined in his employment agreement), he will be entitled to
receive severance pay of his base salary for a period of 18 months from the date
of termination.

On February 14, 2003, the Company entered into substantially similar employment
agreements with Charles J. Novak and Leland Witherspoon (individually, the
"Executive") to serve as Chief Financial Officer and Vice President,
Engineering, respectively, of the Company. The employment agreements provide for
an annual base salary of $10,000 and $11,883 per month to Mr. Novak and Mr.
Witherspoon, respectively, and such incentive compensation as shall be
determined from time to time by the Board of Directors of the Company. The
Executives' employment with the Company is for no specified period and
constitutes at-will employment. However, it is provided in each of the
employment agreements that in the event that the Executive is terminated by the
Company for reasons other than for Cause (as defined in his employment

                                       24
<PAGE>

agreement), the Executive will be entitled to receive severance pay of his base
salary for a period of three months from the date of termination; and if the
Company is a party to any consolidation or merger with or into another entity,
or the sale of all or substantially all of the assets of the Company to another
entity, the Executive is unable to reach a reasonable agreement of employment
with such entity, he will be entitled to receive severance pay of his base
salary for a period of six months from the date of termination, provided,
however, the Executive agrees to make reasonable efforts to assist such entity
in its transition for a reasonable period of time.

Stock Options

The following table contains information concerning the grant of stock options
under any of the Company stock option plans to the Named Executive Officers
during the fiscal year ended December 31, 2004.
<TABLE>
<CAPTION>

                                     Stock Option Grants in Last Fiscal Year

                                              (Individual Grants)


                                    % of Total
                       Number of     Options                                Potential Realizable Value at Assumed
                        Shares      Granted to                                   Annual Rates of Stock Price
                      Underlying    Employees   Exercise                       Appreciation for Option Term (2)
                        Options     in Fiscal   Price per                   -------------------------------------
      Name            Granted (1)      Year       Share    Expiration Date           5%                  10%
      ----            -----------      ----       -----    ---------------           --                  ---
<S>                     <C>           <C>        <C>        <C>                     <C>                 <C>
Ramesh C. Trivedi       100,000       10.13%     $0.0625    July 22, 2008         $1,727              $3,816
Leland Witherspoon      100,000       10.13%     $0.0625    July 22, 2013          3,930               9,961
Charles J. Novak        100,000       10.13%     $0.0625    July 22, 2013          3,930               9,961

     (1)  All options have an exercise price per share equal to 100% of the fair
          market value of the Company's common stock on the grant date. Stock
          options have a 10-year term, except for Dr. Trivedi which have a
          5-year term, and vest periodically over a period not to exceed five
          years.

     (2)  As required by SEC rules, these columns show the potential gains that
          may exist for respective options, assuming that the market price for
          Integrated Surgical Systems, Inc.'s common stock appreciates from the
          date of grant to the end of the option terms at the annual rates of 5%
          and 10%, respectively. These numbers are not estimates of the
          Company's future stock price performance and are not necessarily
          indicative of the Company's future stock price performance. If the
          price of the Company's common stock does not increase above the
          exercise price, no value will be realizable from these options.

     The following table summarizes, for each of the Named Executive Officers,
     the total number of unexercised options held at December 31, 2004, and the
     aggregate dollar value of in-the-money, unexercised options, held at
     December 31, 2004. The value of the unexercised in-the-money options at
     December 31, 2004, is the difference between their exercise or base price
     and the value of the underlying common stock on December 31, 2004. The
     closing sale price of the common stock on December 31, 2004 was $0.035 per
     share.

                                       25
<PAGE>

        Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option Values

                        Shares Acquired
                         Upon Exercise           Number of Securities             Value of Unexercised
                          Of Options                  Underlying                      In-The-Money
                         During Fiscal            Unexercised Options                  Options at
                             2004                At December 31, 2004               December 31, 2004
                             ----                --------------------               -----------------
                                  Value
Name                 Number     Realized     Exercisable    Unexercisable     Exercisable    Unexercisable
- ----                 ------     --------     -----------    -------------     -----------    -------------

Ramesh C. Trivedi        0          -         1,147,417             -           $10,500            -
Leland Witherspoon       0          -           300,000             -             4,375            -
Charles J. Novak         0          -           198,125        11,875             2,800            -

</TABLE>

Director Compensation

The Company currently does not have in effect a policy regarding compensation
for serving on the Company's board of directors. However, the Company does
reimburse its directors for their reasonable expenses incurred in attending
meetings of the Company's board and its non-employee directors are periodically
granted options to purchase shares of the Company's common stock.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of April 15, 2005 by (i) each person
known by the Company to be the owner of more than 5% of the outstanding common
stock, (ii) each director, (iii) each executive officer named in the Summary
Compensation Table above and (iv) all directors and officers as a group.

                                                                Percentage of
                                        Amount and Nature       Common Stock
                                          of Beneficial         Beneficially
Name                                      Ownership (1)           Owned (2)
- ----                                      -------------           ---------
Ramesh C. Trivedi (3)                     1,161,417   (4)           2.51%
Leland Witherspoon (3)                      311,484   (5)               *
Charles J. Novak (3)                        198,125   (6)               *
Falah Al-Kadi (7)                         1,647,136   (8)           3.65%
Jack W. Moorman (9)                         160,938  (10)               *
Paul A.H. Pankow (3)                        160,938  (11)               *
All directors and officers as a group     3,640,038                 7.74%
  (6 persons)
- -----------------------------------------------------------------------------

*    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. Includes any securities that such person has the
     right to acquire within 60 days pursuant to options, warrants, conversion
     privileges or other rights.
(2)  Based on 45,084,089 shares of common stock outstanding as of April 11,
     2005.
(3)  Address is c/o Integrated Surgical Systems, Inc., 1850 Research Park Drive,
     Suite 300, Davis, California 95616.
(4)  Includes 1,147,417 shares that Dr. Trivedi may acquire upon exercise of
     stock options exercisable within the next 60 days - 316,907 shares at an
     exercise price of $0.07 per share, 120,000 shares at an exercise price of
     $3.00 per share, 304,300 shares at an exercise price of $1.81 per share,
     6,210 shares at an exercise price of $0.10 per share, 300,000 shares at an
     exercise price of $0.025 per share and 100,000 shares at an exercise price
     of $0.0625 per share.

                                       26
<PAGE>

(5)  Includes 300,000 shares that Mr. Witherspoon may acquire upon exercise of
     stock options exercisable within the next 60 days - 45,000 shares at an
     exercise price of $3.00 per share, 30,000 shares at an exercise price of
     $1.81 per share, 125,000 shares at an exercise price of $0.025 per share
     and 100,000 shares at an exercise price of $0.0625 per share.
(6)  Includes 198,125 shares that Mr. Novak may acquire upon exercise of stock
     options exercisable within the next 60 days - 20,000 shares at an exercise
     price of $0.055 per share, 80,000 shares at an exercise price of $0.025 per
     share and 100,000 shares at an exercise price of $0.0625 per share. Does
     not include options to purchase 10,000 shares at an exercise price of
     $0.055 per share, none of which are currently exercisable.
(7)  Address is c/o Dogmoch Group of Companies, Adnan Al Hakim St., Assaf Bldg.,
     P.O. Box 135660, Beirut, Lebanon.
(8)  Includes 1,461,198 shares of the Company's common stock, all of which are
     owned by ILTAG, an affiliate of Dogmoch, of which Mr. Al-Kadi is
     Vice-Chairman, and 190,625 shares that Mr. Al-Kadi may acquire upon
     exercise of stock options exercisable within the next 60 days - 90,625
     shares at an exercise price of $0.06 per share and 100,000 shares at an
     exercise price of $0.0625. Does not include options to purchase 9,375
     shares at an exercise price of $0.060 per share, none of which are
     currently exercisable.
(9)  Address is c/o Microbar Inc. 136 Pinta court, Los Gatos, CA 95030.
(10) Includes 165,625 shares that Mr. Moorman may acquire upon exercise of stock
     options exercisable within 60 days - 65,625 shares at an exercise price of
     $0.035 per share and 100,000 shares at an exercise price of $0.0625 per
     share. Does not include options to purchase 34,375 shares at an exercise
     price of $0.035 per share, none of which are currently exercisable.
(11) Includes 160,938 shares that Mr. Pankow may acquire upon exercise of stock
     options exercisable within the next 60 days - 65,625 shares at an exercise
     price of $0.035 per share and 100,000 shares at an exercise price of
     $0.0625 per share. Does not include options to purchase 34,375 shares at an
     exercise price of $0.035 per share, none of which are currently
     exercisable.


Securities Authorized for Issuance Under Equity Incentive Plans

The Company has provided in the "Equity Compensation Plans" section of Item 5 of
this Annual Report on Form 10-KSB certain information with respect to securities
authorized for issuance under The Company's equity plans.

Item 12. Certain Relationships and Related Transactions

At December 31, 2004, the Company had an aggregate amount due to executive
officers of approximately $1,013,000. These amounts due are in the form of
deferred salaries and unreimbursed travel expenses. Of such amounts, $460,000
and $276,000 are included in accrued payroll and related expense and accounts
payable and accrued liabilities, respectively, and are due to Ramesh C. Trivedi,
president and chief executive officer of the Company; $141,000 and $27,000 are
included in accrued payroll and related expense and accounts payable,
respectively, and are due to Leland Witherspoon, vice president of engineering
of the Company; and $109,000 is included in accrued payroll and related expense
and is due to Charles J. Novak, chief financial officer of the Company. At
December 31, 2004, the Company had accrued payroll and accrued payroll taxes of
$479,000 for all other employees.

