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<title>Q1 2002 10Q DOC</title>
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<p align="center"><font size="3"><strong>UNITED STATES<br>
SECURITIES AND EXCHANGE COMMISSION<br>
Washington, D.C. 20549</strong></font></p>

<br>
<HR WIDTH="25%">
<br>

<p align="center"><font size="5"><strong>FORM 10-Q</strong></font></p>

<br>
<HR WIDTH="25%">

<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<i>(Mark One)</i>


<p align="center"><font size="3"><strong>
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="4" color="FF0000"><strong>
               For the quarterly period ended March 31, 2002
</strong></font></p>

<p align="center"><font size="3"><strong> OR </strong></font></p>

<p align="center"><font size="3"><strong>
</font><font face=Wingdings>o</font><font>&nbsp; TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="3"><strong>
 For the transition period from ________to _________
</strong></font></p>
<p align="center"><font size="3"><strong>
                       <u>Commission file number 000-30713</u>
</strong></font></p>
<p align="center"><font size="6" color="#0000FF"><strong>
                                <u>Intuitive Surgical, Inc.</u>
</strong></font><br>
<font size="2">
               (Exact name of Registrant as specified in its Charter)
</font></p>

<P>&nbsp;
<TABLE COLS=2 WIDTH="100%" >
<TR>
<TD>
<font size="3"><strong>
<CENTER><u>Delaware</u></CENTER>
</font></strong>
</TD>
<TD>
<font size="3"><strong>
<CENTER><u>77-0416458</u></CENTER>
</font></strong>
</TD>
</TR>
<TR>
<TD>
<font size="2">
<CENTER>&nbsp; (State or Other Jurisdiction of Incorporation or Organization)&nbsp;</CENTER>
</font>
</TD>
<TD>
<font size="2">
<CENTER>(I.R.S. Employer Identification Number)</CENTER>
</font>
</TD>
</TR>
</TABLE>
<BR>



<p align="center"><font size="3"><strong>
                            950 Kifer Road<br>
                       <u>Sunnyvale, California  &nbsp;&nbsp;  94086
</strong></font></u><br>


<font size="2">
        (Address of Principal Executive Offices including Zip Code)
</font></p>

<p align="center"><font size="3"><strong><u>
                                    (408) 523-2100
</strong></font></u><br>

<font size="2">
                 (Registrant's Telephone Number, Including Area Code)
</font></p>



<font size="3">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. &nbsp;&nbsp; YES
</font><font face=Wingdings>x</font><font>&nbsp; NO
</font><font face=Wingdings>o</font><font>&nbsp; </p>


<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
     The Registrant had 36,378,755 shares of Common Stock, $0.001 par value per
share, outstanding as of April 10, 2002.

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<P ALIGN="CENTER"><IMG SRC="logo.gif">
<p align="center"><strong>
                                Intuitive Surgical, Inc.<br>
                                TABLE OF CONTENTS
</strong></p>


<P ALIGN="LEFT"><TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=700>
  <TR vAlign=bottom>
<TD WIDTH="90%">
<font size="3"><strong>
    PART I.   FINANCIAL INFORMATION
</font></strong>
</TD>

<TD WIDTH="10%">
<font size="3"><strong>
<u>Page No.</u>
</font></strong>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
         Item 1. Financial Statements (Unaudited):
</font>
</TD>


<TD>
<font size="3">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated balance sheets as of March 31, 2002 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2001

</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#bs">1</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of operations for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
            periods ended March 31, 2002 and March 31, 2001

</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#ops">2</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of cash flows for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended March 31, 2002 and March 31, 2001
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#flows">3</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Notes to Consolidated Financial Statements
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#notes">4</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
        Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#mda">8</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 3.   Quantitative and Qualitative Disclosures About Market Risk

</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#market">25</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3"><strong>
        PART II.  OTHER INFORMATION
</font></strong>
</TD>

<TD>
<font size="3">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
            Item 1.  Legal Proceedings
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item1">26</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
        Item 2.   Changes in Securities and Use of Proceeds
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item2">28</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 3.  Defaults Upon Senior Securities
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item3">29</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 4.  Submission of Matters to a Vote of Security Holders
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item4">29</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
Item 5.  Other Information
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item5">29</A></CENTER>
</font>
</TD>
</TR>

<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3">
        Item 6.   Exhibits and Reports on Form 8-K
</font>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#item6">29</A></CENTER>
</font>
</TD>
</TR>


<TR>
<TD>
&nbsp;&nbsp;
</TD>
<TD>
&nbsp;&nbsp;
</TD>
</TR>

  <TR vAlign=top>
<TD>
<font size="3"><strong>
        Signatures
</font></strong>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#sign">31</A></CENTER>
</font>
</TD>
</TR>
</TABLE>

<br>
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<HR WIDTH="85%">
<br>
<br>
<br>


<FONT SIZE=2><P><HR ALIGN="LEFT" WIDTH="85%"><BR>
<BR>
</P>
</FONT><STRONG><P ALIGN="CENTER">PART I -- FINANCIAL INFORMATION </P>
</STRONG><P><HR WIDTH="85%">Item 1. Financial Statements <BR>
<BR>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="bs"></A>
<p align="center"><strong>
                            INTUITIVE SURGICAL, INC.
<br>
                          CONSOLIDATED BALANCE SHEETS
<br>
                       (IN THOUSANDS, EXCEPT SHARE DATA)
</strong>
<pre>

                                                            March 31,  December 31,
                                                             2002          2001
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $      8,335  $    10,487
  Short-term investments...............................       48,294       56,174
  Accounts receivable..................................       15,492       13,248
  Inventory, net.......................................        6,242        6,182
  Prepaid expenses.....................................        2,888        3,128
                                                         ------------  -----------
          Total current assets.........................       81,251       89,219
Property and equipment, net............................       11,124        7,834
Intangible and other assets............................        3,113        3,308
                                                         ------------  -----------
          Total assets.................................       95,488      100,361
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      9,184  $     8,300
  Accrued compensation and employee benefits...........        2,506        2,537
  Warranty accrual.....................................        1,787        1,831
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        2,085        2,128
  Deferred revenue.....................................        3,624        3,870
  Current portion of notes payable.....................        1,587        1,631
                                                         ------------  -----------
          Total current liabilities....................       20,773       21,297
Long-term notes payable................................        1,282          771
Stockholders' equity:
  Preferred stock, 5,000,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of March 31, 2002 and
     December 31, 2001.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,381,465 and 36,223,640 shares
     issued and outstanding as of March 31, 2002
     and December 31, 2001, respectively...............           36           36
  Additional paid-in capital...........................      189,962      188,962
  Deferred compensation................................         (670)        (886)
  Accumulated deficit..................................     (115,987)    (110,370)
  Accumulated other comprehensive income ..............           92          551
                                                         ------------  -----------
          Total stockholders' equity...................       73,433       78,293
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     95,488  $   100,361
                                                         ============  ===========

</pre>
<p align="center">
          See accompanying notes to consolidated financial statements.


