<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>iss12312006.txt
<DESCRIPTION>FORM 10-KSB  (12-31-2006)
<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, 2006

 [ ] 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 of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)


     1433 N Market Blvd, Suite 1                                       95834
        Sacramento, California
 --------------------------------------                               --------
(Address of principal executive Offices)                             (Zip Code)

                                 (916) 285-9943
                                 --------------
                           (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:
                          Common Stock $0.01 par value


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. [ ]

Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [  ]   No [ x ]

The issuer's gross revenue for fiscal year 2006 was $2,593,584. As of April 12,
2007, 45,784,089 shares of Common Stock were issued and outstanding.

The aggregate market value of the Common Stock held by non-affiliates of the
Company on April 12, 2007 was $1,601,796. This calculation is based upon an
estimate of the fair market value of the Common Stock by the Company's Board of
Directors of $0.035 per share on that date.

Transitional Small Business Disclosure Format. (Check one): Yes No X

================================================================================
<PAGE>


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

                        Integrated Surgical Systems, Inc.
                                   Form 10-KSB
                   For the fiscal year ended December 31, 2006

                                Table of Contents
Part I.                                                                    Page

         Item 1.    Description of Business                                  2

         Item 2.    Description of Property                                  6

         Item 3.    Legal Proceedings                                        6

         Item 4.    Submission of Matters to a Vote of Security Holders      7

Part II.
         Item 5.    Market for Common Equity and Related Stockholder         7
                    Matters and Small Business Issuer
                    Purchases of Equity Securities

         Item 6.    Management's Discussion and Analysis or                  8
                    Plan of Operation

         Item 7.    Financial Statements                                    18

         Item 8.    Changes In and Disagreements With Accountants           18
                    on Accounting and Financial Disclosure

         Item 8A.   Control and Procedures                                  18

         Item 8B.   Other Information                                       18
Part III.
         Item 9.    Directors, Executive Officers, Promoters                18
                    and Control Persons; Compliance With Section
                    16(a) of the Exchange Act

         Item 10.   Executive Compensation                                  21

         Item 11.   Security Ownership of Certain Beneficial                23
                    Owners and Management and Related Stockholder
                    Matters

         Item 12.   Certain Relationships and Related Transactions          24

         Item 13.   Exhibits                                                24

         Item 14.   Principal Accountant Fees and Services                  25

         Signatures                                                         27

================================================================================
<PAGE>


                                     Part I

Item 1.  Description of Business

Integrated Surgical Systems, Inc. (Company) was incorporated in Delaware in 1990
to design, manufacture, sell and service image-directed, computer-controlled
robotic software and hardware products for use in orthopedic surgical
procedures. The Company's products are sold through international distributors
to hospitals and clinics in European Union member countries and Australia,
Canada, India, Israel, Japan, Korea, New Zealand, Switzerland and South Africa.

Orthopedic Applications

The Company's principal orthopedic 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 closed its wholly-owned subsidiary in France in the third quarter of
2003 and exited the neurosurgery segment of the market to focus on its core
business of orthopedic surgery. The Company intends to re-enter the neurosurgery
market again after securing FDA clearance for its ROBODOC System.

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 orthopedics
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.

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 orthopedic and trauma surgeons and hospitals in Europe
through direct sales and through distributors in Japan, Korea and India.

                                       2

<PAGE>


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 Sacramento,
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, pursuant to Company
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, 2007. 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, computer-controlled robotic software
and hardware products for use in orthopedic surgical procedures. The Company
incurred research and development expenses of approximately $444,000 during the
year ended December 31, 2006, and $318,000 in the year ended December 31, 2005.

Competition

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


                                       3
<PAGE>


Navigational instrumentation systems, offered by the major manufacturers of
orthopedic 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.

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.

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 in the market place. ROBODOC and ORTHODOC are registered trademarks of
the Company. The Company has been issued nine 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;

     o    Bone motion tracking for ROBODOC Surgical Systems;

     o    Method for determining location and orientation of a bone for CAS
          procedures using intraoperative attached markers;

     o    Methods and apparatus for registered CT-Scan Data to multiple images;

     o    System and method for fusing 3D shape data on distorted images without
          correcting for distortion; 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.

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

                                       4
<PAGE>


Government Regulations

The medical devices the Company manufactures and markets are subject to
extensive regulation by the U.S. Food & Drug Administration ("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, under
certain terms and conditions, while approval is pending. The Company completed
clinical trials in Japan and submitted a petition for approval in 2002. There
can be no assurance that the determination will be favorable, or that any
determination will not include unfavorable limitations or restrictions.

The second U.S. clinical trial designed to secure FDA clearance to market the
ROBODOC System in the U.S. began in December 2000. This trial is designed to
address specific questions raised by the FDA based on its review of the results
from the first clinical trial conducted in 1994 through 1996. This trial for 188
subjects is being conducted using the 3rd generation (latest version) ROBODOC
System. Upon completion of the trials, the Company will submit a 510(k) petition
to the FDA for clearance to market the ROBODOC System in the United States. At
December 31, 2006, a total of 109 patients have been enrolled in this study.

The Company did not sponsor any clinical trial sites from June 2005 through June
2006, as it did not maintain product liability insurance coverage during that
period. Upon obtaining product liability insurance in September 2006, the
Company reestablished clinical trial sites at Sutter General Hospital in
Sacramento, California, Buffalo General Hospital in Buffalo, New York, and
Jewish Hospital in Cincinnati, Ohio, and is in discussion with additional
domestic and international sites to add to the studies.

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 received clearance 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 and 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.

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

                                       5

<PAGE>


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 the 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. In
September 2006, the Company secured a new product liability insurance policy in
the amount of $2 million per occurrence and $2 million in aggregate.

The Company has experienced no liability claims to date.

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's products are sold through international distributors to hospitals
and clinics in European Union member countries and Australia, Canada, India,
Israel, Japan, Korea, New Zealand, Switzerland and South Africa. The Company's
international distributors are KTEC in Japan, ROCOM Frontier in Korea and
Paramount Impex in India. 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.

A significant portion of the Company's sales are to a limited number of
customers. One major customer of the Company accounted for 97% of the Company's
revenue during the year ended December 31, 2006, and another major customer
accounted for 79% for the year ended December 31, 2005. At December 31, 2006,
one customer accounted for 100% of accounts receivable, and at December 31,
2005, three customers accounted for 45%, 24% and 22% of accounts receivable.

Employees

On December 31, 2006, the Company had 10 employees. No such employees were
covered by collective bargaining agreements.

Item 2.  Description of Property

On December 1, 2006, the Company moved to a leased 11,200 square foot site at
1433 N. Market Blvd., Suite 1, Sacramento, California, 95834 with a four year
lease.

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.

On October 20, 2005, the Company was served with a summons and complaint
commenced in San Diego County (California) Superior Court (the "Court"),
entitled La Jolla Cove Investors Inc., et al. vs. Integrated Surgical Systems,
Inc. et al. The plaintiffs alleged that the Company was in breach of contract
and intentional misrepresentation in relation to the June 9, 2004 convertible
debenture agreement. On December 9, 2005, the Company made payment to La Jolla
Cove Investors of $8,000 for La Jolla to halt action on the suit while a
settlement agreement was worked out.

On January 27, 2006, the Company and La Jolla Cove Investors, Inc. signed a
promissory note settlement agreement. Upon making the final payment listed
below, the Company was released of any and all claims stated in, or in any way
related to claims asserted in the lawsuit.

                                       6
<PAGE>


         December 9, 2005                $  8,000
         January 27, 2006                  50,000
         February 24, 2006                 25,000
         March 29, 2006                    25,000
         April 19, 2006                    42,000
                                         --------
                                         $150,000
                                         ========

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

None


                                    Part II.