See also "Item 5 - Market for Common Equity and Related Stockholder Matters -
Recent Sale of Unregistered Securities" and "Item 10 - Executive Compensation -
Employment Agreements."

                                       27
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

Exhibit   Description
- -------   -----------

3.1       Composite of Restated Certificate of Incorporation of the Registrant,
          as amended. (14)
3.2       By-laws of the Registrant, as amended. (1)
3.3       Certificate of Designations for Series F Convertible Preferred Stock.
          (4)
3.4       Certificate of Designations for Series G Convertible Preferred Stock.
          (11)
3.5       Certificate of Designations for Series H Convertible Preferred Stock.
          (12)
4.1       Form of warrant issued to the underwriters for the Registrant's
          initial public offering in November 1996. (2)
4.2       Form of Warrant Agreement relating to the Registrant's Redeemable
          Common Stock Purchase Warrants. (2)
4.3       Specimen Common Stock Certificate. (2)
4.4       Specimen Warrant Certificate (included as Exhibit A to Exhibit 4.2
          herein). (2)
4.5       1998 Stock Option Plan. (5)
4.6       Employee Stock Purchase Plan. (5)
4.7       Common Stock Purchase Warrant issued by the Registrant to
          International Business Machines Corporation ("IBM"), dated February 6,
          1991, as amended (included as Exhibit J to Exhibit 10.5 herein). (2)
4.8       Stockholders' Agreement between the Founders of the Registrant and
          IBM, dated February 6, 1991 as amended. (2)
4.9       Common Stock Purchase Warrant issued by the Registrant to IBM, dated
          December 21, 1995 (included as Exhibit I to Exhibit 10.5 herein). (2)
4.10      Series D Preferred Stock Purchase Warrant issued by the Company to
          IBM, dated December 21, 1995 (included as Exhibit H to Exhibit 10.5
          herein). (2)
4.11      Warrant issued by the Registrant to Sutter Health, Sutter Health
          Venture Partners ("Sutter Health VP") and Keystone Financial
          Corporation ("Keystone"), dated December 21, 1995 (included as
          Exhibits K, L and M, respectively, to Exhibit 10.5 herein). (2)
4.12      Registration Rights Agreement among the Registrant, IBM, John N,
          Kapoor Trust ("Kapoor"), EJ Financial Investments V, L.P. ("EJ
          Financial"), Keystone, Sutter Health and Sutter Health VP, dated as of
          December 21, 1995 (included as Exhibit G to Exhibit 10.5 herein). (2)
4.13      1995 Stock Option Plan, as amended. (2)
4.14      Series D Preferred Stock Purchase Warrant issued by the Registrant to
          IBM, dated February 29, 1996 (together with the warrant referred to in
          Exhibit 4.10, the "Series D Warrants"). (2)
4.15      Letter Agreement between the Registrant and IBM dated October 29,
          1997, amending the Series D Preferred Stock and Warrant Purchase
          Agreement among the Registrant, IBM and EJ Financial, dated December
          21, 1995. (6)
4.16      Form of warrant issued to CA IB Investmentbank Aktiengesellschaft and
          Value Management & Research GmbH. (6)
4.17      Form of warrant issued to purchasers of Series A Convertible Preferred
          Stock. (7)
4.18      Form of warrant issued to purchasers of Series B Convertible Preferred
          Stock. (8)
4.19      Form of warrant issued to purchasers of Series C Convertible Preferred
          Stock. (3)
4.20      Form of warrant issued to purchasers of Series D Convertible Preferred
          Stock. (3)
4.21      Form of warrant issued to purchasers of Series E Convertible Preferred
          Stock. (9)
4.22      Form of warrant issued to purchasers of Series F Convertible Preferred
          Stock. (4)
4.23      Form of warrant issued to purchasers of Series G Convertible Preferred
          Stock. (11)
4.24      Form of warrant issued to purchasers of Series H Convertible Preferred
          Stock. (12)
4.25      Form of Registration Rights Agreement for Series A Convertible
          Preferred Stock financing. (7)
4.26      Form of Registration Rights Agreement for Series B Convertible
          Preferred Stock financing. (8)
4.27      Form of Registration Rights Agreement for Series C Convertible
          Preferred Stock financing. (3)
4.28      Form of Registration Rights Agreement for Series D Convertible
          Preferred Stock financing. (3)

                                       28
<PAGE>

4.29      Form of Registration Rights Agreement for Series E Convertible
          Preferred Stock financing. (9)
4.30      Form of Registration Rights Agreement for Series F Convertible
          Preferred Stock financing. (4)
4.31      Form of Registration Rights Agreement for Series G Convertible
          Preferred Stock financing. (11)
4.32      Form of Registration Rights Agreement for Series H Convertible
          Preferred Stock financing. (12)
4.33      Form of warrant dated December 14, 1999 issued to ILTAG International
          Licensing Holding S.A.L., Bernd Herrmann and Urs Wettstein. (10)
4.34      Form of Registration Rights Agreement dated December 14, 1999 among
          the Registrant, ILTAG International Licensing Holding S.A.L., Bernd
          Herrmann and Urs Wettstein. (10)
4.35      Registration Rights Agreement for the purchasers of Stock under the
          Equity Line of Credit Agreement (included as Exhibit C to Exhibit
          10.26).
4.36      Form of warrant issued under the Equity Line of Credit Agreement
          (included as Exhibit D to Exhibit 10.26).
4.37      2000 Stock Award Plan
4.38      2000 Long Term Performance Plan.
4.39      Change in Auditing Firm
10.1      Loan and Warrant Purchase Agreement between the Registrant and IBM,
          dated as of February 6, 1991. (2)
10.2      License Agreement between the Registrant and IBM, dated February 4,
          1991. (2)
10.3      Series B Preferred Stock Purchase Agreement among the Registrant,
          Sutter Health and Kapoor, dated as of April 10, 1992. (2)
10.4      Series C Preferred Stock Purchase Agreement among the Registrant,
          Sutter Health and Keystone, dated as of November 13, 1992, as amended
          December 13, 1995. (2)
10.5      Series D Preferred Stock and Warrant Purchase Agreement among the
          Registrant, IBM and EJ Financial, dated December 21, 1995. (2)
10.6      Investors Agreement among the Registrant, IBM, Wendy Shelton-Paul
          Trust, William Bargar, Brent Mittelstadt, Peter Kazanzides, Kapoor,
          Sutter Health, Sutter Health VP, and EJ Financial, dated as of
          December 21, 1995. (2)
10.7      Employment Agreement between the Registrant and Ramesh Trivedi, dated
          December 8, 1995. (2)
10.8      License Agreement between the Registrant and IBM, dated February 4,
          1991. (2)
10.9      Stock Purchase Agreement dated as of September 5, 1997 between the
          Registrant and the holders of the outstanding capital stock of
          Innovative Medical Machines International, S.A. (6)
10.10     Registration Rights Agreement dated September 5, 1997 by and among the
          Registrant and the holders of the outstanding capital stock of
          Innovative Medical Machines International, S.A. (6)
10.11     Preferred Stock Purchase Agreement for Series A Convertible Preferred
          Stock. (7)
10.12     Preferred Stock Purchase Agreement for Series B Convertible Preferred
          Stock. (8)
10.13     Preferred Stock Purchase Agreement for Series C Convertible Preferred
          Stock. (3)
10.14     Preferred Stock Purchase Agreement for Series D Convertible Preferred
          Stock. (3)
10.15     Preferred Stock Purchase Agreement for Series E Convertible Preferred
          Stock. (9)
10.16     Preferred Stock Purchase Agreement for Series F Convertible Preferred
          Stock. (4)
10.17     Preferred Stock Purchase Agreement for Series G Convertible Preferred
          Stock. (11)
10.18     Preferred Stock Purchase Agreement for Series H Convertible Preferred
          Stock. (12)
10.19     Stock and Warrant Purchase Agreement dated as of October 1, 1999 among
          the Registrant, ILTAG International Licensing Holding S.A.L., Bernd
          Herrmann and Urs Wettstein. (10)
10.20     Distribution Agreement dated November 12, 1999 between the Registrant
          and Spark 1st Vision GmbH & Co. KG. (14)
10.21     Mutual Termination Agreement dated May 9, 2000 between the Registrant
          and Spark 1st Vision GmbH & Co. KG. (14)
10.22     Personal Undertaking dated May 30, 2000 by ILTAG International
          Licensing Holding S.A.L. towards the Registrant. (14)
10.23     Personal Undertaking dated May 21, 2000 of Urs Wettstein. (14)
10.24     Personal Undertaking dated May 16, 2000 of Bernd Herrmann. (14)