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="ops"></A>
<p align="center"><strong>
                            INTUITIVE SURGICAL, INC.
<br>
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<br>
                                  (UNAUDITED)
<br>
                    (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
</strong>
<pre>

                                        Three Months Ended
                                            March 31,
                                     ----------------------
                                        2002        2001
                                     ---------- -----------
Sales.............................. $   14,409  $   12,079
Cost of sales......................      7,507       6,563
                                     ----------  ----------
    Gross profit...................      6,902       5,516
                                     ----------  ----------
Operating costs and expenses:
  Research and development.........      4,232       3,231
  Selling, general and
   administrative..................      8,785       6,835
                                     ----------  ----------
    Total operating costs and
     expenses......................     13,017      10,066
                                     ----------  ----------
Loss from operations...............     (6,115)     (4,550)
Other income(expense), net ........        498       1,143
                                     ----------  ----------
Net loss........................... $   (5,617) $   (3,407)
                                     ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.15) $    (0.10)
                                     ==========  ==========
Shares used in computing net
  loss per common share............     36,308      35,401
                                     ==========  ==========

</pre>

<p align="center">
          See accompanying notes to consolidated financial statements.


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="flows"></A>
<p align="center"><strong>
                            INTUITIVE SURGICAL, INC.
<br>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<br>
                                  (UNAUDITED)
<br>
                                 (IN THOUSANDS)
</strong>
<pre>

                                                             For the Three Months
                                                             Ended March 31,
                                                         ------------------------
                                                            2002         2001
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (5,617) $    (3,407)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................         622          428
  Loss on sales of fixed assets........................          69           --
  Amortization of deferred compensation................         216          617
  Amortization of intangible and other assets..........         195          194
Changes in operating assets and liabilities:
  Accounts receivable..................................      (2,244)      (3,822)
  Prepaid expenses.....................................         240           99
  Inventory............................................         (60)        (447)
  Accounts payable.....................................         884       (1,588)
  Accrued compensation and employee benefits...........         (31)      (1,157)
  Warranty accrual.....................................         (44)          49
  Other accrued liabilities............................         (43)        (329)
  Accrued royalty expense..............................      (1,000)      (1,000)
  Deferred revenue.....................................        (246)      (1,212)
                                                         -----------  -----------
Net cash used in operating activities..................      (7,059)     (11,575)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (4,024)      (1,562)
Disposition of property and equipment..................          43           --
Purchase of short-term investments.....................      (8,491)     (10,434)
Proceeds from sales of short-term investments..........      11,771          479
Proceeds from maturities of short-term investments.....       4,099       13,746
                                                         -----------  -----------
Net cash provided by investing activities..............       3,398        2,229
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,001          755
Repurchase of common stock.............................          (1)         (61)
Proceeds from notes payable............................         950           --
Repayment of notes payable.............................        (483)        (335)
                                                         -----------  -----------
Net cash provided by financing activities..............       1,467          359
                                                         -----------  -----------
Foreign currency translation adjustments...............          42           --
Net decrease in cash and cash equivalents..............      (2,152)      (8,987)
Cash and cash equivalents, beginning of period.........      10,487       22,657
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     8,335  $    13,670
                                                         ===========  ===========

</pre>
<p align="center">
          See accompanying notes to consolidated financial statements.


</P>
<P ALIGN="CENTER"><BR>
<A NAME="notes"></A> <BR>
</P>
<STRONG><P ALIGN="CENTER">INTUITIVE SURGICAL, INC. <BR>
<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <BR>
(UNAUDITED) </P>
<P>NOTE 1. BASIS OF PRESENTATION</P>
</STRONG><P ALIGN="JUSTIFY">In this report, "Intuitive Surgical," "we," "us,"
and "our" refer to Intuitive Surgical, Inc. </P>
<P ALIGN="JUSTIFY">The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for a fair
presentation have been included. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2001, included in the Annual Report on Form 10-K of Intuitive Surgical, Inc,
filed with the Securities and Exchange Commission. The results for the interim
period ended March 31, 2002 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2002 or future operating periods.
</P>
<STRONG><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</STRONG><P ALIGN="JUSTIFY">For the three months ended March 31, 2002, none of
our customers accounted for 10% or more of total sales. For the three months
ended March 31, 2001, two customers, A and B, accounted for 21% and 14%,
respectively, of total sales. The Company extends reasonably short collection
terms but does not require collateral. The Company provides reserves for
potential credit losses but has not experienced significant losses to date. </P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the three months ended March 31, 2002 and 2001. Purchases of key parts
and components used to manufacture our products are from limited supply sources.
The inability of any of these suppliers to fulfill our supply requirements may
negatively impact future operating results. </P>
<STRONG><H4>NOTE 3. CASH AND CASH EQUIVALENTS</H4>
</STRONG><P ALIGN="JUSTIFY">Intuitive Surgical considers all highly liquid
investments with an original maturity from date of purchase of 90 days or less
to be cash equivalents for the purpose of balance sheet and statement of cash
flows presentation. The carrying value of cash and cash equivalents approximates
market value at March 31, 2002 and December 31, 2001. </P>
<STRONG><P>NOTE 4. SHORT-TERM INVESTMENTS</P>
</STRONG><P ALIGN="JUSTIFY">All short-term investments are classified as
available-for-sale and therefore carried at fair value. We view our available-
for-sale portfolio as available for use in our current operations. Accordingly,
all investments are classified as short-term, even though the stated maturity
date may be one year or more beyond the current balance sheet date. Available-
for-sale securities are stated at fair value based upon quoted market prices of
the securities. Unrealized gains and losses on such securities, when material,
are reported as a separate component of stockholders' equity. Realized gains and
losses on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.</P>
<STRONG><P>NOTE 5. INVENTORY, NET</P>
</STRONG><P ALIGN="JUSTIFY">&#9;Inventory, net consists of the following (in
thousands): </P>