Item 5.  Market for Common Equity and Related Stockholder Matters

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 its failure to file its 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 December        High            Low
              31, 2006

              First Quarter                     $0.010          $0.002
              Second Quarter                    $0.009          $0.003
              Third Quarter                     $0.020          $0.002
              Fourth Quarter                    $0.075          $0.007

              Fiscal Year Ended December
              31, 2005

              First Quarter                     $0.040          $0.021
              Second Quarter                    $0.005          $0.005
              Third Quarter                     $0.005          $0.004
              Fourth Quarter                    $0.002          $0.002

Holders

As of March 31, 2007 there were 275 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.

                                       7

<PAGE>


Recent Sale of Unregistered Securities

During the twelve-month period ended December 31, 2006, the Company did not
issue any unregistered securities.

Equity Compensation Plans

The following table provides information as of the fiscal year ended December
31, 2006 with respect to the Company's compensation plans (including individual
compensation arrangements).
<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          197,908                       $1.92                     1,672,038 (1)

Equity compensation plans not
approved by security holders        2,200,000 (2)                   $0.04                         -0-
                                    ---------                       -----                      --------

Total                               2,397,908                       $0.20                     1,672,038
                                    =========                       =====                     =========
</TABLE>


(1)  Includes the Company's 1998 Stock Option Plan and its 2000 Stock Award
     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 and 1,800,000 shares to officers of the
     Corporation and have and exercise price of $0.04 per share which will
     expire in November 2011.

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

The following discussion and analysis relates to the operations of Integrated
Surgical Systems, Inc. and should be read in conjunction with its financial
statements, including the notes thereto, appearing elsewhere in this report.

Overview

Integrated Surgical Systems, Inc. was incorporated in Delaware in 1990 to
design, manufacture, sell and service image-directed, computer-controlled
robotic software and hardware products for use in orthopedic surgical
procedures. Although The Company have not received clearance to market the
ROBODOC(R) System (ROBODOC) 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 and Australia, Canada, India, Israel, Japan,
Korea, New Zealand, Switzerland and South Africa, do not require FDA export
approval. The Company sells its robotic systems to international distributors,
who in turn resell the product in their territories. The Company's international
distributors are KTEC in Japan, ROCOM Frontier in Korea and Paramount Impex in
India.

On June 10, 2005 The Company filed an 8-K with the SEC disclosing that it had
ceased operations, two of the three outside directors had resigned, all
employees were terminated and the Company's officers were evaluating all options
available, including securing additional capital, the sale of assets and the
seeking of protection under the Federal Securities Laws. On July 11, 2005, the
third outside director resigned leaving Ramesh C. Trivedi as the only director.

                                       8

<PAGE>


In November 2005, the Company received an advance for a ROBODOC System from its
Korean distributor and this system was shipped in January 2006. In February
2006, the Company received an advance for another ROBODOC System from our Korean
distributor and this system was shipped in March 2006.

On August 8, 2006, the Company filed Form 8-K with the SEC disclosing that it
had entered into a $4 million asset purchase agreement to sell substantially all
of our assets to Novatrix Biomedical, Inc. in consideration of $4 million as
well as a loan agreement with Novatrix pursuant to which Novatrix would loan us
an aggregate of $6 million in two tranches of $2.7 million upon the execution of
the agreement, and an additional $3.3 million in two tranches upon certain
milestones with Novatrix. As required by the loan agreement, the Company has
reached a settlement with over 80% of its outstanding creditors in exchange for
17.6 cents for each dollar owed. The loan agreement further provides that in the
event that approval by the Company's stockholders of the asset sale does not
occur by June 30, 2007, the Company will be required to grant an exclusive
license in the Asian markets of our ROBODOC Surgical System software to Novatrix
in exchange for a one-time royalty payment of $100,000.

In conjunction with this current Form 10-KSB, the Company has also filed all
prior quarterly and annual reports for the years ended 2005 and 2006 with the
SEC.

Product revenue consists of sales of the Company's principal orthopedic product,
the ROBODOC(R) Surgical Assistant System ("ROBODOC"), which integrates the
ORTHODOC(R) Presurgical Planner ("ORTHODOC") with a computer-controlled robot
for use in joint replacement surgeries. The Company develops specialized
operating software for several implant manufacturing companies. These implant
manufacturers contract with the Company for the development of software for
particular lines of new prosthesis to be used with the ROBODOC System.

The Company currently has warranty reserves of $57,000 on products shipped in Q1
2006.

Results of Operations (2006 vs. 2005)

For the year ended December 31, 2006, net revenue of $2,594,000 and cost of
revenue of $555,000 resulted with gross margin of $2,038,000 and operating
expenses of $441,000 and other expenses, net of $9,000 resulted in net income
$1,588,000 or $0.04 per basic share and $0.02 per dilutive share.

Net revenue

Net revenue of $2,594,000 for the year ended December 31, 2006 was down 24% when
compared to $3,430,000 for the year ended December 31, 2005. Although there were
two ROBODOC Systems sales in 2006 for $2,070,000, it was not enough to overcome
the loss of the 2005 development revenue of $2,994,000. Revenue from service
contracts, parts and consumables increased slightly to $524,000 from $436,000.

The decrease in revenue of $836,000 in 2006 from 2005 is presented in the
following table:
<TABLE>
<CAPTION>

                                                     2006                          2005              Increase (Decrease)
                                    ---------------------------    --------------------------    --------------------------
                                    Units                          Units                         Units
                                    Sold        Revenues           Sold       Revenues           Sold       Revenues
                                    --------    ---------------    -------    ---------------    -------    ---------------

<S>                                                <C>                <C>     <C>                           <C>
ROBODOC Systems                           2        $ 2,070,000          -     $            -          2     $   2,070,000
ROBODOC Modules                           -                  -          -                  -          -                 -
                                    -------        -----------      -----    ---------------    -------    --------------
  Total Systems and Modules               2                  -          -                  -          2                 -
                                    =======                       =======                       =======

Service contracts, parts
 and consumables                                       524,000                       436,000                       88,000

Development revenues                                         -                     2,994,000                   (2,994,000)
                                                   -----------               ---------------               --------------
  Total Revenues                                    $2,594,000                    $3,430,000                $    (836,000)
                                                   ===========               ===============               ==============

</TABLE>
                                                               9
<PAGE>


Cost of revenue

Cost of revenue of $555,000 in 2006 decreased 16% when compared to $657,000 in
2005, however, the costs increased as a percent of revenue to 21% in 2006 when
compared to 19% of revenue in 2005. This increase in cost as a percentage of
revenues is directly related to the change in the mix of revenue, from lower
cost development revenues to higher cost system revenues. In 2006, 80% of
revenues were from higher cost system revenues and there were no software
development revenues when compared to 2005 where there were no system revenues
and 87% of revenues were from lower cost development revenues. Service
contracts, parts and consumable revenues of $524,000 increased 20% when compared
to $436,000 in 2005 were primarily driven by support requirements for the
ROBODOC Systems sold in the first quarter of 2006.

Gross margin

Gross margin of $2,038,000 in 2006 decreased 27% when compared to $2,773,000 in
2005 and was 79% of revenue compared to 81% of revenue in 2005. This decrease in
gross margin as a percentage of revenues is directly related to the change in
the mix of revenue, to higher cost system revenues from lower cost development
revenues. In 2006, 80% of revenues were from lower gross margin system revenues
and there were no software development revenues when compared to 2005 where
there were no system revenues and 87% of revenues were from higher gross margin
development revenues.