                                       29
<PAGE>

10.25     Private Equity Line of Credit Agreement dated September 15, 2000 with
          Triton West Group, Inc. (14)
10.26     Escrow Agreement dated September 15, 2000 for the Equity Line of
          Credit Agreement (included as Exhibit A to Exhibit 10.26). (14)
10.27     Letter Agreement dated October 6, 2000 amending the Private Equity
          Line of Credit Agreement dated September 15, 2000. (14)
10.28     Addendum One dated March 31, 1998 to Employment Agreement between
          Registrant and Ramesh Trivedi dated December 8, 1995. (14)
10.29     Employment Agreement dated February 14, 2003, between Integrated
          Surgical Systems, Inc. and Charles J. Novak. (14)
10.30     Employment Agreement dated February 14, 2003, between Integrated
          Surgical Systems, Inc. and Leland Witherspoon. (14)
14.1      Code of ethics (15)
21.1        List of Subsidiaries
23.0      Consent of Macias Gini and Company LLP, Independent Registered Public
          Accounting Firm *
23.1      Consent of Ernst & Young LLP, Independent Registered Public Accounting
          Firm *
31.1      Certification Pursuant to Exchange Act Rule 13a-14(a) of Ramesh
          Trivedi *
31.2      Certification Pursuant to Exchange Act Rule 13a-14(a) of Charles
          Novak*
32.1      Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of
          2002 of Ramesh Trivedi*
32.2      Certification Pursuant to Section 1350 of the Sarbanes-Oxley Act of
          2002 of Charles Novak*

- --------------------------------------------------------------------------------
* Filed Herewith

(1)  Incorporated by reference to the Registrant's Registration Statement on
     Form SB-2 (Registration No. 333-48040) declared effective on October 31,
     2000.
(2)  Incorporated by reference to the Registrant's Registration Statement on
     Form SB-2 (Registration No. 333-9207), declared effective on November 20,
     1996.
(3)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-3 (Registration No. 333-83067), declared effective on October 14,
     1999.
(4)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-3 (Registration No. 333-30422), declared effective on February 22,
     2000.
(5)  Incorporated by reference to the Registrant's Annual Report on Form 10- KSB
     for the fiscal year ended December 31, 1997.
(6)  Incorporated by reference to the Registrant's Registration Statement on
     Form SB-2 (Registration No. 333-31481), declared effective on November 14,
     1997.
(7)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-3 (Registration No. 333-66133), declared effective on January 14,
     1999.
(8)  Incorporated by reference to the Registrant's Quarterly Report on Form
     10-QSB for the fiscal quarter ended March 31, 1999.
(9)  Incorporated by reference to the Registrant's Quarterly Report on Form
     10-QSB for the fiscal quarter ended June 30, 1999.
(10) Incorporated by reference to the Registrant's proxy statement dated October
     5, 1999.
(11) Incorporated by reference to the Registrant's Registration Statement on
     Form S-3 (Registration No. 333-40710), declared effective on July 28, 2000.
(12) Incorporated by reference to the Registrant's Registration Statement on
     Form S-3 (Registration No. 333-45706), declared effective on September 28,
     2000.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
     for the fiscal year ended December 31, 1999.
(14) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
     for the fiscal year ended December 31, 2002.
(15) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
     for the fiscal year ended December 31, 2003.

                                       30
<PAGE>


Item 14. Principal Accountant Fees and Services

Audit Fees

All audit related fees are approved by the Audit Committee. The Audit Committee
has considered whether the provisions of such services, including non-audit
services, by the Company's Independent Registered Public Accounting Firm is
compatible with maintaining their independence and has concluded that it is.

The following table sets forth the Company's aggregate fees billed by its
Independent Registered Public Accounting Firm for each of the last two fiscal
years for the categories of services indicated.

     Category                              2004                2003
     ---------------                       ----                ----
     Audit fees (1)                     $ 120,000           $  75,000
     Audit Related Fees                      -0-                 -0-
     Tax fees (2)                          20,000              20,000
     All Other Fees                          -0-                 -0-
                                        ---------           ---------
       Total                            $ 140,000           $  95,000
                                        =========           =========

     (1)  Consists of the Company estimates of the aggregate fees billed by its
          Independent Registered Public Accounting Firm for professional
          services rendered in connection with the audit of the Company's annual
          financial statements on Form10-KSB and the review of the Company's
          quarterly financial statements on Form 10-QSB and services that are
          normally provided by the Independent Registered Public Accounting Firm
          in connection with the statutory and regulatory filings or
          engagements.

     (2)  Consists of professional services rendered for tax compliance, tax
          advice, and tax planning.






                                       31
<PAGE>



                   Index to Consolidated Financial Statements




                                                                        PAGE
                                                                        ----


Report of Independent Registered Public Accounting Firm
  (Macias Gini & Company LLP), for
   the year ended December 31, 2004                                      33
Consolidated Balance Sheet at December 31, 2004                          34
Consolidated Statements of Operations for the years
   ended December 31, 2004 and 2003                                      35
Consolidated Statements of Convertible Preferred Stock
   and Stockholders' Deficit for the
   years ended December 31, 2004 and 2003                                36
Consolidated Statements of Cash Flows for the years
   ended December 31, 2004 and 2003                                      37
Notes to Consolidated Financial Statements                               38


                                       32

<PAGE>

                      REPORT OF MACIAS GINI & COMPANY LLP,
                  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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, 2004, and the related consolidated
statements of operations, convertible preferred stock and stockholders' deficit,
and cash flows for the years ended December 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Integrated Surgical Systems, Inc. as of December 31, 2004, and the results of
its operations and its cash flows for the years ended December 31, 2004 and 2003
in conformity with accounting principles generally accepted in the United States
of America.

The accompanying financial statements have been prepared assuming that
Integrated Surgical Systems, Inc. will continue as a going concern. As more
fully described in Note 2, the Company has incurred recurring operating losses,
has a working capital deficit of $5,749,062 and an accumulated deficit of
$68,287,471 as of December 31, 2004. In addition, as more fully described in
Note 11, the Company is a defendant in a product liability lawsuit. The amount
of damages, if any, related to the lawsuit is indeterminable. The Company may
not be covered by insurance for legal fees, and damages, if any, related to this
lawsuit. The Company does not have the funds, which may be necessary to defend
itself against the plaintiffs claim, or satisfy any judgment against it. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that may
result from the outcome of this uncertainty.


/s/ MACIAS GINI & COMPANY LLP

Sacramento, California
April 15, 2005

                                       33

<PAGE>


                        Integrated Surgical Systems, Inc.

                           Consolidated Balance Sheet
                                December 31, 2004


Assets
Current assets:
     Cash                                                          $  1,324,403
     Accounts receivable less allowance
      for doubtful accounts of $0                                        58,569
     Inventory                                                          646,210
     Other current assets                                                31,903
                                                                   ------------
Total current assets                                                  2,061,085

Property and equipment, net                                               5,414
                                                                   ------------
                                                                   $  2,066,499
                                                                   ============


Liabilities and stockholders' deficit
Current liabilities:
     Accounts payable                                              $  2,173,941
     Accrued payroll and related expense                              1,306,729
     Accrued liabilities                                                260,151
     Unearned income                                                  3,917,827
     Other current liabilities                                          151,499
                                                                   ------------
Total current liabilities                                             7,810,147

Convertible preferred stock, $0.01 par value,
     1,000,000 shares authorized;
     168 shares issued and outstanding
     ($168,496 aggregate liquidation value)                             168,496

Stockholders' deficit:
     Common stock, $0.01 par value,
         100,000,000 shares authorized;
         45,084,089 shares issued and outstanding                       450,841
     Additional paid-in capital                                      61,924,486
     Accumulated deficit                                            (68,287,471)
                                                                   ------------
Total stockholders' deficit                                          (5,912,144)
                                                                   ------------
                                                                   $  2,066,499
                                                                   ============


See accompanying notes to the consolidated financial statements.

                                       34
<PAGE>


                        Integrated Surgical Systems, Inc.

                      Consolidated Statements of Operations


                                                      Years ended December 31,
                                                   ----------------------------
                                                       2004            2003
                                                   ------------    ------------

Net revenue                                        $  2,359,839    $  5,831,482
Cost of revenue                                         893,682       3,990,140
                                                   ------------    ------------
                                                      1,466,157       1,841,342
Operating expenses:
     Selling, general and administrative              1,139,569       2,439,172
     Research and development                           994,030       1,664,160
     Loss on disposal of subsidiary                        --         1,516,519
                                                   ------------    ------------
                                                      2,133,599       5,619,851
                                                   ------------    ------------
Operating loss                                         (667,442)     (3,778,509)

Other income (expense):
     Foreign currency exchange gain                        --           143,321
     Loan forgiveness                                      --           109,000
     Other, net                                         111,180         275,969
                                                   ------------    ------------
                                                        111,180         528,290
                                                   ------------    ------------

Net loss available to common stockholders          $   (556,262)   $ (3,250,219)
                                                   ============    ============

Basic and diluted net loss per common share        $      (0.01)   $      (0.08)
                                                   ============    ============
Shares used in computing basic and
 diluted net loss per share
                                                     44,961,384      43,015,760
                                                   ============    ============


See accompanying notes to the consolidated financial statements.


                                       35
<PAGE>
<TABLE>
<CAPTION>


                                                      Integrated Surgical Systems, Inc.