<pre>

                                  March 31,   December 31,
                                   2002           2001
                               -------------  -----------
Raw materials................ $       3,403  $     3,577
Work-in-process..............         1,407        1,330
Finished goods...............         1,432        1,275
                               -------------  -----------
                              $       6,242  $     6,182
                               =============  ===========

</pre>


<FONT SIZE=2><P>&nbsp;</P>
</FONT><STRONG><P>NOTE 6. INTANGIBLE AND OTHER ASSETS</P>
</STRONG><P ALIGN="JUSTIFY">Purchased intangible assets represent patents which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six years. At
March 31, 2002 gross intangible assets totaled $4.7 million and related
accumulated amortization was $1.6 million.  </P>
<STRONG><P>NOTE 7. COMPREHENSIVE LOSS</P>
</STRONG><P ALIGN="JUSTIFY">&#9;The components of comprehensive loss consist of
the following (in thousands): </P>

<PRE>

                                         Three Months Ended
                                             March 31,
                                      --------------------
                                         2002       2001
                                      ---------  ---------
Net loss............................ $  (5,617) $  (3,407)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................        42         --
  Change in unrealized gain on
    forward exchange contracts......        --        (67)
  Change in unrealized gain (loss)
    on available-for-sale securities      (501)       320
                                      ---------  ---------
Comprehensive loss.................. $  (6,076) $  (3,154)
                                      =========  =========

</PRE>

<FONT SIZE=2><P>&nbsp;</P>
</FONT><STRONG><P>&nbsp;</P>
<P>NOTE 8. NET LOSS PER SHARE</P>
</STRONG><P ALIGN="JUSTIFY">&#9;The following table presents the computation of
basic and diluted net loss per share (in thousands, except share and per share
data): </P>

<PRE>

                                  Three Months Ended
                                      March 31,
                               ------------------------
                                  2002         2001
                               -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (5,617) $    (3,407)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,342,421   35,743,685
  Less weighted-average
    shares subject to
    repurchase...............     (34,439)    (342,658)
                               -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,307,982   35,401,027
                               ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.15) $     (0.10)
                               ===========  ===========

</PRE>


<FONT SIZE=2><P>&nbsp;</P>
</FONT><STRONG><P>NOTE 9. REVENUE RECOGNITION</P>
</STRONG><P ALIGN="JUSTIFY">We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably assured.  </P>
<P ALIGN="JUSTIFY">Revenue from system sales is generally recognized upon
installation for direct sales and upon shipment for sales to our distributors.
If substantial contractual obligations exist after system installation, revenue
is recognized after such obligations are fulfilled.  In certain instances,
contract terms may provide for customer acceptance and transfer of title to
occur prior to installation for direct sales.  In those instances, we account
for the sale as a multiple element arrangement and defer revenue recognition on
the fair value of any undelivered elements, including installation.  The fair
value of the undelivered elements are then recognized when the outstanding
obligations are fulfilled.</P>
<P ALIGN="JUSTIFY">Our distributors do not have price protection rights. One of
our distributors has return rights under limited circumstances. Such rights are
accounted for under the provisions of SFAS No. 48. To date, we have not had any
returns of our systems.</P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is
recognized upon shipment. Revenue related to future commitments under service
contracts is deferred and recognized ratably over the service period.  Amounts
billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">Our <I>da Vinci </I>Surgical System contains a software
component.  We believe that the software element of our <I>da Vinci</I> Surgical
System is an incidental part of the system.  The software element within our
product is not sold or marketed separately to customers and the software does
not operate independently of the surgical system.  Furthermore, the software
development effort does not require a significant cost to the Company relative
to the overall development cost of the product.  As such, the software we
provide is incidental to the surgical system as a whole and the software revenue
guidance provided in SOP 97-2 is not applicable to our revenues.</P>
<STRONG><P>NOTE 10. SOFTWARE DEVELOPMENT COSTS</P></STRONG>
<P>&#9;Software development costs are accounted for in
accordance with FASB Statement No. 86, &quot;Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.&quot;  Prior to the
achievement of technological feasibility, software development costs are
expensed as incurred and are included in research and development expense.
Costs incurred between feasibility and the general release of software
enhancements are insignificant.</P>
<STRONG><P ALIGN="JUSTIFY">NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
</P>
</STRONG><P ALIGN="JUSTIFY">In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 &quot;Business Combinations&quot; and SFAS No.
142 &quot;Goodwill and Other Intangible Assets,&quot; effective for fiscal years
beginning after December 15, 2001.  SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and that the use of the pooling-of-interest method is no longer
allowed.  Under SFAS No. 142 goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to an annual
impairment test in accordance with the new standards.  Other intangible assets
will continue to be amortized over their useful lives. The Company adopted SFAS
No. 141 and SFAS No. 142 as of January 1, 2002.  The adoption of SFAS No. 141
and SFAS No. 142 has not had a significant impact on our financial position or
results of operations.</P>
<P ALIGN="JUSTIFY">In August 2001, the FASB issued SFAS No. 144 &quot;Accounting
for the Impairment or Disposal of Long-Lived Assets&quot;, effective for fiscal
years beginning after December 15, 2001.  SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets and
supersedes SFAS 121.  The Company adopted SFAS No. 144 as of January 1, 2002.
The adoption of SFAS No. 144 has not had a significant impact on our financial
position or results of operations.</P>