Operating expenses

Operating expenses of $441,000 in 2006 decreased by 42% when compared to
$758,000 in 2005 and were 17% of revenue in 2006 compared to 22% of revenue in
2005. Operating expenses in 2006 are comprised of selling, general and
administrative expenses of $1,490,000, research and development of $444,000
offset by the forgiveness of debt of $1,493,000.

Selling, general and administrative expenses of $1,490,000 increased 86% in 2006
when compared to $803,000 in 2005 and were 57% of revenue in 2006 compared to
23% of revenue in the 2005. Selling, general and administrative expense in 2006
included $600,000 to the Company's distributor as commission expense. Without
this commission, selling, general and administrative expense would only have
been $890,000, or 34% of revenue during 2006. During 2005, the Company ceased
operations and all its employees were terminated. During the third quarter of
2005 and in 2006 the Company had started to add staff and restart portions of
the operations on a limited basis.

Research and development expenses of $444,000 increased 40% from $318,000 in
2005 as a result of restarting operations in 2006.

As required by a loan agreement, the Company reached a settlement with over
least 80% of its outstanding creditors at June 30, 2006 in exchange for 17.6
cents for each dollar owed. During Q3 of 2006 the Company reached agreements
with 98% of its creditors and settled $1,669,000 of outstanding debt.

Other income and expense - net

The Company recorded net other expense of $9,000 and $10,000 in 2006 and 2005,
respectively, as interest expense. In 2006 other expense was primarily $104,000
in interest expense from the Company's note outstanding partially offset by
$95,000 of miscellaneous income from the elimination of prior year accrued
liabilities no longer anticipated.

                                       10

<PAGE>


Liquidity

The reports of the Company's Independent Registered Public Accounting Firm on
the 2006 and 2005 financial statements included explanatory paragraphs stating
that there is substantial doubt with respect to the Company's ability to
continue as a going concern. On June 2, 2005, the Company terminated all of its
employees and ceased operations. The former officers of the Company were
evaluating all options available, including securing additional capital, the
sale of assets and the seeking of protection under the federal bankruptcy laws.

In November 2005, the Company received a cash advance to build a ROBODOC System
and relocated to a smaller facility in Sacramento, California to build this
system with a limited workforce. In February 2006 the Company received final
payment on one ROBODOC System and a deposit for the delivery of a second ROBODOC
System, which was delivered in March 2006 with the final payment being received
in April 2006. In July 2006 the Company received the first of two tranches of
the loan agreement with Novatrix.

At December 31, 2006, 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 1.02. 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 2007.

At December 31, 2006 the cash balance of the Company increased to $1,327,000
from $159,000 primarily as the result of cash provided by financing operations
of $2,558,000 which were partially reduced by cash used in operating activities
of $1,386,000.

Net cash used in operating activities was $1,386,000 for the year ended December
31, 2006. This resulted from net income of $1,588,000, adjusted for a non-cash
transaction of $1,460,000 for the forgiveness of debt relating to the
aforementioned settlement with over 80% of the Company's outstanding creditors
in exchange for 17.6 cents for each dollar owed. The primary changes in funds
used in operating assets and liabilities were decreases in accrued payroll and
related expenses of $794,000, unearned income of $337,000, accounts payable,
accrued liabilities and other accrued liabilities of $242,000 and an increase in
other current assets of $168,000.

The decrease in accounts payable, accrued liabilities and other accrued
liabilities was primarily due to the settlement that was reached with our
outstanding creditors as required by our agreement with Novatrix. The decrease
in accrued payroll and other related expenses was primarily from payments made
for past due payrolls and related accrued benefits. The decrease in unearned
income primarily is from the recognition of revenue on development projects and
the recognition of income on servicing contracts.

The increase in cash from financing activities of $2,558,000 resulted from the
advance received from Novatrix which was partially off-set by the final payment
on the Company's settlement of a debt owed to an accredited investor. 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.

The Company has the following contractual obligations and commercial commitments
at December 31, 2006:
                                          Less Than                 Greater Than
                               Total        1 year     1-3 Years     3 years
                               -----        ------     ---------     -------

Facility operating leases     $376,875     $82,500      $188,100    $106,275

The Company will require substantial funds for operating activities, further
product development, continuing clinical trials, regulatory approvals,
litigation expenses and marketing of its products. The Company's future capital

                                       11

<PAGE>

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.

Capital Resources

On March 31, 2007, there were 45.8 million shares of the Company's common stock
outstanding, and is listed on the pink sheets at $0.03 a share, giving the
Company a market capitalization of $1.4 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.

The convertible debenture bore 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 had 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
intended 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 would be made pursuant to a proxy
statement conforming to the rules and regulations of the Securities and Exchange
Commission.

                                       12

<PAGE>


The issuance of the convertible debenture and warrants to the investor was
contingent upon stockholder approval of the increase in the Company's authorized
common stock. If such approval had not been received, the Agreement would
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. In the event of a default on the
original $100,000 the Company will be assessed a penalty of 150% of the original
amount plus $15,000 for each month that payment is not received.

On February 9, 2005, the Company amended the June 9, 2004 convertible debenture
agreement to extend the effective registration statement date from November 6,
2004 to April 30, 2005 and reduced the conversion factor percentage from eighty
percent (80%) of the average of the five lowest volume weighted average prices
during the twenty (20) trading days prior to the conversion to seventy-five
percent (75%) of the average of the five lowest volume weighted average prices
during the twenty (20) trading days prior to the conversion.

On April 29, 2005, the Company amended the June 9, 2004 convertible debenture
agreement to extend the registration statement effective date from April 30,
2005 to June 30, 2005.

The Company received notice that it was in default on August 31, 2005 and as of
December 31, 2005 had recorded $94,288 in penalties and interest.

On December 9, 2005, the Company made a payment of $8,000 to the accredited
investor as earnest money to halt legal action while a settlement could be
worked out.

On January 27, 2006, the Company reached a settlement agreement in the form of a
promissory note and the Agreement, debenture and warrants were cancelled in
exchange for payments made as follows:

         December 9, 2005                   $    8,000
         January 27, 2006                       50,000
         February 24, 2006                      25,000
         March 29, 2006                         25,000
         April 19, 2006                         42,000

At December 31, 2006 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.

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 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 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

                                       13

<PAGE>


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 board of directors 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 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.

New Accounting Pronouncements

The Financial Accounting Standards Board has issued FIN 48, Accounting for
Uncertainty in Income Taxes, effective for the year commencing after December
15, 2006. The Company has not yet determined what the effect will be, if any, on
their financial statements.

The Financial Accounting Standards Board has issued FASB N0. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities" which provides an
option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements, effective for 2008
financial statements. The Financial Accounting Standards Board has issued.

Management does not believe that any other recently issued, not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.

                                       14
<PAGE>


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 2006 and 2005 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, 2007. 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.
The 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 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 sold only two ROBODOC systems
in 2006 and no ROBODOC Systems in 2005, 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, if any, 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.

                                       15

<PAGE>


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 its second U.S. clinical trial 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
trial calls for the completion of hip replacement surgeries in a total of up to
188 subjects performed at up to four clinical trial sites. The Company has
established three sites, Sutter General Hospital in Sacramento, California,
Buffalo General Hospital in Buffalo, New York, and Jewish Hospital in
Cincinnati, Ohio.

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 may require FDA clearance prior to marketing. The FDA may require
additional trials before allowing the Company to incorporate new imaging
modalities (such as ultrasound, MRI, etc.) or other different technologies in
the ROBODOC System. Similarly the FDA may require additional 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. The Company maintains product
liability insurance against product liability claims in the amount of $2 million
per occurrence and $2 million in the aggregate. Although the Company has not
experienced any product liability claims to date, a successful claim in excess
of the Company's insurance coverage could have a materially adverse effect on
the business, financial condition, cash flows and results of operations of the
Company.