                               Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit


                                                       Convertible Preferred Stock                   Stockholders' Deficit
                                            ---------------------------------------------------     ------------------------
                                                                        Additional                        Common Stock
                                                                         Paid-in                    ------------------------
                                              Shares      Amount         Capital        Total         Shares         Amount
                                            ---------------------------------------------------     ------------------------

<S>                                             <C>     <C>           <C>            <C>            <C>           <C>
Balance at December 31, 2002                    250     $        2    $  250,494     $  250,496     41,978,469    $  419,785
   Conversions of preferred stock               (82)          --         (82,000)       (82,000)     2,888,889        28,889
   Comprehensive loss:
    Net loss
    Foreign currency translation               --             --            --             --             --            --
     adjustments                               --             --            --             --             --            --
    Foreign currency translation
     adjustment related to                     --             --            --             --             --            --
     disposal of subsidiary
   Comprehensive loss                          --             --            --             --             --            --
                                            --------------------------------------------------------------------------------
Balance at December 31, 2003                    168     $        2    $  168,494     $  168,496     44,867,358    $  448,674
   Stock compensation, non-employees           --             --            --             --          130,000         1,300
   Employee stock options exercised            --             --            --             --           86,731           867
   Comprehensive loss:
    Net loss                                   --             --            --             --             --            --

   Comprehensive loss                          --             --            --             --             --            --

Balance at December 31, 2004                    168     $        2    $  168,494     $  168,496     45,084,089    $  450,841
                                            ================================================================================




                                              Integrated Surgical Systems, Inc.

                Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit (Continued)

                                                                            Stockholders' Deficit
                                                   ------------------------------------------------------------------------
                                                                      Accumulated
                                                    Additional            Other                                    Total
                                                      Paid-in         Comprehensive        Accumulated         Stockholders'
                                                      Capital             Loss               Deficit             Deficit
                                                   ------------------------------------------------------------------------

Balance at December 31, 2002                       $ 61,849,581       $ (1,217,907)       $(64,480,990)       $ (3,429,531)
   Conversions of preferred stock                        53,111               --                  --                82,000
   Comprehensive loss:
    Net loss                                               --                 --            (3,250,219)         (3,250,219)
    Foreign currency translation
     adjustments                                           --              (66,862)               --               (66,862)
    Foreign currency translation
     adjustment related to
     disposal of subsidiary                                --            1,284,769                --             1,284,769
                                                                                                              ------------
   Comprehensive loss                                      --                 --                  --            (2,032,312)
                                                   -----------------------------------------------------------------------
Balance at December 31, 2003                       $ 61,902,692       $       --          $(67,731,209)       $ (5,379,843)
   Stock compensation, non-employees                     19,900               --                  --                21,200
   Employee stock options exercised                       1,894               --                  --                 2,761
   Comprehensive loss:
    Net loss                                               --                 --              (556,262)           (556,262)
                                                                                                              ------------
   Comprehensive loss                                      --                 --                  --              (556,262)
                                                   ------------------------------------------------------------------------
Balance at December 31, 2004                       $ 61,924,486       $       --          $(68,287,471)       $ (5,912,144)
                                                   =========================================================================


See accompanying notes to the consolidated financial statements.

                                                             36

<PAGE>


                                    Integrated Surgical Systems, Inc.

                                  Consolidated Statements of Cash Flows


                                                                          Years ended December 31,
                                                                     ---------------------------------
                                                                        2004                   2003
                                                                     -----------            ----------
Cash flows from operating activities:
Net loss                                                             $  (556,262)           $(3,250,219)
Adjustments to reconcile net loss to net cash provided by
  (used in) operating activities:
    Loss on disposal of subsidiary                                          --                1,446,597
    Loss on write-down of fixed assets                                     2,296                   --
    Depreciation                                                          21,086                236,992
    Forgiveness of note payable                                             --                 (109,262)
    Stock compensation, non-employees                                     21,200                   --
    Changes in operating assets and liabilities:
       Accounts receivable                                                52,187              1,115,890
       Inventory                                                        (159,254)               663,301
       Other current assets                                               81,006                 46,310
       Accounts payable                                                  211,092                 72,244
       Accrued payroll and related expenses                              425,282                585,779
       Accrued liabilities                                               (94,764)                70,376
       Unearned income                                                 1,073,654               (434,892)
       Other current liabilities                                           1,499               (257,468)
                                                                     -----------            -----------
Net cash provided by operating activities                              1,079,022                185,648

Cash flows from investing activities:
Purchases of property and equipment                                         --                  (20,174)
Disposal of property and equipment                                          --                    9,343
Proceeds from sale of property and equipment                               6,200                   --
                                                                     -----------            -----------
Net cash provided by (used in) investing activities                        6,200                (10,831)

Cash flows from financing activities:
Proceeds from Financing Agreement                                        150,000                   --
Proceeds from exercise of stock options                                    2,761                   --
Proceeds from officers advances                                          210,846                 70,099
Payments on officers advances                                           (267,335)               (66,286)
                                                                     -----------            -----------
Net cash provided by financing activities                                 96,272                  3,813

Effect of exchange rate changes on cash                                     --                 (117,790)
                                                                     -----------            -----------
Net increase in cash                                                   1,181,494                 60,840
Cash at beginning of year                                                142,909                 82,069
                                                                     -----------            -----------
Cash at end of year                                                  $ 1,324,403            $   142,909
                                                                     ===========            ===========


Supplemental disclosure of non-cash
activity:
    Supplemental disclosure of non-cash financing activities:
       Conversion of preferred stock                                 $      --              $    82,000
</TABLE>


See accompanying notes to the consolidated financial statements.


                                       37

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Note 1. Description of Business and Basis of Presentation

Integrated Surgical Systems, Inc. ("the Company") designs, manufactures, sells
and services image-directed, pre-surgical planning computer-controlled robotic
software and hardware products for use in orthopaedic and neurosurgical
procedures. The Company was incorporated in Delaware in 1990.

In 1997, the Company acquired 100% interest in a French company, Innovative
Machines International, S.A., involved in the manufacturing and servicing of
neurosurgical products and changed the name to Integrated Surgical Systems, S.A.
("ISS-SA"). Under French law, a company whose net assets are less than 50% of
its capital stock may come under the supervision and control of a regional
administrative tribunal. On September 30, 2003, the Tribunal de Commerce (the
"Tribunal") in Lyon, France appointed an administrator to manage the Company's
operations and the administrator exercised control over all aspects of ISS-SA's
operations including employee retention, purchasing, sales and inventory
management. Effective with the administrator's appointment, the Company no
longer had access to the assets, personnel or records of ISS-SA. As a result, in
the fourth quarter of 2003, the Company recorded a loss of $1,516,519 in
connection with the liquidation of its investment in ISS-SA and closure of the
Company's European operation. The results of operations of ISS-SA are only
included for the nine-months ended September 30, 2003, reflecting the Company's
liquidation of its operations concurrent with the assumption of the Tribunal.

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary Integrated Surgical Systems, BV
("ISS-BV") for the years ended December 31, 2004 and 2003. All significant
intercompany balances and transactions have been eliminated.

Note 2. Results of Operations and Management's Plans

The Company had net losses of $556,262 and $3,250,219 for the years ended
December 31, 2004 and 2003, respectively. In addition, the Company had a working
capital deficit of $5,749,062 and an accumulated deficit of $68,287,471 at
December 31, 2004. In addition, as more fully described in Note 11, the Company
is a defendant in a product liability lawsuit. The report of Independent
Registered Public Accounting Firm on the Company's December 31, 2004 and
December 31, 2003 consolidated financial statements includes an explanatory
paragraph indicating there is substantial doubt about the Company's ability to
continue as a going concern.

The Company believes that it has a plan to address these issues and enable the
Company to continue operating through December 31, 2005. This plan includes
effecting the issuance of additional convertible debentures and warrants as
described in Note 5, seeking additional sources of equity or debt financing,
generating cash flows through product, system upgrade and technology sales and
continued limitation of discretionary expenditures. Although the Company
believes that the plan will be realized, there is no assurance that these events
will occur, or that the plan will generate the necessary funds to allow the
Company to defend itself against, or satisfy any judgment resulting from the
product liability lawsuit (see Note 11). In the event that the Company is
unsuccessful, it is possible that it will cease operations or seek bankruptcy
protection. The consolidated financial statements do not include any adjustments
to reflect the uncertainties related to the recoverability and classification of
assets or the amounts and classification of liabilities that may result from an
inability on the Company's part to continue as a going concern.

Note 3. Significant Accounting Policies

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable and collectability is reasonably assured.


                                       38

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Revenue for product sales is generally recognized upon completion of training
and installation of the equipment at the end-user's site, except when the sales
contract requires formal customer acceptance. Equipment sales with contractual
customer acceptance provisions are recognized as revenue upon written
notification of customer acceptance, which generally occurs after the completion
of training and installation. Furthermore, due to business customs in Japan and
the Company's interpretation of Japanese law, all equipment sales to Japan are
recognized after customer acceptance, which generally occurs after the
completion of training and installation. Revenue related to maintenance and
service contracts is recognized ratably over the duration of the contracts.

Effective with its adoption of Emerging Issues Task Force ("EITF") 00-21,
"Multiple Deliverable Revenue Arrangements," when elements such as products and
services or other elements are combined in a single arrangement, or in related
arrangements with same customer, the Company allocates revenue to each element
based on its relative fair value, provided that such element meets the criteria
for treatment as a separate unit of accounting. The price charged when the
element is sold separately generally determines fair value. In the absence of
fair value for an undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled.