<P><A NAME="mda"></A></P>
<STRONG><P>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS</P>
</STRONG><P ALIGN="JUSTIFY">This Management's Discussion and Analysis of
Financial Condition and Results of Operations as of March 31, 2002 and for the
three month periods ended March 31, 2002 and March 31, 2001 should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in Intuitive Surgical's Annual Report on Form
10-K for the year ended December 31, 2001. </P>
<P ALIGN="JUSTIFY">Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere. </P>
<P ALIGN="JUSTIFY">Intuitive<FONT FACE="Symbol">&#226;</FONT>
, Intuitive Surgical<FONT FACE="Symbol">&#226;</FONT>
, da Vinci&trade;, EndoWrist&trade;, InSite&trade; and Navigator&trade; are
trademarks of Intuitive Surgical, Inc. </P>
<B><I><P>OVERVIEW</P>
</B></I><P ALIGN="JUSTIFY">We design, manufacture, and market the <I>da
Vinci</I> Surgical System, an advanced surgical system that we believe
represents a new generation of surgery. The <I>da Vinci</I> Surgical System
consists of a surgeon's console, a patient-side cart, a high performance vision
system and proprietary instruments. The <I>da Vinci</I> Surgical System
seamlessly translates the surgeon's natural hand movements on instrument
controls at a console into corresponding micro-movements of instruments
positioned inside the patient through small puncture incisions, or ports. We
believe that the <I>da Vinci</I> Surgical System is the only commercially
available technology that can provide the surgeon with the intuitive control,
range of motion, fine tissue manipulation capability and 3-D visualization
characteristic of open surgery, while simultaneously allowing the surgeons to
work through the small ports of minimally invasive surgery or MIS. By placing
computer-enhanced technology between the surgeon and the patient, we believe
that the <I>da Vinci</I> Surgical System enables surgeons to perform better
surgery while giving patients the benefits of MIS surgery, including decreased
trauma and postoperative pain, reduced surgical complications, shorter hospital
stays and lower total treatment costs. </P>
<P ALIGN="JUSTIFY">In 1999, we obtained permission from the European Union to
affix the CE Mark to the<I> da Vinci</I> Surgical System and <I>EndoWrist</I>
instruments for general surgical and cardiac surgical use. Based on this
approval, we recognized revenue for the first time in the second quarter of 1999
for the sale of our products. In July 2000, we received clearance from the U.S.
Food and Drug Administration, the FDA, to begin commercialization of our <I>da
Vinci</I> Surgical System in the United States for use in laparoscopic surgical
procedures. In March 2001, we received clearance from the FDA for use of our
<I>da Vinci</I> Surgical System in non-cardiac thoracoscopic surgical
procedures.  In May 2001, we received market clearance from the FDA to promote
use of the<I> da Vinci</I> Surgical System for performance of laparoscopic
radical prostatectomy procedures.</P>
<P ALIGN="JUSTIFY">To date, the majority of our revenues have come from the
sales of the <I>da Vinci</I> Surgical System, which are high revenue dollar
items. A smaller percentage of revenues have come from sales of <I>EndoWrist</I>
instruments and accessories, which are lower revenue dollar items. In addition,
a portion of our revenue comes from ongoing service of installed <I>da Vinci</I>
Surgical Systems. Although we expect the majority of our revenues to continue to
come from the sale of <I>da Vinci</I> Surgical Systems over the next few years,
the percentage of revenue from our <I>EndoWrist </I>instruments and service
should continue to increase. Due to the high dollar revenue per system sold,
small variations in system unit sales may cause revenue to vary significantly
from quarter to quarter. During the useful life of each installed <I>da
Vinci</I> Surgical System, we expect to generate recurring revenue through sales
of the <I>EndoWrist</I> instruments and accessories and ongoing service. </P>
<B><I><P>RESULTS OF OPERATIONS</P>
</B></I><P ALIGN="JUSTIFY">Sales. Sales for the three months ended March 31,
2002 were $14.4 million, up 19% from $12.1 million for the three months ended
March 31, 2001.  Sales growth was driven by increased recurring revenue and
higher da Vinci&trade; Surgical System placements.  First quarter 2002 recurring
revenue, consisting of instruments, accessories, and service was $2.7 million,
up 120% from $1.2 million for the same period last year.  We shipped 13 da
Vinci&trade; Surgical Systems during the first quarter of 2002 compared to 12 in
the first quarter of 2001.  As of March 31, 2002 there were 102 cumulative da
Vinci&trade; Surgical Systems shipped, compared to 52 as of March 31, 2001.
</P>
<P ALIGN="JUSTIFY">Gross Profit. Gross profit for the three months ended March
31, 2002 was $6.9 million, or 48% of sales, compared with $5.5 million, or 46%
of sales for the three months ended March 31, 2001. The improvement in gross
profit resulted from sales growth and increased manufacturing efficiencies. </P>
<P ALIGN="JUSTIFY">Research and Development Expenses. Research and development
expenses for the three months ended March 31, 2002 were $4.2 million, up 31%
from $3.2 million for the  three months ended March 31, 2001. The year over year
increase resulted primarily from headcount additions to support product
development and enhancements. </P>
<P ALIGN="JUSTIFY">Research and development expenses include costs associated
with the design, development, testing and enhancement of our products. These
enhancements represent significant improvements to our products. Research and
development expenses also include expenditures for clinical trials and purchases
of laboratory supplies. Research and development costs are expensed as incurred.
We expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future. </P>
<P ALIGN="JUSTIFY">Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended March 31, 2002
were $8.8 million, up 29% from $6.8 million  for the three months ended March
31, 2001. The year over year increase resulted primarily from headcount
additions in the field service and sales functions to support increased revenue
and a larger installed base of <I>da Vinci</I> Surgical Systems. </P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses are expected to increase in the
future to support expanding business activities. </P>
<P ALIGN="JUSTIFY">Deferred Compensation. We record deferred compensation as the
difference between the exercise price of options granted and the fair value of
our common stock at the time of grant for financial reporting purposes. Deferred
compensation is amortized to research and development expense and selling,
general and administrative expenses. Non-cash deferred compensation expense
included in research and development expenses was $0.1 million and $0.4 million
for the three months ended March 31, 2002 and 2001, respectively. Non-cash
deferred compensation expense included in selling, general and administrative
