Osteoarthritis is a common medical condition that leads to the degeneration of joints from aging and repetitive stresses, resulting in a loss of the flexibility, elasticity and shock-absorbing properties of the joints. As osteoarthritis disease progresses, the cartilage and other soft tissues protecting the surfaces of key joints in the body, including knees, hips and shoulders, deteriorate, resulting in substantial and chronic joint pain, numbness and loss of motor function.

This pain can be overwhelming for patients and can have significant physical, psychological, quality of life and financial implications. According to estimates by the National Institutes of Health, or NIH, 21 million people in the U.S., or 12.1% of the U.S. population age 25 and older, suffer from osteoarthritis.

Compelling demographic trends, such as the growing, aging and more active population and rising obesity rates are expected to be key drivers in the continued growth of osteoarthritis. The NIH projects that by 2030, 20% of Americans, or approximately 72 million people, will be 65 years or older and will be at high risk of developing osteoarthritis.

According to Frost & Sullivan, it is estimated that in 2007 there are 73.7 million obese people in the U.S. and by 2012, as many as 88 million Americans will suffer from obesity. According to the American Journal of Epidemiology, obese women had nearly four times the risk of suffering from osteoarthritis of the knee as non-obese women, and obese men had nearly five times the risk of suffering from osteoarthritis of the knee as non-obese men.

The centerpiece of MAKOplasty is the TGS, a proprietary tactile robotic-arm and patient-specific visualization system that provides both pre-operative and intra-operative guidance to the surgeon, enabling minimally invasive, tissue-sparing bone removal and implant insertion. The Company’s TGS consists of two elements: a tactile robotic arm utilizing an integrated bone-cutting instrument and a patient-specific visualization component.

In January 2008, the Company obtained 510(k) marketing clearance from the FDA for version 1.2 of its TGS. The Company currently anticipates that Version 1.2, which features new surgical planning software applications and instrumentation necessary to support unicompartmental resurfacing procedures using a tibial onlay knee implant system, will be commercially available in the first quarter of 2008. Version 1.2 also reflects further refinement of the basic instrumentation set and features a customized bone cutting instrument.

The Company is also developing version 2.0 of its TGS. The Company expects that version 2.0 will represent an important expansion from the first generation of its TGS, enabling application of MAKOplasty to multicompartmental resurfacing procedures, allowing orthopedic surgeons to treat degenerative osteoarthritis from early-stage, unicompartmental degeneration through mid-stage, multicompartmental degeneration with a modular knee implant system.

The second component of MAKOplasty is the Company’s implant portfolio that is designed for insertion in a minimally invasive manner. The Company currently offers an inlay knee implant system for unicompartmental resurfacing procedures. The inlay knee implant system is composed of a rounded, anatomically-shaped femoral component that attaches to the sculpted surface of the femur and a flat polymer component that fits into a “pocket” that has been sculpted in the tibial bone by the TGS.

Both the femoral and tibial components are offered in multiple sizes to best accommodate the size and shape of the patient’s knee. The Company’s TGS utilizes disposable products such as the arrays, bone pins and spheres used in its tracking system, irrigation clips and tubes that cool the cutting instruments, a boot used to position the patient’s leg, drapes to cover the robotic arm and other items that require disposal after each use.

Cost of revenue was $29,000 for the nine months ended September 30, 2006, compared to $291,000 for the nine months ended September 30, 2007.

Research and development expense was $3.3 million for the nine months ended September 30, 2006, compared to $5.3 million for the nine months ended September 30, 2007.

Depreciation and amortization expense was $418,000 for the nine months ended September 30, 2006, compared to $915,000 for the nine months ended September 30, 2007.

Interest income was $411,000 for the nine months ended September 30, 2006, compared to $860,000 for the nine months ended September 30, 2007.