The Company develops specialized operating software for several implant
manufacturing companies. These implant manufacturers contract with the Company
for the development of particular lines of new prosthesis software to be used
with the ROBODOC system. These contracts are accounted for under the provisions
of Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," using the completed
contract and percentage of completion method of accounting. Product development
revenue for contracts recorded using the completed contract method is recognized
when development is complete under the terms of the contract, and the customer
has accepted the product. The direct cost, primarily labor, of product
development contracts is deferred until the development revenue is recognized.
Losses on contracts are accrued in the period that such losses are determined
under the percentage of completion method. Under the percentage of completion
method, revenue is recognized as work is performed, based on the relationship
between actual costs incurred and total estimated costs at completion. Revenues
are adjusted prospectively for revisions in estimated total contract costs when
identified. Losses, if any, are recognized in full when identified.

The Company has not leased any equipment to customers since liquidating its
ISS-SA European operation in the fourth quarter of 2003. Prior to the fourth
quarter of 2003, the Company, through its ISS-SA subsidiary, recognized revenue
from leasing activities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases." Accordingly, leases that,
transfer substantially all the benefits and risks of ownership are accounted for
as sales-type leases. All other leases are accounted for as operating leases.
Under the sales-type method, profit is recognized at lease inception by
recording revenue and cost. Revenue consists of the present value of the future
minimum lease payments discounted at the rate implicit in the lease. Cost
consists of the equipment's book value. The present value of the estimated value
of the equipment at lease termination (the residual value), which is generally
not material, and the present value of the future minimum lease payments are
recorded as assets. In each period, interest income is recognized as a
percentage return on asset carrying values. The cost of equipment subject to
operating leases is recorded as leased equipment and is depreciated on a

                                       39

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


straight-line basis over the estimated service life of the equipment. Operating
lease revenue is recognized as earned over the term of the underlying lease. All
such leasing activity was performed by, and recorded on the books of, ISS-SA. As
a result, at December 31, 2003, the Company held no such leases. During the year
ended December 31, 2004 and the year ended December 31, 2003, the Company
recorded $0 and $238,000, respectively, in revenues from cancelable operating
leases.

Foreign Currency Translation

The financial position and results of ISS-SA and ISS-BV are measured in Euros.
Balance sheet accounts are translated into dollars at the year-end exchange rate
and statement of operations amounts are translated at the average exchange rate
for the period. The resulting translation adjustments are recorded in the other
comprehensive income section of stockholders' deficit. The Company's foreign
currency transactions are usually recorded and settled in the same foreign
currency, without foreign exchange transaction gains or losses. Foreign exchange
transaction gains or losses are, however, recognized when translating
inter-company receivables and payables. Primarily due to the liquidation of
ISS-SA and the closure of its European operations, the Company reversed its
existing accumulated foreign exchange translation adjustment balance of
$1,284,769 in December 2003.

Research and Development

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

Shipping and Handling Costs

Costs related to shipping and handling are included in costs of revenues for all
periods presented.

Certain Risks and Uncertainties

The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments consist primarily of cash and
accounts receivable. The Company's cash is invested in cash deposits,
substantially all with one financial institution. The Company sells its products
to companies in the healthcare industry, most of which are located in foreign
countries. The Company requires a down payment when an order is received, with a
progress payment upon shipment, and final payment upon completion of training
and installation or customer acceptance. The Company believes that adequate
provisions for uncollectable accounts receivable has been made in the
accompanying consolidated financial statements.

A significant portion of the Company's sales are to a limited number of
customers located in foreign countries. Three major foreign customers of the
Company accounted for 45%, 24% and 22% of the Company's revenue during the year
ended December 31, 2004, and three major foreign customers accounted for 22%,
14% and 13% for the year ended December 31, 2003. At December 31, 2004, two
foreign customers accounted for 98% of accounts receivable, and at December 31,
2003, two customers accounted for 100% of accounts receivable.


                                       40
<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Foreign revenue, substantially all from Western European countries, Japan, India
and Korea was approximately $2,360,000 and $5,225,000 for the years ended
December 31, 2004 and December 31, 2003, respectively.

One of the key components of the ROBDOC system, a customized Robotic arm, has
been manufactured by a Japanese manufacturer, Sankyo Seiki, per ISS
specifications. The specifications, for this component, are the proprietary
property of the Company and can not be used by anyone else to build or supply
robot arms. The manufacturer has discontinued their medical robot business, and
will not manufacture new robot arms for the Company. This situation does not
create immediate risk as the Company has supplies in inventory to meet
anticipated demand through December 31, 2005 and, the Company is redesigning the
robot arm and is securing a new vendor for alternative vendor manufacture. Any
significant delay in securing a new vendor for this component could have a
material adverse effect on the financial condition, results of operations, or
cash flow of the Company.

Financial Statement Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company 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

Cash includes cash deposited in bank accounts.

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.

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 Company's products, and deferred costs associated with
certain of the Company's development contracts.

Inventory consisted of the following at December 31, 2004:

         Raw materials                                        $125,790
         Work-in-process                                       219,669
         Finished goods                                         94,181
         Deferred product development contract costs           206,570
                                                              --------
                                                              $646,210
                                                              ========


                                       41
<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Warranty

The Company offers a one-year warranty for parts and labor on all ROBODOC
systems commencing upon the completion of training and installation, except when
the sales contract requires formal customer acceptance. In most cases, the
Company's customers purchase a service contract, which includes warranty
coverage (parts and labor), unspecified product maintenance updates, customer
support services and various consumables required during surgical procedures.
Revenue from service contracts is initially deferred and then recognized ratably
over the term of the agreements. Service contracts can be renewed at the
customers' option, annually thereafter. Where the Company's products are not
covered by separate service agreements, the Company provides for the estimated
cost of product warranties at the time revenue is recognized, based on
historical results. The warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from these estimates, revisions to the estimated warranty
liability would be required. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary. The
Company has no recorded warranty liability for the periods ending December 31,
2004 and December 31, 2003, as all systems within the one-year warranty periods
were covered by service contracts.

Stock-Based Compensation

As permitted under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has elected to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." 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.

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 had accounted for the 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 2004 and 2003, respectively: risk-free interest rates of 3.4%
and 3.0%; dividend yield of 0%; volatility factors of the expected market price
of the common stock of 101% and 107%; and an expected life of the option of 4
years.

The weighted average grant date fair value of these options was $0.08 in 2004
and $0.03 in 2003. No options with option prices less than the fair market value
of the Company's stock on the date of grant were granted to employees in 2004 or
2003. 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, it
is the Company's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the employee stock options. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period.

                                       42

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


                                                       Year Ended December 31,
                                                         2004          2003
                                                     -----------    ----------
Net loss, as reported                                $  (556,262)   $(3,250,219)
Less: stock-based employee compensation
  cost included in net loss, as reported                    --             --
Stock-based employee compensation
  expense, determined under fair
  value method for all awards                            (11,104)      (112,444)
                                                     -----------    -----------
Pro forma net loss                                   $  (567,366)   $(3,362,663)
                                                     ===========    ===========

Loss per share:
    Basic and diluted net loss per share             $     (0.01)   $     (0.08)
                                                     ===========    ===========
    Pro forma basic and diluted net loss per share   $     (0.01)   $     (0.08)
                                                     ===========    ===========

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.

Recent Accounting Pronouncements

In May 2003, FASB issued Statement of Financial Accounting Standards No. (SFAS
No. 150), "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." SFAS No. 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and, as
such, SFAS No. 150 represents a significant change in practice in the accounting
for a number of mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003.

The adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated financial position, cash flows or results of operations.

In November 2002, the EITF reached a consensus on Issue 00-21, "Multiple
Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to
account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services, or both, are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are "separate units of accounting." The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus is applicable to
agreements entered into in fiscal periods beginning after June 15, 2003, with
early adoption permitted. Additionally, companies will be permitted

                                       43

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


to apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." The adoption of EITF 00-21 did not have a material
impact on the Company's consolidated financial position, cash flows or results
of operations.

Note 4. Property and Equipment

Property and equipment consists of the following at December 31, 2004:

    Computer hardware and purchased software               $  206,166
    Machinery and equipment                                   242,210
    ROBODOC and NeuroMate System equipment                    687,082
    Furniture and fixtures                                     85,997
    Leasehold improvements                                     10,383
                                                           ----------
                                                            1,231,838
    Less accumulated depreciation                           1,226,424
                                                           ----------
                                                           $    5,414
                                                           ==========

Note 5. Financing Agreement

To obtain funding for the Company's ongoing operations, the Company entered into
a securities purchase agreement (the "Agreement") with an accredited investor on
June 15, 2004 with respect to the sale by the Company for aggregate
consideration of $150,000 of (i) a convertible debenture in the principal amount
of $150,000 and (ii) warrants to purchase 1,500,000 shares of Company common
stock. The Agreement contemplates the sale of additional convertible debentures
and warrants upon the occurrence of specific events. The Company is obligated to
register under the Securities Act for resale by the investor the common stock
underlying the debenture and warrants issued pursuant to the Agreement. In
connection with the sale of the original $150,000 convertible debenture and 1.5
million warrants the investor provided the Company with funds as follows:

     o    $100,000 was disbursed to the Company on June 15, 2004;

     o    $50,000 was disbursed to the Company on October 19, 2004; and

     o    $50,000 has been retained by the investor for disbursement to various
          professionals in payment for services to be provided to the Company.