expenses was $0.1 million and $0.2 million for the three months ended March 31,
2002 and 2001, respectively. The remaining $0.7 million of deferred compensation
will be amortized over the remaining vesting periods of the options, generally
four years from the date of grant, using a graded vesting method. The amount of
deferred compensation expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been recorded are
subsequently canceled. </P>
<P ALIGN="JUSTIFY">Other Income (Expense). Other income (expense) for the three
months ended March 31, 2002 was $0.5 million, down $0.6 million compared to $1.1
million for the three months ended March 31, 2001. The decrease was due
primarily to lower interest income in the first quarter of 2002 resulting
primarily from lower average cash and short-term investment balances than in the
first quarter of 2001 and lower interest rates earned on funds invested. </P>
<B><I><P>LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Our operations have been financed through the sales
of our convertible preferred stock, yielding net proceeds of approximately
$127.3 million, our initial public offering of 5,750,000 shares of our common
stock, yielding approximately $46.8 million, and equipment financing
arrangements, yielding approximately $9.0 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors. As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement. </P>
<P ALIGN="JUSTIFY">As of March 31, 2002, we had working capital of $60.5
million, compared to $67.9 million as of December 31, 2001. The decrease in
working capital during the first three months of 2002 resulted primarily from
our first quarter net loss of $5.6 million and investments in fixed assets. </P>
<P ALIGN="JUSTIFY">Net cash used in operating activities for the three months
ended March 31, 2002 was $7.0 million, compared to $11.6 million for the three
months ended March 31, 2001.  The decrease was primarily due to lower working
capital requirements in the first quarter of 2002 compared to the prior year.
As a result of timing of payments, combined accounts payable, accrued
compensation, and other accrued liabilities grew by $0.8 million during the
first quarter of 2002 while these liabilities were paid down by $3.0 million
during the first quarter of 2001.</P>
<P ALIGN="JUSTIFY">Net cash provided by investing activities was $3.4 million
for the three months ended March 31, 2002, compared to $2.2 million for the
three months ended March 31, 2001.  During the first quarter of 2002, $7.4
million of net short-term investments were converted to cash to support business
operations and to acquire $4.0 million of fixed asset additions.  During the
first quarter of 2001, $3.8 million of investments were converted to cash,
offset by $1.6 million of capital purchases.</P>
<P ALIGN="JUSTIFY">Net cash provided by financing activities was $1.5 million
for the three months ended March 31, 2002, compared to $0.4 million for the
three months ended March 31, 2001.  During the first quarter of 2002, $1.0
million was provided from issuance of stock and $0.5 million was provided from a
net increase in long-term borrowings.  During the first quarter of 2001, $0.8
million was provided from the issuance of stock, offset by a $0.3 million net
reduction in long-term borrowings.</P>
<P ALIGN="JUSTIFY">Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities and for other general
corporate activities. We believe that our current cash and short-term investment
balances, together with revenue to be derived from the sale of our products,
will be sufficient to fund our operations at least through 2003. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. </P>
<B><I><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P>The Company believes the following represent its critical accounting
policies:</P>
<P ALIGN="JUSTIFY">Revenue Recognition.  In certain cases, revenue from direct
system sales is generated from multiple element  arrangements which require
judgement in the areas of delivery, customer acceptance, installation and
collectibility.  Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of the
system, revenue is deferred until that essential element is delivered. The fair
value of each undelivered element that is not essential to the functionality of
the system is deferred until performance occurs. The fair value of an
undelivered element is based upon an estimate made by management. Amounts billed
in excess of revenue recognized is recorded as deferred revenue on the balance
sheet.</P>
<P ALIGN="JUSTIFY">Warranties.  We provide for the estimated costs of product
warranties at the time revenue is recognized.  The Company's estimate of costs
to service its warranty obligations is based upon historical experience and
expectation of future conditions.  Should warranty claim activity and the costs
associated with servicing those claims differ from the Company's estimates,
revisions to the estimated warranty liability may be required.</P>
<P ALIGN="JUSTIFY">Allowance for Doubtful Accounts.  The allowance for doubtful
accounts is based upon management estimates.  Factors underlying these estimates
include analysis of days outstanding, customer payment history and management
judgement.  The allowance is adjusted regularly to reflect current data and
activity.</P>
<P ALIGN="JUSTIFY">Inventory Reserves. We write our inventory down 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 future demand or market conditions are
less favorable than those projected by management, additional inventory write-
downs may be required.</P>
<P ALIGN="JUSTIFY">Intangible Assets.  We have intangible assets on our balance
sheet related to the acquisition of patents.  The valuation and classification
of these assets and the assignment of useful amortization lives involves
judgments and the use of estimates. The testing of these intangibles for
impairment under established accounting guidelines would be required if
indicators of impairment exist. Changes in business conditions could potentially
require future adjustments to asset valuations.</P>
<P ALIGN="JUSTIFY">Contingencies. We are subject to proceedings, lawsuits and
other claims related to our products, patents and other matters. We are required
to assess the likelihood of any adverse judgments or outcomes to these matters
as well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.</P>
<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</B></I><STRONG><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.</P>
</STRONG><P ALIGN="JUSTIFY">Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven, and we
may be unable to generate significant commercial revenues. In addition, our
costs may be higher than we, securities analysts or investors expect. If we fail
to generate sufficient revenues or our costs are higher than we expect, our
results of operations will suffer, which in turn could cause our stock price to
decline. Further, future revenue from sales of our products, if any, will be
difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors,
including: </P>