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

                                       16

<PAGE>


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, 2007 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
Novak, the Company's Vice President of Finance and Administration, David Adams,
the Company's Chief Financial Officer and Leland Witherspoon, the Company's Vice
President of Research and Development, are not retained by employment agreements
and are terminable by the Company or by such officer at any time. The loss of
the services of Dr. Trivedi, Mr. Novak, Mr. Adams, 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
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 the
Company's 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.

                                       17
<PAGE>


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

On September 20, 2006, the Company retained Most & Company, LLP ("Most &
Company") as its new independent registered public accounting firm to audit the
financial statements of the Company for the years ended December 31, 2004, 2005
and 2006. During the Company's two most recent fiscal years, and during the
subsequent period through September 15, 2006, the Company did not consult with
Most & Company on any accounting or auditing issues.

The retention of Most & Company was discussed with and approved by the Company's
Board of Directors.

Item 8A. Controls and Procedures

Under the supervision and with the participation of management, including the
Company's President and Chief Executive Officer and Chief Financial Officer, an
evaluation was made of the effectiveness of the Company's disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of December 31,
2006.

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, 2006.

Item 8B. Other Information

None


                                    Part III

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

The Company's executive officers were terminated on June 2, 2005 when the
Company ceased operations, but they continued to explore opportunities to
restart the Company without compensation through November 23, 2005. Effective
December 1, 2005, the officers of the Company began receiving compensation as
they restarted the Company.

As the Company restarted in August 2006, the following officers and directors
were added and were actively serving the Company at December 31, 2006:

<TABLE>
<CAPTION>

            Name                   Age at                   Position with the Company                        Period
                                Dec. 31, 2006
------------------------------ ----------------- -------------------------------------------------------- ---------------------

<S>                                   <C>
Ramesh C. Trivedi                     67         Officer - President/Chief Executive Officer              Continuous

Charles J. Novak                      59         Officer - VP of Finance  & Administration                From 11-1-2006

David H. Adams                        62         Officer - Chief Financial Officer                        From 9-20-2006

Leland W. Witherspoon                 55         Officer - VP of Research & Development                   From 8-1-2005

Ramesh C. Trivedi                     67         Director / Chairman of the Board                         Continuous

Michael J. Tomczak                    51         Director                                                 From 9-20-2006

Peter B. Mills                        51         Director                                                 From 9-20-2006
</TABLE>

                                       18

<PAGE>


Biographical Information on Officers, Directors and Control Persons

Ramesh C. Trivedi has been the Company's President and Chief Executive Officer
from November 1995 through June 2005. 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 Company's Chief Financial Officer from July 2002
through June 2005 and the Company's Vice President of finance and administration
since November 2006. From September 2001 to December 2001, Mr. Novak was the
Vice President of Finance and Administration and Chief Financial Officer 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 Chief Financial Officer 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.

David H. Adams has been the Company's controller from April 2004 through June
2005. From 2003 to 2004 Mr. Adams was Chief Financial Officer of Velocity Mobile
a provider of cellular phone equipment and services. From 2000 to 2003 Mr. Adams
was Chief Financial Officer of Unify Corporation, a software development company
with international subsidiaries. Prior to that Mr. Adams was Chief Financial
Officer of Commerce Security Bank. Mr. Adams earned his BA in Accounting from
Humboldt State University.

Leland W. Witherspoon has been the Company's Vice President of research &
engineering from April 1997 through June 2005. 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.

Michael J. Tomczak was appointed to serve as a Director of the Company in
September 2006. Mr. Tomczak is currently an owner and President of Sequoia
Business Solutions, Inc., which primarily provides consulting and bookkeeping
services to small businesses. He served as Vice President, Chief Financial
Officer and Secretary for the Company from 1991 until 1997. Mr. Tomczak served
as Retail Technology International, Inc.'s (RTI) Chief Executive Officer and
President from 2002 until its sale to Island Pacific, Inc in 2004 and was
co-owner during that same time period. RTI was a developer of point-of-sale
software and Island Pacific is a developer of retail management software. Mr.
Tomczak was also Chairman of RTI's Board of Directors during that same period
and had previously served as RTI's Chief Financial Officer from 2001. Upon the
sale of RTI to Island Pacific, he became its President and Chief Operating
Officer until 2005. Mr. Tomczak was a member of Island Pacific's Board of
Directors from 2004 until 2005. Prior to joining the Company, Mr. Tomczak served
as director of Ernst & Young's Sacramento office's Entrepreneurial Services
Group. Mr. Tomczak holds a Bachelor of Business Administration degree from
Western Michigan University and has been a Certified Public Accountant in both
California and Michigan.

                                       19

<PAGE>


Peter B. Mills was appointed to serve as a Director of the Company in September
2006. Mr. Mills is Vice President of Sales at Speck Design, a leading product
design firm with offices in Palo Alto, California and Shanghai, China. He has
spent 15 years selling sophisticated industrial robotics and automation systems
with Adept Technology, the leading U.S. manufacturer of industrial robots, and
Hewlett-Packard Company. He has also served as the Vice President of Sales at
Softchain, an enterprise supply chain software company acquired in 2001. Mr.
Mills has significant experience with respect to the design and manufacturing
needs of a variety of industries including medical devices, disk drives,
consumer products, food packaging, printers, computers and networking, and
semiconductor equipment. He has extensive international business experience in
Japan, Singapore, and Korea. Mr. Mills earned an MBA from Harvard Business
School and an A.B. in engineering, cum laude, from Dartmouth College.

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,
2006.

Committees of the Board Of Directors

Prior to June 2, 2005, the Company had an audit committee and a compensation
committee. From June 3, 2005 through September 19, 2006, the Company functioned
with only one director and had no committees.

Terms of Office

The directors of the Company are appointed for a one-year term to hold office
until the next annual meeting of shareholders of the Company and until their
successors have been duly elected and qualified, unless removed from office in
accordance with the Company's by-laws. The Board of Directors appoints the
officers at its annual meeting immediately following the shareholders annual
meeting and such officers hold office until removed from office by the Board of
Directors.

Code of Ethics

A Code of Ethics that applies to the Company 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, 1433 N. Market Blvd, Suite 1, Sacramento, CA., 95834.

Item 10. Executive Compensation

The following table sets forth, for the fiscal years ended December 31, 2006,
2005 and 2004, 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, 2006
(collectively, the "Named Executive Officers").

                                       20
<PAGE>

<TABLE>
<CAPTION>

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

<S>                               <C>         <C>          <C>          <C>               <C>
Ramesh C. Trivedi                 2006        $241,060      $0          $11,774          -0-
President and Chief               2005         135,753       0           10,964          -0-
Executive Officer                 2004         302,226       0           13,862        100,000

Leland  W. Witherspoon            2006         142,828       0                0          -0-
Vice President, Research          2005          77,334       0                0          -0-
and Engineering                   2004         142,600       0                0        100,000

Charles J. Novak                  2006          99,251       0                0          -0-
Vice President, Finance &         2005          73,154       0                0          -0-
Administration                    2004         120,000       0                0        100,000

David H. Adams                    2006          89,835       0                0          -0-
Chief Financial Officer           2005          60,519       0                0          -0-
                                  2004               0       0                0         45,000

(1)  The 2005 salary information for all officers represents a partial year as
     all of the Company's employees were terminated effective June 2, 2005.