The convertible debenture bears interest at 6 3/4%, matures two years from the
date of issuance, and is convertible into, at the investor's option, into the
number of shares of Company common stock equal to the principal amount of the
debenture being converted multiplied by 11, less the product of the conversion
factor multiplied by ten times the dollar principal amount of the debenture
being converted. The conversion factor for the convertible debenture is the
lesser of (i) $0.25 or (ii) eighty percent of the average of the five lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is no limit on the number of shares into which
the debenture may be converted. In addition, the investor is obligated to
proportionately exercise, concurrently with the submission of a conversion
notice by the selling stockholder, the warrants. The warrants are at an exercise
price of $1.00 per share.

                                       44

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


The investor has contractually agreed to restrict its ability to convert or
exercise its warrants and receive shares of Company common stock such that the
number of shares of common stock held by it and its affiliates after such
conversion and exercise does not exceed 4.9% of the then issued and outstanding
shares of Company common stock.

The issuance of more than 51.5 million shares of common stock upon conversion of
the convertible debenture and exercise of the warrants issued pursuant to the
Agreement would require the Company to issue shares of common stock in excess of
the Company's currently authorized shares of its common stock. The Company
intends to seek stockholder approval to amend the Company's certificate of
incorporation to increase the Company's authorized common stock from 100,000,000
to 300,000,000 shares. Such solicitation will be made pursuant to a proxy
statement conforming to the rules and regulations of the Securities and Exchange
Commission. This Annual Report on Form 10-KSB should not be considered, in any
manner, a solicitation for voting in favor of such an increase in the Company's
authorized common stock.

The issuance of the convertible debenture and warrants to the investor is
contingent upon stockholder approval of the increase in the Company's authorized
common stock. If such approval is not received, the Agreement will terminate and
the Company will be obligated to repay the proceeds received to date and other
funds disbursed by the investor to professionals in payment of services rendered
on behalf of the Company. As a result, the Company recorded such proceeds in
other current liabilities.

Note 6. Note Payable

The Company received a $143,403 interest-free loan in 1997 from ANVAR, a French
agency established to aid research and development projects. The loan provided
funding for the first phase of the development of NeuroMate applications for
spinal surgery. Under the terms of the loan, 50% of the revenues generated from
the sale or licensing of the related technology, prototype, or articles
manufactured specifically for the research project, were to be paid to ANVAR in
the subsequent year, up to the balance of the loan amount outstanding. No such
revenues were recorded during the years ending December 31, 2004 and 2003.

The loan also provided for the forgiveness of the loan under certain conditions,
including a review by ANVAR. In August 2003, ANVAR completed a review of the
loan balance and determined that the remaining balance of approximately $109,000
was forgiven. The Company has recorded the forgiveness of the loan in other
income, net in August 2003.

Note 7. Stockholders' Deficit

Common Stock

At December 31, 2004 the Company has reserved a total of 6,017,714 shares of
common stock for future issuance pursuant to Series G Convertible Preferred
Stock, warrants and options outstanding.

The Company established an Employee Stock Purchase Plan ("ESPP") in 1998. The
ESPP plan provides all eligible employees an opportunity to acquire an ownership
interest in Integrated Surgical Systems, Inc. on a payroll deduction or other
compensation basis at a 15% discount. The plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code. The
plan covers an aggregate of 300,000 shares of the Company's common stock. At
December 31, 2004, no offerings have been made to employees under the ESPP plan.


                                       45

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Warrants

The following table summarizes information about common stock warrants
outstanding at December 31, 2004 and 2003:
<TABLE>
<CAPTION>
                                                                                                                Outstanding at
                                             Issue        Expiration                         Exercise            December 31,
                Warrants issued               Year           Date             Issued          Range           2004           2003
                ---------------               ----           ----             ------          -----           ----           ----
<S>                                           <C>              <C>           <C>                 <C>        <C>           <C>
Pursuant to stock purchase agreement (2)      1997    December 2006          2,274,066           $0.01      2,206,479     2,206,479
With Series F preferred stock (1)             2000    February 2004            125,000            2.38              -       125,000
With Series G preferred stock (1)             2000       May 2004               63,000            1.88              -        63,000
With Series H preferred stock (1)             2000     August 2004             650,000       0.50-1.02              -       650,000
In connection with equity financing (3)       2000    September 2004            35,000            0.86              -        35,000
In connection with services (4)               2002       May 2007              100,000            0.06        100,000       100,000
In connection with services (5)               2004      July 2014              300,000           .0625        300,000             -
                                                                             ---------                      ------------------------
                                                                             3,547,066                      2,606,479     3,179,479
                                                                             =========                      ========================
</TABLE>

Unless otherwise stated below, the warrants are exercisable when granted and
expire between 2004 and 2014.

- ---------

(1)  Warrants are exercisable when vested, generally within one year of issue.

(2)  Number of common shares and exercise price are subject to dilution
     adjustment.

(3)  Aggregate estimated fair value of $20,650, based on Black-Scholes option
     valuation model.

(4)  Aggregate estimated fair value of $5,000, based on Black-Scholes option
     valuation model.

(5)  Aggregate estimated fair value of $18,000, based on Black-Scholes option
     valuation model

Preferred Stock

The Company's Certificates of Incorporation authorize 1,000,000 shares of
undesignated, serial 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 further vote or action by the Company's stockholders.

Convertible Preferred Stock

The Company's convertible preferred stock is classified as mezzanine financing,
outside of permanent equity, due to its liquidation rights upon a change in
control, as this condition is not solely within the Company's control. Given the
liquidation rights of the Company's convertible preferred stock, these
securities have been accounted for as if they were redeemable preferred stock.
As such, the redemption value of the convertible preferred stock has been its
liquidation preference of $168,496, and the carrying value of the convertible
preferred stock is adjusted to its redemption amount at each balance sheet date
through corresponding debits and credits to accumulated deficit and convertible
preferred stock respectively, up to the liquidation preference.


                                       46
<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


Since September 1998, the Company has received aggregate net proceeds of
$14,084,995 from the sale of eight series of convertible preferred stock.
Information concerning these convertible preferred stock financing is set forth
below:

                                           Shares                Net
     Series      Date of Sale               Sold              Proceeds
     --------------------------------------------------------------------

       A      September 10, 1998             3,520       $      3,300,447
       B      March 26, 1999                 1,000                916,918
       C      June 10, 1999                    750                658,190
       D      June 30, 1999                  2,000              1,861,549
       E      July 30, 1999                  3,000              2,819,484
       F      February 8, 2000               2,000              1,850,861
       G      May 30, 2000                   1,800              1,610,555
       H      August 17, 2000                1,200              1,066,991

Each series of convertible preferred stock has a stated value of $1,000 per
share and is convertible into common stock at conversion prices equal to 80% or
85% of the lowest sale price of the common stock on its listed market over the
five trading days preceding the date of conversion ("Beneficial Conversion
Feature") subject to a maximum conversion price. 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 convertible preferred stock to be converted by
the conversion price.

The value assigned to the Beneficial Conversion feature of each class of
preferred stock was based upon the difference between the maximum conversion
price and the quoted market price of the common stock on the date the
convertible preferred stock was sold (the "Discount"). The Discount was accreted
using the straight-line method over the conversion period. No series of
convertible preferred stock entitles holders to dividends or voting rights,
unless required by law or with respect to certain matters relating to a
particular series of convertible preferred stock.

During the year ended December 31, 2003, 82 shares of Series G convertible
preferred stock were converted into 2,888,889 shares of common stock. At
December 31, 2004 and 2003, 168 shares of Series G convertible preferred stock
were outstanding. At December 31, 2004, the series G shares would have converted
into a minimum of 103,371 shares of common stock based upon its maximum
conversion price of $1.63. No other series of preferred stock were outstanding.
The number of shares of common stock issued upon conversion and the average
actual conversion price for each series of convertible preferred stock converted
into shares of common stock through December 31, 2004 was as follows:


                                       47
<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


            Series             Common Shares                        Price
           ---------------------------------------------------------------

              A                   2,867,135                          $2.23
              B                     459,831                           2.17
              C                     563,497                           1.33
              D                   1,605,203                           1.25
              E                   1,490,101                           1.22
              F                   2,143,242                           0.93
              G                   9,887,747                           0.17
              H                  10,921,902                           0.11


Stock Option and Long-Term Performance Plans

The Company has established four specific stock option plans in which officers,
employees, directors and consultants may participate. Options granted under the
plans may be incentive stock options or non-incentive stock options and
generally have a term of ten years from the date of grant. The exercise price of
incentive stock options granted under the plans may not be less than 100% of the
fair market value of the 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 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 the Company's 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.

Each plan is administered by the Company's board of directors, as the board of
directors may be composed from time to time. Certain officers and directors may
be deemed to be "affiliates" as that term is defined under the Securities Act.
The common stock acquired under the Plans by an affiliate may be re-offered or
resold only pursuant to an effective registration statement or pursuant to Rule
144 under the Securities Act or another exemption from the registration
requirements of the Securities Act.

The 1995 Stock Option Plan: The 1995 Plan was approved by the Company's board of
directors on December 22, 1995. The purpose of the 1995 Plan is to attract,
motivate and retain selected employees and other individuals providing services
to us. The options in this plan were not intended to qualify as incentive stock
options. The options vest over a four-year period and must be exercised within
three months of termination.

The 1998 Stock Option Plan: The 1998 Plan was approved by the Company's board of
directors on May 13, 1998. The purpose of the 1998 Plan is to attract, motivate
and retain selected employees and other individuals providing services to the
Company. The options in this plan were not intended to qualify as incentive
stock options. The options vest over a four-year period and must be exercised
within three months of termination.