<UL>
<LI>the progress and results of clinical trials; </LI>
<LI>actions relating to regulatory matters; </LI>
<LI>the extent to which our products gain market acceptance; </LI>
<LI>our timing and ability to develop our manufacturing and sales and marketing
capabilities; </LI>
<LI>demand for our products; </LI>
<LI>the progress of surgical training in the use of our products; </LI>
<LI>our ability to develop, introduce and market new or enhanced versions of our
products on a timely basis; </LI>
<LI>product quality problems; </LI>
<LI>our ability to protect our proprietary rights; </LI>
<LI>our ability to license additional intellectual property rights; and </LI>
<LI>third-party payor reimbursement policies. </LI></UL>

<P ALIGN="JUSTIFY">Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline. </P>
<STRONG><P>WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.</STRONG> </P>
<P ALIGN="JUSTIFY">We have incurred substantial losses since inception and we
expect to incur substantial additional operating losses for at least the next
two years, primarily as a result of expected increases in expenses for our
manufacturing and sales and marketing capabilities, research and development
activities, clinical trials and regulatory approval applications. The extent of
our future losses and the timing of profitability are highly uncertain, and we
may never achieve profitable operations. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, we
may not be able to continue our operations. Our net loss for the three months
ended March 31, 2002 was $5.6 million compared to a net loss of $3.4 million for
the same period last year. As of March 31, 2002, we had an accumulated deficit
of $116.0 million. </P>
<STRONG><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A
NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</STRONG>
</P>
<P ALIGN="JUSTIFY">Our <I>da Vinci</I> Surgical System has a lengthy sales and
purchase order cycle because it is a major capital item and generally requires
the approval of senior management at purchasing institutions. We do not plan to
maintain a significant inventory of assembled <I>da Vinci</I> Surgical Systems,
but rather plan to manufacture these systems after receiving customer orders.
These factors may contribute to substantial fluctuations in our quarterly
operating results, particularly during the periods in which our sales volume is
low. Because of these fluctuations, it is likely that in some future quarters,
our operating results could fall below the expectations of securities analysts
or investors. If that happens, the market price of our stock would likely
decrease. These fluctuations also mean that you will not be able to rely upon
our operating results in any particular period as an indication of future
performance. </P>
<STRONG><P>BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE
TO ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE
DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.</STRONG> </P>
<P ALIGN="JUSTIFY">A relatively small number of customers account for a
significant portion of our total revenues. While no customer accounted for over
10% of total sales for the three months ended March 31, 2002, AB Medica SRL, our
Italian distributor, accounted for 21% of total sales and Marubeni America
Corporation, our Japanse distributor, accounted for 14% of our total sales for
the three months ended March 31, 2001. </P>
<P ALIGN="JUSTIFY">We expect that revenues from a limited number of new
customers will account for a large percentage of total revenues in future
quarters. Our ability to attract new customers will depend on a variety of
factors, including the capability, safety, efficacy, ease of use, price, quality
and reliability of our products and effective sales, support, training and
service. The loss or delay of individual orders could have a significant impact
on revenues and operating results. Our failure to add new customers that make
significant purchases of our products would reduce our future revenues. </P>
<STRONG><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE
TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</STRONG> </P>
<P ALIGN="JUSTIFY">Our products represent a fundamentally new way of performing
surgery. Achieving physician, patient and third-party payor acceptance of
<I>Intuitive</I> surgery as a preferred method of performing surgery will be
crucial to our success. If our products fail to achieve market acceptance,
hospitals will not purchase our products and we will not be able to generate the
revenue necessary to support our business. We believe that physicians' and
third-party payors' acceptance of the benefits of procedures performed using our
products will be essential for acceptance of our products by patients.
Physicians will not recommend the use of our products unless we can demonstrate
that they produce results comparable or superior to existing surgical
techniques. Even if we can prove the effectiveness of our products through
clinical trials, surgeons may elect not to use our products for any number of
other reasons. For example, cardiologists may continue to recommend conventional
open-heart surgery simply because such surgery is already so widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived
liability risks arising from the use of new products and the uncertainty of
reimbursement from third-party payors. </P>
<P ALIGN="JUSTIFY">We expect that there will be a learning process involved for
surgical teams to become proficient in the use of our products. Broad use of our
products will require training of surgical teams. Market acceptance could be
delayed by the time required to complete this training. We may not be able to
rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. Although we are in the process of developing training programs
for surgical teams, we cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs. </P>
<STRONG><P>WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER
MOTION AND BROOKHILL-WILK 1, LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE
COSTLY TO US AND MAY PREVENT US FROM SELLING OUR PRODUCTS.</P>
</STRONG><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since publicly accused us of infringing a tenth patent, and
we anticipate they will soon add U.S. Patent No. 6,244,809 to the litigation.
These ten patents concern various methods and devices for conducting various
aspects of robotic surgery. On December 7 and 8, 2000, the U.S. Patent and
Trademark Office ("PTO") declared three interferences between a single SRI
patent application exclusively licensed to us and three of Computer Motion's
patents, Numbers 5,855,583, 5,878,193, and 5,907,664, in two of which judgment
has either already been entered or soon will be entered in Intuitive's favor. In
light of those declarations of interference, the District Court on February 2001
stayed -- put on hold -- all proceedings in the litigation for one year while
the PTO conducts the interference proceedings. On March 30, 2002 the PTO
rendered decisions in each of the interferences.  As a result of the decisions
by the PTO, the District Court lifted the stay on May 1, 2002 and set trial to
begin in late April 2003. </P>
<P ALIGN="JUSTIFY">If the California litigation proceeds notwithstanding the
interferences, and if we ultimately lose Computer Motion's suit against us, it
will hurt our competitive position, may be costly to us and may prevent us from
selling our products. In addition, if we lose the patent suit, we will need to
obtain from Computer Motion a license to this technology if we are to continue
to market our products that have been found to infringe Computer Motion's
patents. This license could be expensive, or could require us to license to
Computer Motion some of our technology, which would result in a partial loss of
our competitive advantage in the marketplace, each of which could seriously harm
our business.  If Computer Motion is successful in its suit against us and is
unwilling to grant us a license, we will be required to stop selling our
products that are found to infringe Computer Motion's patents unless we can
redesign them so they do not infringe Computer Motion's patents, which we may be
unable to do. In addition, if we lose the patent suit, we could be required to
pay Computer Motion damages, including treble damages, which could be
substantial and harm our financial position. </P>
<P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our <I>da Vinci </I>Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery. In March
2001, Wilk withdrew its assertion of the '015 patent against Intuitive. On
November 8, 2001, the District Court granted summary judgment of noninfringement
of the '003 patent in our favor and dismissed Wilk's complaint in its entirety