(2)  Represents expense allowances for Dr. Trivedi as approved by the Board of
     directors.

Employment Agreements

There are no current employment agreements.

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, 2006
                                                Stock Option Grants in Last Fiscal Year
                                                          (Individual Grants)



                                                % of Total
                                  Number of      Options
                                   Shares       Granted to                                     Potential Realizable Value at Assumed
                                 Underlying     Employees     Exercise                              Annual Rates of Stock Price
                                   Options      in Fiscal     Price per                            Appreciation for Option Term
              Name                Granted          Year         Share       Expiration Date            5%                 10%
  -----------------------------  ---------      ---------     ---------     ---------------         -------             -------

  Ramesh C. Trivedi              1,000,000       52.16%         $0.04          11/01/2011           $25,156             $63,750
  Leland W. Witherspoon            700,000       36.52%         $0.04          11/01/2011           $17,609             $44,625
  David H. Adams                   100,000        5.22%         $0.04          11/01/2011           $ 2,516             $ 6,375
  Mike J. Tomczak                   30,000        1.56%         $0.04          11/01/2011           $   755             $ 1,192
  Peter B. Mills                    30,000        1.56%         $0.04          11/01/2011           $   755             $ 1,192

                                       21

<PAGE>


The following table summarizes, for each of the Named Executive Officers, the
total number of unexercised options held at December 31, 2006, and the aggregate
dollar value of in-the-money, unexercised options, held at December 31, 2006.
The value of the unexercised in-the-money options at December 31, 2006, is the
difference between their exercise or base price and the value of the underlying
common stock on December 31, 2006.


                  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
                                          2006                At December 31, 2006              December 31, 2006
                                               Value
 Name                            Number      Realized     Exercisable    Unexercisable    Exercisable     Unexercisable

 Ramesh C. Trivedi                none        none        166,667         833,333             $0.00             $0.00
 Leland W. Witherspoon            none        none        116,667         583,333             $0.00             $0.00
 David H. Adams                   none        none         16,667          83,333             $0.00             $0.00
 Mike J. Tomczak                  none        none          5,000          25,000             $0.00             $0.00
 Peter B. Mills                   none        none          5,000          25,000             $0.00             $0.00


Director Compensation

The Company compensates its non-employee directors $1,875 per quarter for
serving on the Company's board of directors and periodically grants options to
purchase shares of the Company's common stock.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of March 31, 2007 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 (3)                                                    Ownership (1)         Owned (2)

Ramesh C. Trivedi                                           590,334  (4)           1.29
Leland W. Witherspoon                                       419,818  (5)              *
Charles J. Novak                                             83,333  (6)              *
David H. Adams                                               58,334  (7)              *
Michael J. Tomczak                                           17,500  (8)              *
Peter B. Mills                                               17,500  (9)              *

All directors and officers as a group (6 persons)         1,186,819                2.53
</TABLE>

-------------------
*  Less than one percent.
                                       22

<PAGE>


(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 45,784,089 shares of common stock outstanding as of April 9, 2007.
(3)  Address is c/o Integrated Surgical Systems, Inc., 1433 N. Market Blvd.,
     Suite 1, Sacramento, California 95834.
(4)  Includes 583,334 shares that Dr. Trivedi may acquire upon exercise of stock
     options exercisable within 60 days at an exercise price of $0.04 per share.
(5)  Includes 408,333 shares that Mr. Witherspoon may acquire upon exercise of
     stock options exercisable within 60 days at an exercise price of $0.04 per
     share.
(6)  Includes 83,333 shares that Mr. Novak may acquire upon exercise of stock
     options exercisable within 60 days at an exercise price of $0.04 per share.
(7)  Includes 58,334 shares that Mr. Adams may acquire upon exercise of stock
     options exercisable within 60 days at an exercise price of $0.04 per share.
(8)  Includes 17,500 shares that Mr. Tomczak may acquire upon exercise of stock
     options exercisable within 60 days at an exercise price of $0.04 per share.
(9)  Includes 17,500 shares that Mr. Mills may acquire upon exercise of stock
     options exercisable within 60 days at an exercise price of $0.04 per share.

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

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

Item 13. Exhibits
<TABLE>
<CAPTION>

Exhibit  Description
-------  -----------
<S>           <C>

3.1      Composite of Restated Certificate of Incorporation of the Registrant, as amended. (1)
3.2      By-laws of the Registrant, as amended. (1)
3.4      Certificate of Designations for Series G Convertible Preferred Stock. (3)
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)

                                                        23

<PAGE>


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)
4.23     Form of warrant issued to purchasers of Series G Convertible Preferred Stock. (3)
4.31     Form of Registration Rights Agreement for Series G Convertible Preferred Stock financing. (3)
4.37     2000 Stock Award Plan
4.38     2000 Long Term Performance Plan.
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)
10.6     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)
10.17    Preferred Stock Purchase Agreement for Series G Convertible Preferred Stock. (3)
14.1     Code of ethics (6)
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 David Adams*
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 David Adams*


-----------------------------------------------------------------------------------------------------------------------------------
* Filed Herewith
(1)   Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
(2)   Incorporated by reference to the Registrant's Registration  Statement on Form SB-2 (Registration  No. 333-48040) declared
      effective on October 31, 2000.
(3)   Incorporated by  reference to the Registrant's Registration Statement on Form S-3 (Registration  No. 333-40710), declared
      effective on July 28, 2000.
(4)   Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration  No. 333-9207), declared
      effective on November 20, 1996.
(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 Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003.
</TABLE>

Item 14. Principal Accountant Fees and Services

Audit Fees

All audit related fees are approved by the Board of Directors. The Board of
Directors 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.

                                       24

<PAGE>


         Category                         2006                    2005
         --------                         ----                    ----

      Audit Fees (1)                    $ 65,000                $ 65,000

      Audited Related Fees                     0                       0

      Tax fees (2)                        15,000                       0

      All Other Fees                           0                       0
                                        --------                --------
                                        $ 80,000                $ 65,000
                                        ========                ========


(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 Form 10-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.

                                       25


<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/ DAVID H. ADAMS
                                ------------------------------------------------
                                    David H. Adams
                                   (Principal Financial and Accounting Officer)



Dated: April 13, 2007

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 ,
2007 in the capacities indicated.

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


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


/s/ DAVID H. ADAMS          Chief Financial Officer
-----------------------     (Principal Financial and Accounting Officer)
David H. Adams

/s/ MICHAEL J. TOMCZAK      Director
-----------------------
Michael Tomczak


/s/ PETER B. MILLS          Director
-----------------------
Peter B. Mills

                                       26

<PAGE>


                          Index to Financial Statements


                                                                           PAGE


Report of Independent Registered Public Accounting Firm                   F - 2

Balance Sheet at December 31, 2006                                        F - 3

Statement of Operations for the years ended December 31, 2006 and 2005    F - 4

Statement of Convertible Preferred Stock and Stockholders'                F - 5
   Deficit for the years ended December 31, 2006 and 2005

Statement of Cash Flows for the years ended December 31, 2006 and 2005    F - 6

Notes to Financial Statements                                             F - 7


                                      F - 1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Integrated Surgical Systems, Inc.

     We have audited the accompanying balance sheet of Integrated Surgical
Systems, Inc. as of December 31, 2006 and the related statements of operations,
convertible preferred stock and stockholders' deficit and cash flows for the two
years then ended. 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 audit.

     We conducted our audit 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 audit 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 audit provides a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Surgical Systems,
Inc. as of December 31, 2006, and the results of its operations and its cash
flows for the two years then ended in conformity with accounting principles
generally accepted in the United States of America.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company has incurred recurring operating losses, has working capital of $587,392
and an accumulated deficit of $64,694,975 as of December 31, 2006. 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 3. The financial statements do not include any adjustments that may
result from the outcome of this uncertainty.