The 2000 Stock Award Plan: The 2000 Plan was approved by the Company's board of
directors on December 12, 2000. The purpose of the 2000 Plan is to attract,
motivate and retain selected employees and other individuals providing services
to the Company. The 2000 Plan is a long-term performance plan and the options
are intended to qualify as incentive stock options. The options vest over a
four-year period and must be exercised within 30 days of termination.

The 2004 Long-Term Performance and Incentive Plan: The 2004 Plan was approved by
the Company's board of directors on July 22, 2004. The purpose of the 2004 Plan
is to attract, motivate and retain selected employees of, and other individuals


                                       48
<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


providing services to the Company. The 2004 plan is a long-term performance and
incentive plan. The options in this plan were not intended to qualify as
incentive stock options. The options vest over a four-year period and must be
exercised within three month of termination. This plan has not yet been approved
by the stockholders and will be presented for approval at a future date.

The following table summarizes activity under the plans for the years ended
December 31, 2004 and 2003:
<TABLE>
<CAPTION>

                                                                                          Weighted
                                                                                          Average
                                                                           Number         Exercise
                                                                          of Shares        Price
                                                                          -----------------------
<S>                                                                       <C>               <C>
Outstanding at December 31, 2002 (at $.03 to $8.50 per share)             1,608,971         $1.28
     Granted (at $0.03 to $0.06 per share)                                1,130,100          0.03
     Cancelled (at $0.03 to $3.94 per share)                               (260,429)         0.67
     Exercised                                                                   -             -
                                                                          ----------
Outstanding at December 31, 2003 (at $.03 to $8.50 per share)             2,478,642         $0.77
     Granted (at $0.06 to $0.08 per share)                                   27,500          0.08
     Cancelled (at $0.03 to $5.69 per share)                               (216,219)         0.47
     Exercised (at $0.03 to $0.06 per share)                                (86,731)         0.05
                                                                          ----------
Outstanding at December 31, 2004 (at $.03 to $8.50 per share)             2,023,192         $0.82
                                                                          ==========

The weighted average exercise price of options granted in 2004 and 2003 with
option prices equal to the fair market value of the stock on the grant date was
$0.08 and $0.06, respectively. At December 31, 2004 there were 438,951 shares
of common stock reserved for future grants under the Stock Option Plan.

The following table summarizes information related to options outstanding and
options exercisable at December 31, 2004:

                                                                 Weighted
                                                                  Average                            Weighted
                                            Weighted             Remaining                            Average
     Exercise            Options            Average             Contractual         Options          Exercise
      Price            Outstanding       Exercise Price        Life (in Years)     Exercisable         Price
  ----------------------------------------------------------------------------------------------------------

  $0.00 -$ .49            858,000            $0.03                   8.1              776,855          $0.03
    0.50 - 0.99           668,652             0.08                   3.9              585,805           0.08
    1.00 - 1.99           384,263             1.78                   5.1              384,263           1.78
    2.00 - 3.99           233,000             3.08                   3.8              233,000           3.08
    4.00 - 8.50            59,277             5.97                   2.1               59,277           5.97
                       ----------                                                  ----------
                        2,203,192            $0.82                   5.7            2,039,200          $0.89
                       ==========                                                  ==========


                                       49
</TABLE>
<PAGE>

                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements

Note 8. Income Taxes

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, 2004
and 2003 are as follows:

                                                       2004              2003
                                                    ----------------------------
Deferred tax assets:
    Net operating loss carryover                    $19,249,000      $19,882,000
    Research and development credit                   2,301,000        2,212,000
    Research and development                            228,000          305,000
    Accrued product retrofit costs                         --               --
    Inventory                                           268,000          303,000
    Depreciation                                         77,000          154,000
    Stock compensation                                  289,000          289,000
    Loss on investment                                  126,000          126,000
    Deferred income                                   1,565,000        1,130,000
    Other                                               199,000          227,000
                                                    ----------------------------
                                                     24,302,000       24,628,000
Less valuation allowance                             24,302,000       24,628,000
                                                    ----------------------------
Net deferred taxes                                  $      --        $      --
                                                    ============================

The Company expects the carryforward amounts will not be used 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
as of December 31, 2004 and 2003 are as follows:

                                                          2004         2003
                                                     --------------------------

Federal benefit expected at statutory rates          $  (189,129)   $(1,136,670)
Domestic net operating loss with no current benefit      187,539      5,019,945
Net effect of foreign operations                            --          (70,744)
Other taxes                                                1,590     (3,814,892)
Other non-deductible items                                  --            2,361
                                                     --------------------------
                                                     $      --      $     --
                                                     ==========================

As a result of stock sales through December 31, 1995, 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 federal and state net operating loss
carryforwards from these years will be subject to a total annual limitation in
the amount of approximately $400,000.

The Company had at December 31, 2004 a net operating loss carryover of
approximately $42,055,000 for federal income tax purposes which expires between
2005 and 2023, a net operating loss carryforward of approximately $11,204,000
for state income tax purposes which expires between 2005 and 2013, and a net
capital loss carryover for federal income tax purposes of $12,640,000 which will
expire in 2008.


                                       50

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


The Company had at December 31, 2004 research and development credit carryovers
of approximately $1,446,000 and $1,295,000 for federal and state income tax
purposes, respectively. The Company paid $800 for income and franchise taxes
during each of the two years ended December 31, 2004 and 2003. The valuation
allowance decreased by $326,000 in 2004 and increased by $5,855,000 in 2003.

Note 9. Net Loss Per Share Information

At December 31, 2004, outstanding options to purchase 2,203,192 shares of common
stock (with exercise prices ranging from $0.025 to $8.50), 2,606,479 outstanding
warrants to purchase 2,606,479 shares of common stock (with exercise prices from
$0.01 to $0.0625), and 6,017,714 shares of common stock issuable upon conversion
of Series G 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.
The exercise price and the ultimate number of shares of common stock issuable
upon conversion of the warrants are subject to adjustments based upon the
occurrence of certain future events.

Note 10. Commitments

The Company's executive offices and production facility are located in Davis,
California. The Company occupies the facility in Davis under a lease that
expires in June 2005, which is currently being renegotiated. During the third
quarter of 2004, the Company renegotiated this lease to reduce the square
footage from approximately 30,500 square feet to approximately 16,000 square
feet, with a corresponding per month reduction in monthly rent expense from
approximately $32,500 per month to approximately $18,000 per month. Prior to the
renegotiations of the lease, the Company paid utilities and maintenance fees
directly to the providers of these services. These utility and maintenance fees
are now paid to the providers directly by the lessor and billed back to the
Company, along with property taxes, on a pro-rated percentage based on the
Company's percentage of occupancy.

Future payments under the non-cancelable facility operating lease is
approximately $90,000 for the year ending December 31, 2005. Aggregate rental
expense under this lease and the Company's lease for ISS-SA's facility in France
amounted to approximately $321,000 and $438,000 during the years ended December
31, 2004 and 2003, respectively. Effective October 1, 2003, the lease in France
was terminated by the Tribunal and no further expenses were recorded.

Note 11. Contingencies

The Company is subject to legal proceedings and claims that arise in the normal
course of business. The Company cannot assure that it would prevail in such
matters nor can it assure that any remedy could be reached on mutually agreeable
terms, if at all. Due to the inherent uncertainties of litigation, the Company
would not be able to accurately predict their ultimate outcome.

On December 17, 2004, the Company was served with a summons and complaint
commenced in Yolo County (California) Superior Court, styled Bischoff, et al.
vs. Integrated Surgical Systems, Inc. et al. The plaintiffs, in the litigation,


                                       51
<PAGE>



                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements


all from Germany, allege that the Company's ROBODOC System is defective and
dangerous, both in its manufacture and design and, as a result of such defect
and dangerous condition, the plaintiff, all of whom were subject to medical
treatment utilized the ROBODOC System, sustained injury. The plaintiffs are
seeking class status for this matter.

The Company believes the plaintiff's allegations are without merit. The Company
intends to conduct a vigorous defense against the allegations contained in the
complaint. However, the Company did not have any product liability insurance
from June 2004 through March 3, 2005, due to its financial inability to pay the
requisite insured premiums. Effective March 4, 2005 the Company secured a new
product liability insurance policy in the amount of $2 million per occurrence
and $2 million in aggregate.

This case is at its incipient stages. The Company has retained competent counsel
to represent it in this matter. The amount of damages, if any, are
indeterminable at this juncture.

Defending against a product liability action can be expensive and time consuming
to management personnel. The Company currently does not have the funds, which
may be necessary to defend against the plaintiffs' allegations. The failure to
properly defend the Company against the allegations could result in a material
judgement against the Company, which could adversely affect our financial
condition, results of operations and cash flow. The Company may also currently
not have the funds necessary to satisfy any judgement rendered against it. The
Company's failure to successfully defend against the allegations could result in
our seeking protection under the United States Bankruptcy Code. Such action
could have a material adverse effect on the market price of the Company's common
stock, business, financial condition, cash flow and results of operations.

In accordance with SFAS No. 5. "Accounting for Contingencies," the Company has
reviewed the facts related to the liquidation of its investment in ISS-SA and
closure of its European operations (see Note 1) and has determined that no
provision for loss is required related to this action. Were a claim to be filed
the Company would not be able to accurately predict its ultimate outcome.