without prejudice.  Wilk has since filed a notice with the U.S. Court of Appeals
for the Federal Circuit to appeal the summary judgment ruling. Briefing on the
appeal should conclude in mid-2002, with a hearing date possible towards the end
of 2002 or in early 2003. If we lose on appeal and ultimately also lose Wilk's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. If we lose the patent suit, we may
need to obtain from Wilk a license to this technology if we are to continue to
market our products that have been found to infringe Wilk's patents. This
license could be expensive, which could seriously harm our business.  If Wilk is
successful in its suit against us and is unwilling to grant us a license, we may
be required to stop selling our products that are found to infringe Wilk's
patents unless we can redesign them so they do not infringe Wilk's patents,
which we may be unable to do. In addition, if we lose the patent suit, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. </P>
<P ALIGN="JUSTIFY">The foregoing proceedings, will be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in this lawsuit, these proceedings could consume
substantial amounts of our financial and managerial resources. At any time
Computer Motion or Wilk may file additional claims against Intuitive Surgical,
or we may file claims against Computer Motion or Wilk, which could increase the
risk, expense and duration of the litigations. Further, because of the
substantial amount of discovery often involved in connection with this type of
litigation, there is a risk that some of our confidential information could be
compromised by disclosure. For more information on our litigation with Computer
Motion, see "Part II-Item 1: Legal Proceedings."</P>
<STRONG><P>IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN
OUR PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET
WILL BE HARMED.</STRONG> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges. </P>
<P ALIGN="JUSTIFY">We will incur substantial costs in obtaining patents and, if
necessary, defending our proprietary rights. The patent positions of medical
device companies, including ours, can be highly uncertain and involve complex
and evolving legal and factual questions. We cannot assure you that we will
obtain the patent protection we seek, or that the protection we do obtain will
be found valid and enforceable if challenged. We also cannot assure you that we
will be able to develop additional patentable proprietary technologies. If we
fail to obtain adequate protection of our intellectual property, or if any
protection we obtain is reduced or eliminated, others could use our intellectual
property without compensating us, resulting in harm to our business. We may also
determine that it is in our best interests to voluntarily challenge a third
party's products or patents in litigation or administrative proceedings,
including patent interferences or reexaminations. Given the early priority dates
of some of our licensed patents, we believe one or more patent proceedings may
be in our best interests. In addition, the laws of certain foreign countries do
not protect intellectual property rights to the same extent as do the laws of
the United States. </P>
<STRONG><P>OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE
NOT SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.</STRONG> </P>
<P ALIGN="JUSTIFY">We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery and minimally invasive
surgery. Some of these patents on their face appear broad enough to cover one or
more aspects of our present technology, and may cover aspects of our future
technology. We do not know whether any of these patents, if challenged, would be
held valid, enforceable and infringed. From time to time, we receive, and likely
will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative
proceeding because of one or more of these third parties, regardless of the
merits or likely outcome of such suit or proceeding. We cannot assure you that a
court or administrative body would agree with any arguments or defenses we have
concerning invalidity, unenforceability or noninfringement of any third-party
patent. In addition to the issued patents of which we are aware, other parties
may have filed, and in the future are likely to file, patent applications
covering surgical products that are similar or identical to ours. We cannot
assure you that any patents issuing from applications filed by a third party
will not cover our products or will not have priority over our patent
applications. </P>
<P ALIGN="JUSTIFY">The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us as Computer Motion and Brookhill-Wilk 1,
LLC have done, our technical and management personnel will experience a
significant diversion of time and effort and we will incur large expenses
defending ourselves. If third parties in any patent action are successful, our
patent portfolio may be damaged, we may have to pay substantial damages,
including treble damages, and we may be required to stop selling our products or
obtain a license which, if available at all, may require us to pay substantial
royalties. We cannot be certain that we will have the financial resources or the
substantive arguments to defend our patents from infringement or claims of
invalidity or unenforceability, or to defend against allegations of infringement
of third-party patents. In addition, any public announcements related to
litigation or administrative proceedings initiated by us, or initiated or
threatened against us, could cause our stock price to decline. </P>
<STRONG><P>THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL
PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES
FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR ABILITY TO COMPETE IN THE
MARKET.</STRONG> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
For further information on our intellectual property and the difficulties in
protecting it, see "Item 1: Business -- Intellectual Property," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC. </P>
<STRONG><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE
ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.</STRONG> </P>
<P ALIGN="JUSTIFY">We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Olympus Optical Co.,
Ltd., and Heartport, Inc. now part of Johnson &amp; Johnson. Any of these
agreements may be terminated for breach.  If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC. </P>
<STRONG><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK
PRICE.</P>
</STRONG><P ALIGN="JUSTIFY">During the course of our administrative proceedings
and/or lawsuits with Computer Motion and Brookhill-Wilk 1, LLC, there may be
public announcements of the results of hearings, motions, and other interim
proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could have a substantial negative effect on the
trading price of our stock. </P>
<STRONG><P>OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC
REGULATORY PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC
REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE
UNITED STATES.</STRONG> </P>
<P ALIGN="JUSTIFY">Our products and operations are subject to extensive
regulation in the United States by the U.S. Food and Drug Administration, or
FDA. The FDA regulates the research, testing, manufacturing, safety, labeling,
storage, recordkeeping, promotion, distribution and production of medical
devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first
obtain clearance from the FDA, pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act ("FFDCA"). Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. If we modify our products after they receive FDA clearance, the
FDA may require us to submit a separate 510(k) or PMA for the modified product
before we are permitted to market the products in the U.S. In addition, if we
develop products in the future that are not considered to be substantially
equivalent to a legally marketed device, we will be required to obtain FDA
approval by submitting a premarket approval application ("PMA"). </P>
<P ALIGN="JUSTIFY">The FDA may not act favorably or quickly in its review of our
510(k) or PMA submissions, or we may encounter significant difficulties and
costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the
FDA may request additional data, require us to conduct further testing, or
compile more data, including clinical data, in support of a 510(k) submission.
The FDA may also, instead of accepting a 510(k) submission, require us to submit
a PMA, which is typically a much more complex application than a 510(k). To
support a PMA, the FDA would likely require that we conduct one or more clinical
studies to demonstrate that the device is safe and effective, rather than
substantially equivalent to another legally marketed device. We may not be able