                                                   /s/ Most & Company LLP
                                                   -----------------------------
                                                       Most & Company, LLP

New York, New York
February 9, 2007

                                     F - 2

<PAGE>


                        Integrated Surgical Systems, Inc.

                                  Balance Sheet
                                December 31, 2006

Assets
Current assets:
     Cash                                                          $  1,327,268
     Accounts receivable                                                 16,666
     Inventory                                                          308,651
     Other current assets                                               249,623
                                                                   ------------
Total current assets                                                  1,902,208

     Net property and equipment                                           8,945
     Other assets                                                        21,238
                                                                   ------------
Total assets                                                       $  1,932,391
                                                                   ============

Liabilities and stockholders' deficit
Current liabilities:
     Accounts payable                                              $     86,926
     Accrued payroll and related expense                                 22,508
     Accrued liabilities                                                165,324
     Unearned income                                                  1,038,583
     Other current liabilities                                            1,475
                                                                   ------------
Total current liabilities                                             1,314,816

Note payable                                                          2,700,000

Convertible preferred stock, $0.01 par value,
     1,000,000 shares authorized;
     168 shares issued and outstanding
     ($168,496 aggregate liquidation value)                             168,496
                                                                   ------------
Total liabilities                                                     4,183,312
                                                                   ------------

Stockholders' deficit:
     Common stock, $0.01 par value, 100,000,000 shares
         authorized; 45,784,089 shares issued and outstanding           457,841
     Additional paid-in capital                                      61,986,213
     Accumulated deficit                                            (64,694,975)
                                                                   ------------
Total stockholders' deficit                                          (2,250,921)
                                                                   ------------
                                                                   $  1,932,391
                                                                   ============


See accompanying notes to financial statements.

                                     F - 3
<PAGE>

<TABLE>
<CAPTION>

                                      Integrated Surgical Systems, Inc.

                                          Statements of Operations


                                                                             Years ended December 31,
                                                                        ------------------------------------
                                                                            2006                   2005
                                                                        ------------            ------------
<S>                                                                     <C>                     <C>
Net revenue                                                             $  2,593,584            $  3,429,802
Cost of revenue                                                              555,202                 657,234
                                                                        ------------            ------------
                                                                           2,038,382               2,772,568
                                                                        ------------            ------------
Operating expenses:
     Selling, general and administrative                                   1,490,360                 802,916
     Research and development                                                443,757                 317,647
     Gain on forgiveness of debt                                          (1,492,739)               (362,881)
                                                                        ------------            ------------
                                                                             441,378                 757,682
                                                                        ------------            ------------
Operating income                                                           1,597,004               2,014,886

Other income (expense), net:
     Other income (expense), net                                              95,014                    --
     Amortization of discount                                                   --                   (86,141)
     Derivative liability                                                       --                    86,141
     Interest expense - net                                                 (104,218)                (10,190)
                                                                        ------------            ------------
Net income available to common stockholders                             $  1,587,800            $  2,004,696
                                                                        ============            ============

Basic net income per common share                                       $       0.04            $       0.04
                                                                        ============            ============
Diluted net income per common share                                     $       0.02            $       0.03
                                                                        ============            ============
Shares used in computing basic net income  per common share
                                                                          45,321,247              45,084,089
                                                                        ============            ============
Shares used in computing diluted net income per common share
                                                                          63,796,686              63,313,274
                                                                        ============            ============

See accompanying notes to financial statements.


                                                          F - 4

<PAGE>


                                         Integrated Surgical Systems, Inc.

                        Statements of Convertible Preferred Stock and Stockholders' Deficit


                              Convertible Preferred Stock

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

Balance at
December 31, 2004         168   $    2  $ 168,494  $ 168,496  45,084,089  $ 450,841  $ 61,924,486  $(68,287,471) $ (5,912,144)

     Net income
                         --       --         --         --          --         --            --       2,004,696     2,004,696
                       ------   ------  ---------  ---------------------  ---------  ------------  ------------  ------------
Balance at
December 31, 2005         168   $    2  $ 168,494  $ 168,496  45,084,089  $ 450,841  $ 61,924,486  $(66,282,775) $ (3,907,448)
                       ------   ------  ---------  ---------------------  ---------  ------------  ------------  ------------

   Stock compensation,
      non-employee       --       --         --         --       700,000      7,000          --            --           7,000
   Employee stock        --       --         --         --          --         --          61,727          --          61,727
      option
     Net income          --       --         --         --          --         --            --       1,587,800     1,587,800
                       ------   ------  ---------  ---------------------  ---------  ------------  ------------  ------------

Balance at
December 31, 2006         168   $    2  $ 168,494  $ 168,496  45,784,089  $ 457,841  $ 61,986,213  $(64,694,975) $ (2,250,921)
                       ======   ======  =========  ========= ===========  =========  ============  ============  ============


See accompanying notes to financial statements.

                                                                F - 5

<PAGE>


                                         Integrated Surgical Systems, Inc.

                                             Statements of Cash Flows


                                                                     Years ended December 31,
                                                                 -------------------------------------
                                                                    2006                       2005
                                                                 -----------               -----------
Cash flows from operating activities:
Net income                                                       $ 1,587,800               $ 2,004,696
Adjustments to reconcile net income to net cash
  used in operating activities:
    Gain on sale of assets                                            (5,000)                     --
    Depreciation                                                        --                       5,414
    Inventory reserve                                                   --                     100,000
    Forgiveness of debt                                           (1,460,439)                 (362,881)
    Amortization of deferred compensation                             10,189                      --
    Stock compensation, non-employees                                  7,000                      --
    Changes in operating assets and liabilities:
       Accounts receivable                                            21,289                    20,614
       Inventory                                                      (6,176)                  243,735
       Other current assets                                         (167,857)                  (19,563)
       Accounts payable                                             (218,323)                  (45,372)
       Accrued payroll and related expenses                         (793,921)                 (490,300)
       Accrued liabilities                                            59,550                  (155,035)
       Unearned income                                              (336,930)               (2,542,314)
       Other current liabilities                                     (82,757)                   83,392
                                                                 -----------               -----------
Net cash  used in operating activities                            (1,385,575)               (1,157,614)
                                                                 -----------               -----------

Cash flows from investing activities:
Purchase of property and equipment                                    (8,946)                     --
Proceeds from disposal of property and equipment                       5,000                      --
                                                                 -----------               -----------
Net cash used in investing activities                                 (3,946)                     --
                                                                 -----------               -----------

Cash flows from financing activities:
Proceeds from note payable                                         2,700,000                      --
Payments on note payable                                            (142,000)                   (8,000)
                                                                 -----------               -----------
Net cash provided by (used in) financing activities                2,558,000                    (8,000)

                                                                 -----------               -----------
Net increase (decrease) increase in cash                           1,168,479                (1,165,614)
Cash at beginning of year                                            158,789                 1,324,403
                                                                 -----------               -----------
Cash at end of year                                              $ 1,327,268               $   158,789
                                                                 ===========               ===========


See accompanying notes to financial statements.

                                                    F - 6
</TABLE>

<PAGE>


                        Integrated Surgical Systems, Inc.