Note 12. Related Party Transactions

At December 31, 2004, the Company had an aggregate amount due to executive
officers of approximately $1,013,000. These amounts due are in the form of an
interest bearing advance, deferred salaries and unreimbursed travel expenses. Of
such amounts, $460,000 and $276,000 are included in accrued payroll and related
expense and accounts payable and accrued liabilities, respectively, and are due
to Ramesh C. Trivedi, president and chief executive officer of the Company;
$141,000 and $27,000 are included in accrued payroll and related expense and
accounts payable, respectively, and are due to Leland Witherspoon, vice
president of engineering of the Company; and $109,000 is included in accrued
payroll and related expense and is due to Charles J. Novak, chief financial
officer of the Company. At December 31, 2004, the Company had accrued payroll
and accrued payroll taxes of $479,000 for all other employees.

Note 13. Restatement of Unaudited Interim Financial Information

In conjunction with the audit of its financial statements for the year ended
December 31, 2004, the Company determined that it had overstated accounts
receivable and unearned income as of September 30, 2004 due to prematurely or
incorrectly recording certain service contracts with its customers. Accounts
receivable and unearned income as of September 30, 2004 were overstated by
$287,897 and $253,933, respectively. In the third quarter of 2004, net revenue


                                       52

<PAGE>


                        Integrated Surgical Systems, Inc.

                   Notes to Consolidated Financial Statements

was overstated by $33,964 and net loss understated by a similar amount, as a
result of the amortization related to these service contracts. There was no
impact on the reported amount of basic or diluted net loss per common share as a
result of the correction.

A summary of the Company's interim financial information as of, and for the
three month period ended, September 30, 2004, as reported and as restated is
provided below:

- ----------------------------------------------------------------------------
                                          As Reported            As Restated
- ----------------------------------------------------------------------------
Accounts Receivable                       $   329,948            $     42,051
- ----------------------------------------------------------------------------
Unearned Income                           $ 2,714,991            $  2,461,058
- ----------------------------------------------------------------------------
Net Revenue                               $   139,140            $   105,176
- ----------------------------------------------------------------------------
Net Loss                                  $  (332,861)           $  (366,825)
- ----------------------------------------------------------------------------
Basis and Diluted Net Loss Per
Common Share                              $      (.01)           $      (.01)
- ----------------------------------------------------------------------------


                                       53

<PAGE>



                                   Signatures


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      Integrated Surgical Systems, Inc.


                                       By: /s/ RAMESH C. TRIVEDI
                                           -------------------------------------
                                               Ramesh C. Trivedi, President
                                               (Principal Executive Officer)


                                       By: /s/ CHARLES J. NOVAK
                                        ----------------------------------------
                                               Charles J. Novak
                                              (Principal Financial and
                                               Accounting Officer)


Dated: April 15, 2005

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant on April 15,
2004 in the capacities indicated.

       Signature                                     Title
       ---------                                     -----


/s/ RAMESH C. TRIVEDI          Chief Executive Officer, President and a Director
- -------------------------      (Principal Executive Officer)
Ramesh C. Trivedi


/s/ CHARLES J. NOVAK           Chief Financial Officer
- ------------------------       (Principal Financial and Accounting Officer)
Charles J. Novak


/s/ FALAH AL-KADI              Chairman of the Board
- ------------------------
Falah Al-Kadi


/s/ JACK W. MOORMAN            Director
- ------------------------
Jack W. Moorman


/s/ PAUL A.H. PANKOW           Director
- ------------------------
Paul A.H. Pankow


                                       54
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>2
<FILENAME>iss23.txt
<DESCRIPTION>CONSENT
<TEXT>

EXHIBIT 23.0





          CONSENT OF MACIAS GINI & COMPANY LLP, INDEPENDENT REGISTERED
                             PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on
Form S-8 Nos. 333-44093, 333-70779, 333-53188 and 333-53190 pertaining to the
1995 Stock Option Plan, as amended, the 1998 Stock Option Plan and Employee
Stock Purchase Plan and the 2000 Stock Award Plan, of Integrated Surgical
Systems, Inc. of our report dated April 15, 2005, with respect to the
consolidated financial statements of Integrated Surgical Systems, Inc. included
in the Annual Report on Form 10-KSB for the year ended December 31, 2004.



MACIAS GINI & COMPANY LLP


Sacramento, California
April 15, 2005

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>iss120431-1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

Exhibit 31.1

                                  CERTIFICATION

I, Ramesh C. Trivedi, Chief Executive Officer of Integrated Surgical Systems,
Inc., certify that:

1.   I have reviewed this annual report on Form 10-KSB for the year ended
     December 31, 2004 of Integrated Surgical Systems, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the small business issuer as of, and for, the periods presented in this
     report;

4.   The small business issuer's other certifying officers and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (language
     intentionally omitted pursuant to SEC Release No 5 33-8238 and 34-47986)
     for the small business issue and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the small
          business issuer, including its consolidated subsidiaries, is made
          known to us by others within those entities, particularly during the
          period in which this report is being prepared;

     (b)  (Language intentionally omitted pursuant to SEC Release No 5 33-8238
          and 34-47986);

     (c)  Evaluated the effectiveness of the small business issuer's disclosure
          controls and procedures and presented in this report our conclusion
          about the effectiveness of the disclosure controls and procedures, as
          of the end of the period covered by this report based on such
          evaluation; and

     (d)  Disclosed in this report any change in the small business issuer's
          internal control over financial reporting that occurred during the
          small business issuer's most recent fiscal quarter (the small business
          issuer's fourth quarter in the case of an annual report) that has
          materially affected, or is reasonably likely to materially affect, the
          small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have
     disclosed, based on our most recent evaluation of internal control over
     financial reporting, to the small business issuer's auditors and the audit
     committee of the small business issuer's board of directors (or persons
     performing the equivalent functions):

     (a)  All significant deficiencies and material weakness in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the small business issuer's
          ability to record, process, summarize and report financial
          information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.



Date: April 15, 2005                   By: /s/ RAMESH C. TRIVEDI
                                       -------------------------
                                       Ramesh C. Trivedi
                                       Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>4
<FILENAME>iss120431-2.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

Exhibit 31.2

                                  CERTIFICATION

I, Charles J. Novak, Chief Financial Officer of Integrated Surgical Systems,
Inc., certify that:

1.   I have reviewed this annual report on Form 10-KSB for the year ended
     December 31, 2004 of Integrated Surgical Systems, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the small business issuer as of, and for, the periods presented in this
     report;

4.   The small business issuer's other certifying officers and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (language
     intentionally omitted pursuant to SEC Release No 5 33-8238 and 34-47986)
     for the small business issue and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the small
          business issuer, including its consolidated subsidiaries, is made
          known to us by others within those entities, particularly during the
          period in which this report is being prepared;

     (b)  (Language intentionally omitted pursuant to SEC Release No 5 33-8238
          and 34-47986);

     (c)  Evaluated the effectiveness of the small business issuer's disclosure
          controls and procedures and presented in this report our conclusion
          about the effectiveness of the disclosure controls and procedures, as
          of the end of the period covered by this report based on such
          evaluation; and

     (d)  Disclosed in this report any change in the small business issuer's
          internal control over financial reporting that occurred during the
          small business issuer's most recent fiscal quarter (the small business
          issuer's fourth quarter in the case of an annual report) that has
          materially affected, or is reasonably likely to materially affect, the
          small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have
     disclosed, based on our most recent evaluation of internal control over
     financial reporting, to the small business issuer's auditors and the audit
     committee of the small business issuer's board of directors (or persons
     performing the equivalent functions):

     (a)  All significant deficiencies and material weakness in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the small business issuer's
          ability to record, process, summarize and report financial
          information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.



Date: April 15, 2005                       By: /s/ CHARLES J. NOVAK
                                           ------------------------
                                           Charles J. Novak
                                           Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>5
<FILENAME>iss120432-1.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

Exhibit 32.1

                                  CERTIFICATION


I, Ramesh C. Trivedi, Chief Executive Officer of Integrated Surgical Systems,
Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1.   The Annual Report on Form 10-KSB of the Company for the year ended
          December 31, 2004, which this certification accompanies (the "Periodic
          Report"), fully complies with the requirements of Section 13(a) of the
          Securities Exchange Act of 1934; and

     2.   The information contained in the Periodic Report fairly presents, in
          all material respects, the financial condition and results of
          operations of the Company.



Dated: April 15, 2005                        /s/ Ramesh C. Trivedi
                                             ---------------------
                                             Ramesh C. Trivedi
                                             Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>6
<FILENAME>iss120432-2.txt
<DESCRIPTION>CERTIFICATION
<TEXT>

Exhibit 32.2

                                  CERTIFICATION



I, Charles J. Novak, Chief Financial Officer of Integrated Surgical Systems,
Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1.   The Annual Report on Form 10-KSB of the Company for the year ended
          December 31, 2004, which this certification accompanies (the "Periodic
          Report"), fully complies with the requirements of Section 13(a) of the
          Securities Exchange Act of 1934; and

     2.   The information contained in the Periodic Report fairly presents, in
          all material respects, the financial condition and results of
          operations of the Company.




Dated: April 15, 2005                         /s/ Charles J. Novak
                                              --------------------
                                              Charles J. Novak
                                              Chief Financial Officer





</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