                          Notes to Financial Statements


Note 1. Organization and Operations

Integrated Surgical Systems, Inc. (Company) was incorporated in Delaware in 1990
to design, manufacture, sell and service image-directed, computer-controlled
robotic software and hardware products for use in orthopedic surgical
procedures. The Company's products are sold through international distributors
to hospitals and clinics in European Union member countries and Australia,
Canada, India, Israel, Japan, Korea, New Zealand, Switzerland and South Africa.
Subsequent to March 31, 2005, the Company ceased operations, all of its outside
directors resigned and all employees were terminated. In November 2005, the
Company received an advance on a sale and commenced operations with limited
employees (Note 5.).

Note 2. Significant Accounting Policies

Basis of presentation

The financial statements include all the accounts of the Company.

Estimates

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

Financial instruments

The Company considers the carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable, accrued payroll and related
expenses and accrued expenses to approximate their fair values because of their
relatively short maturities.

Accounts receivable

Accounts receivable consisted of amounts due from customers. The Company
estimates doubtful receivables, if necessary, based upon the Company's prior
collection experience, customer creditworthiness and current economic trends.

Inventories

The Company values inventories at the lower of average cost, first-in,
first-out, or market. Allowances for losses are estimated for obsolete or
unmarketable inventories to reflect the difference between the carrying value of
inventory and the estimated market value, based upon assumptions about future
demand, market conditions and sales forecasts.

Revenue Recognition

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


                                     F - 7

<PAGE>


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. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts.

When elements of a sale, such as products, services, etc. are combined in a
single arrangement, or in related arrangements with the 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 using either the
completed contract or percentage-of-completion method. Product development
revenues 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 are 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.

Shipping and Handling Costs

Costs related to shipping and handling are included in costs of revenues.

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.

Warranty/Service Contracts

The Company offers a one-year warranty for parts and labor on all ROBODOC
Systems commencing upon the completion of training and installation or customer
acceptance. Generally, 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. Annually, service
contracts can be renewed at the customers' option. 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. Warranty liabilities are included in unearned income.


                                     F - 8
<PAGE>


Derivative Liabilities

Derivative liabilities consisted of: (a) the embedded conversion feature
bifurcated from the June 9, 2004 convertible note payable and (b) the warrants
in connection with the convertible notes payable. The value of the derivative
liabilities are recorded first as a discount on the convertible notes payable
and the excess is charged to operations. The discount is being amortized over
the term of the note. The derivative liabilities are adjusted quarterly to
reflect changes in fair value.

The Company uses the Black-Scholes option price model to value the embedded
conversion and the detachable warrants that are recorded as a derivative
liability. In valuing the embedded conversion feature and the detachable
warrants, at the time they were issued and quarterly thereafter, the Company
used the market price of our common stock on the date of valuation, an expected
dividend yield of zero, the remaining period or maturity date of the convertible
debt feature or detachable warrants and the expected volatility of our common
stock.

Stock-Based Compensation

Compensation costs for stock, warrants and options issued to employees and
non-employees are based on the fair value method. The value of warrants and
options are calculated using a Black-Scholes Model, using the market price of
our common stock on the date of valuation, an expected dividend yield of zero,
the remaining period or maturity date of the warrants or options and the
expected volatility of our common stock.

Stock-based costs with future service periods are deferred as shareholders'
equity and amortized on the straight-line method over its service period.

Income taxes

Deferred income taxes have been provided for temporary differences between
financial statement and income tax reporting under the liability method, using
expected tax rates and laws that are expected to be in effect when the
differences are expected to reverse. A valuation allowance is provided when
realization is not considered more likely than not.

Income per share

Basic income per share is computed by dividing net income by the weighted
average number of shares of basic common stock outstanding during the period.
Diluted net income per share is computed by dividing net income by the weighted
average number of shares of basic common stock outstanding during the period
plus dilutive common stock equivalents, using the treasury stock method.

As of December 31, 2006 and 2005, dilutive common stock equivalents were
convertible preferred stock of 18,475,439 and 105,310,000, respectively.

New Accounting Pronouncements

The Financial Accounting Standards Board has issued FIN 48, Accounting for
Uncertainty in Income Taxes, effective for the year commencing after December
15, 2006. The Company has not yet determined what the effect will be, if any, on
their financial statements.


                                     F - 9

<PAGE>


The Financial Accounting Standards Board has issued FASB N0. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities" which provides an
option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements, effective for 2008
financial statements. The Financial Accounting Standards Board has issued.

Management does not believe that any other recently issued, not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.

Note 3. Going Concern and Managements Plan

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
of December 31, 2006, the Company has an accumulated deficit of $64,694,975
working capital of $587,392, negative operating cash flow of $1,385,575 and
future losses are anticipated.

The Company's management is planning to seek additional sources of debt or
equity or financing, generating cash flows through product, system upgrade and
technology sales and the continued limitation of discretionary expenditures.

The Company's plan of operations, even if successful, may not result in cash
flow sufficient to finance and expand its business. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Realization of assets is dependent upon continued operations of the Company,
which in turn is dependent upon management's plans to meet its financing
requirements and the success of its future operations. These financial
statements do not include any adjustments related to the recoverability and
classification of asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue in existence.

Note 4. Inventory

Inventory consisted of the following at December 31, 2006:


     Raw materials and supplies                                   $474,144
     Work-in-process                                                33,964
     Finished goods                                                106,010

     Less Allowance for obsolescence and overstock                (305,468)
                                                                  --------
                                                                  $308,651
                                                                  ========

Note 5. Note Payable and Sale of Asset

Note Payable

On August 4, 2006, the Company entered into a loan agreement (Loan Agreement) to
borrow an aggregate of $6,000,000, as follows: $2,700,000 on August 4, 2006, an
aggregate of $1,000,000 in February and March 2007 and $2,300,000 no later than
August 1, 2007. Principal shall be payable on demand, subject to the terms of
this Loan Agreement, including termination of the Loan Agreement. Interest shall
be payable monthly at prime plus 1%, per annum. Loans under the Loan Agreement
are collateralized by substantially all the assets of the Company.


                                     F - 10
<PAGE>


The Loan agreement provides that upon the earlier of stockholder approval of the
Asset Agreement or a material default by the lender, all obligations to repay
any loans under the Loan Agreement shall terminate and the lender shall have no
rights to any secured interests.

Sale of Assets

On August 14, 2006, the Company has entered into an agreement (Asset Agreement)
to sell substantially all of its tangible and intangible assets in exchange for:
(1) $2,000,000 at closing; (2) $2,000,000 upon the earlier of the Company
obtaining clearance from the United State Federal Food and Drug Administration
for the Robodoc Surgical Assist System or March 31, 2008 and (3) providing
additional working capital of $3,300,000 under the terms of the Loan Agreement.

Closing is dependent upon stockholder approval, but not later than June 30,
2007. In the event this Agreement is terminated, the Company will license to
the purchaser the exclusive right to manufacture, market and sell the Company's
principal products in Asia, for a term of ten years in exchange for
$100,000 and the principal amount of the borrowings under the Loan Agreement.
In addition, if termination is the result of material breach by the Company, the
Company shall pay a fee to the lender of $240,000.

Note 6  Convertible Note Payable

In January 2006, debenture and warrants were cancelled in exchange for the
following payments, including the $8,000 payment made in December 2005:


     December 9, 2005                             $  8,000
     January 27, 2006                               50,000
     February 24, 2006                              25,000
     March 29, 2006                                 25,000
     April 19, 2006                                 42,000
                                                  --------
                                                  $150,000
                                                  ========


As the notes were paid-off and the conversion feature and warrants were
cancelled, no derivative liability was recognized at December, 31, 2005.

Note 7. Convertible 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.


                                     F - 11

<PAGE>


The Company's convertible preferred stock is not classified as equity due to its
liquidation rights upon a change in control which, 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.

The Series G 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 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. The Series G convertible preferred stock does not
entitle 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.

For the years ended December 31, 2006 and 2005, no shares of Series G
convertible preferred stock were converted into shares of common stock. At
December 31, 2006, the outstanding series G shares could have converted into a
minimum of 7,020,667 shares of common stock based upon its maximum conversion
price of $.024.

Note 8. Common Stock

During 2006, the Company issued 700,000 shares of common stock to non-employees
in exchange for services valued at $7,000 and options to purchase 1,917,000
shares of common stock to employees valued at $61,727. The options are
exercisable at $0.04 per share through October 31, 2011.

As of December 31, 2006, the Company had reserved 11,625,054 shares of common
stock for future issuance pursuant to Series G Convertible Preferred Stock,
warrants and options outstanding, as follows:

       Options under plans                            1,997,908
       Warrants                                       2,606,479
       Series G preferred                             7,020,667
                                                     ----------
                                                     11,625,054
                                                     ==========

                                     F - 12

<PAGE>


Note 9. Stock Option Plans

The Company has two stock option plans to attract, motivate and retain selected
officers, employees, directors and consultants under which incentive or
non-incentive options may be granted, generally for a term of ten years from the
date of grant. Exercise prices of incentive stock options may not be less than
100% and exercise price of non-statutory stock options may not be less than 85%
of the fair market value of the common stock on the date of the grant.

For persons owning 10% or greater of the voting power of all classes of the
Company's stock, the exercise price of the incentive or the non-qualified stock
options may not be less than 110% of the fair market value of the common stock
on the date of the grant.

Both plans are administered by the Company's board of directors.

The 1998 Stock Option Plan (1998 Plan) was established to grant up to 850,000
non-qualified options through May 12, 2008 to employees and other individuals
providing services to the Company. Options under the 1998 Plan vest variably
from one year to four years from the date grant and must be exercised within 30
days of employee termination. As of December 31, 2006, the 1998 plan had 691,569
options available for future grant.

The 2000 Stock Award Plan (2000 Plan) was established to grant up to 1,000,000
incentive options through December 11, 2010 to employees and other individuals
providing services to the Company. Options under the 2000 Plan vest variably
from one year to four years from the date grant and must be exercised within
three months of employee termination. As of December 31, 2006, the 2000 plan had
980,469 options available for future grant.

For the years ended December 31, 2006 and 2005, option activity under both plans
was as follows:

<TABLE>
<CAPTION>

                                                       2006                             2005
----------------------------------------- -------------------------------- --------------------------------
                                           Number of    Weighted-Average    Number of    Weighted-Average
                                            Shares       Exercise Price      Shares       Exercise Price
                                                           per Share                        per Share
----------------------------------------- ------------ ------------------- ------------ -------------------
<S>                                           <C>            <C>             <C>              <C>
Outstanding at beginning of year              141,319        $3.61           2,203,192        $0.82
Granted                                     1,917,000        $0.04                   -        $0.00
Forfeited/expired                                   -        $0.00           2,061,873        $0.63
Cancelled                                      60,411        $2.54                   -          -
----------------------------------------- ------------ ------------------- ------------ -------------------
Exercised                                           -        $0.00                   0          0
----------------------------------------- ------------ ------------------- ------------ -------------------
Outstanding at end of year                  1,997,908        $0.22             141,319        $3.61
Exercisable at end of year                    239,116        $1.57             141,319        $3.61
Available for future grants                 1,672,038                        1,799,038
========================================= ============ =================== ============ ===================


As of December 31, 2006, a summary of options outstanding under the plans was as follows:

   Range of       Weighted-Average         Number        Weighted-Average     Number       Weighted-Average
Exercise Price       Remaining         Outstanding at    Exercise Price   Exercisable at   Exercise Price
                  Contractual Life        12/31/06                           12/31/06
                      (Years)
--------------- --------------------- ------------------ ---------------- ---------------- ----------------
0.00-1.99               9.8               1,918,408           $0.04           317,825           $0.04
2.00-3.99               2.3                  50,500            3.43            50,500            3.43
4.00-8.50                .6                  29,000            6.97            29,000            6.97
                        ---               ---------           -----           -------           -----
                        9.5               1,997,908           $0.23           397,325           $1.57
                        ===               =========           =====           =======           =====
</TABLE>

                                                      F - 13

<PAGE>


Note  9. Income Taxes

As of December 31, 2006, the Company had net operating loss (NOL) carryforwards
of approximately $49,600,000 to reduce future Federal taxable income through
2026. The Company has had ownership changes, as defined by the Internal Revenue
Service, which may defer or limit the use of the NOL's.

As of December 31, 2006, realization of the Company's net deferred tax asset of
approximately $19,131,000 was not considered more likely than not and,
accordingly, a valuation allowance of $19,131,000 has been provided. For the
year ended December 31, 2006, the valuation allowance decreased by $636,000.

As of December 31, 2006, the Company had a Federal research and development
credit carryover of approximately $1,240,000.


 As of December 31, 2006, deferred tax assets consisted of the following:


                                                         2006
     ------------------------------------------------------------

     Net operating loss                              $19,857,000
     Research and development credit                   1,391,000)
     Inventory                                           122,000

     Compensation                                         13,000

     Deferred income                                     379,000
                                                     -----------
                                                      21,762,000

     Less valuation allowance                         21,762,000)
                                                     -----------

                                                            None


For the years ended December 31, 2006 and 2005, deferred income tax expense
(benefit) was as follows:

                                     F -14
<PAGE>


                                                  2006               2005
                                                  ----               ----

     Net operating loss                        ($218,000)       ($ 708,000)
     Research and development credit                   -            23,000
     Compensation                               (271,000)           (6,000)
     Inventory                                  (136,000)          (10,000)

     Deferred income                             (11,000)          (78,000)
                                                --------          --------

                                                (637,000)         (779,000)

     Less valuation allowance                    637,000           779,000

                                                    None              None
                                                    ----              ----


For the years ended December 31, 2006 and 2005, the provision for income taxes
on the statement of operations differs from the amount computed by applying the
statutory Federal income tax rate to income before the provision for income
taxes, as follows:


                                                      2006               2005
                                                      ----               ----

Federal expense (benefit)
  expected at statutory rate                       $540,000           $682,000
State income taxes                                   96,000            120,000
Use of prior period NOL                                   -                  -
Other                                                     -                  -
Change in valuation allowance                      (636,000)          (779,000)
                                                   --------         ----------

                                                       None               None
                                                       ----               ----

Note 11. Contingencies

The Company is subject to claims that arise in the normal course of business and
can not predict their ultimate outcome, if any.

During the period June 2004 and September 2006, the Company was self-insured for
product liability insurance. In September 2006, the Company obtained product
liability insurance of $2,000,000. The Company is not aware of any current
product liability claims.

Note 12. Concentrations

The Company maintains cash in financial institutions in excess of insured
limits. In assessing its risk, the Company's policy is to maintain cash only
with reputable financial institutions.

                                     F - 15

<PAGE>


During the year ended December 31, 2006, one customers accounted for 97% of the
Company's revenue and in the year ended December 31, 2005, another customer
accounted for 79% of the Company's net revenues.

The Company purchases a key component, a proprietary robotic arm, from one
vender, but believes alternative vendors are available.

Note 13. Related Party Transactions

At December 31, 2006, the Company had amounts due to officers as follows:


                                                  2005               2004
                                                  ----               ----

         Deferred salaries                      $657,605        $  709,981
         Expenses                                 21,110           302,921
                                                  ------        ----------

                                                $678,715        $1,012,902
                                                ========        ==========


                                     F - 16
</TEXT>
</DOCUMENT>