to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA
may not grant any necessary clearances or approvals. In addition, the FDA may
place significant limitations upon the intended use of our products as a
condition to a 510(k) clearance or PMA approval. Product applications can also
be denied or withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following approval. Any delays or failure
to obtain FDA clearance or approvals of new products we develop, any limitations
imposed by the FDA on new product use or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations. </P>
<P ALIGN="JUSTIFY">In order to conduct a clinical investigation involving human
subjects for the purpose of demonstrating the safety and effectiveness of a
device, a company must, among other things, apply for and obtain Institutional
Review Board ("IRB") approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption ("IDE") application. We may not
be able to obtain FDA and/or IRB approval to undertake clinical trials in the
U.S. for any new devices we intend to market in the United States in the future.
If we obtain such approvals, we may not be able to comply with the IDE and other
regulations governing clinical investigations or the data from any such trials
may not support clearance or approval of the investigational device. Failure to
obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.
For additional information concerning regulatory approvals of our products, see
"Item 1: Business -- Government Regulation," included in the Annual Report on
Form 10-K of Intuitive Surgical, Inc., filed with the Securities and Exchange
Commission or SEC. </P>
<STRONG><P>OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY
PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE
NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND
SELL OUR PRODUCTS IN FOREIGN COUNTRIES.</P>
</STRONG><P ALIGN="JUSTIFY">To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals,
and the time required for regulatory review vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed. </P>
<P ALIGN="JUSTIFY">The European Union requires that manufacturers of medical
products obtain the right to affix the CE mark to their products before selling
them in member countries of the European Union. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to products, a manufacturer must obtain certification that its
processes meet certain European quality standards. In January 1999, we received
permission to affix the CE mark to our <I>da Vinci</I> Surgical System and
<I>EndoWrist</I> instruments for general surgical use. We received
additional CE approvals for use of our <I>da Vinci </I>Surgical System and
<I>EndoWrist </I>instruments in cardiac surgery in September 1999, February
2000, and August 2001.</P>
</STRONG><P ALIGN="JUSTIFY">If we modify existing products or develop new
products in the future, including new instruments, we will need to apply for
permission to affix the CE mark to such products. In addition, we will be
subject to annual regulatory audits in order to maintain the CE mark permissions
we have already obtained. We cannot be certain that we will be able to obtain
permission to affix the CE mark for new or modified products or that we will
continue to meet the quality and safety standards required to maintain the
permissions we have already received. If we are unable to maintain permission to
affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union.</P>
<STRONG><P>IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.</STRONG> </P>
<P ALIGN="JUSTIFY">Domestic institutions will typically bill the services
performed with our products to various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans. If hospitals
do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if government and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
In such circumstances, we may have to apply to the American Medical Association
for a unique Current Procedural Terminology code covering computer-enhanced
surgery. If an application for a unique code is required, reimbursement for any
use of our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years. </P>
<P ALIGN="JUSTIFY">Our success in international markets also depends upon the
eligibility of our products for reimbursement through government-sponsored
health care payment systems and third-party payors. Reimbursement practices vary
significantly by country. Many international markets have government-managed
healthcare systems that control reimbursement for new products and procedures.
Other foreign markets have both private insurance systems and government-managed
systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of
reimbursement in any country within a particular time. In addition, health care
cost containment efforts similar to those we face in the United States are
prevalent in many of the other countries in which we intend to sell our products
and these efforts are expected to continue. For further information on third-
party reimbursement policies, see "Item 1: Business -- Third-Party
Reimbursement," included in the Annual Report on Form 10-K of Intuitive
Surgical, Inc., filed with the SEC.</P>
<STRONG><P ALIGN="JUSTIFY">BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS
MAY CHOOSE TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE
SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.</P>
</STRONG><P ALIGN="JUSTIFY">Intuitive surgery is a new technology that must
compete with established minimally invasive surgery and open surgery. These
procedures are widely accepted in the medical community and in many cases have a
long history of use. We also face competition from several companies that are
developing new approaches and products for the minimally invasive surgery
market. In addition, we presently face increasing competition from companies who
are developing robotic and computer-assisted surgical systems. Our revenues may
be reduced or eliminated if our competitors develop and market products that are
more effective or less expensive than our products. If we are unable to compete
successfully, our revenues will suffer. We may not be able to maintain or
improve our competitive position against current or potential competitors,
especially those with greater resources. </P>
<P ALIGN="JUSTIFY">In many cases, the medical conditions that can be treated
using our products can also be treated by pharmaceuticals or other medical
devices and procedures. Many of these alternative treatments are also widely
accepted in the medical community and have a long history of use. In addition,
technological advances could make such treatments more effective or less
expensive than using our products, which could render our products obsolete or
unmarketable. We cannot be certain that physicians will use our products to
replace or supplement established treatments or that our products will be
competitive with current or future technologies. </P>
<STRONG><P>IF SOFTWARE DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR
ADDITIONAL UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR
REPUTATION MAY SUFFER.</STRONG> </P>
<P ALIGN="JUSTIFY">Our products do incorporate computer software. Software can
contain errors or failures, especially when first introduced. In addition, new
products or enhancements may contain undetected errors or performance problems
that, despite testing, are discovered only after commercial shipment. Because
our products are designed to be used to perform complex surgical procedures, we
expect that our customers will have an increased sensitivity to software
defects. We cannot assure you that our software will not experience errors or
performance problems in the future. If we experience software errors or
performance problems, any of the following could occur: </P>

<UL>
<LI>delays in product shipments; </LI>
<LI>loss of revenue; </LI>
<LI>delay in market acceptance; </LI>
<LI>diversion of our resources; </LI>
<LI>damage to our reputation; </LI>
<LI>increased service or warranty costs; or </LI>
<LI>product liability claims. </LI></UL>

<STRONG><P>WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY
ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST
REVENUE.</STRONG> </P>
<P ALIGN="JUSTIFY">We have manufactured a limited number of our products for
sales to customers. We may be unable to establish or maintain reliable, high-volume
manufacturing capacity. Even if this capacity can be established and
maintained, the cost of doing so may increase the cost of our products and
reduce our ability to compete. We may encounter difficulties in scaling up
production of our products, including: </P>

<UL>
<LI>problems involving production yields; </LI>
<LI>quality control and assurance; </LI>
<LI>component supply shortages; </LI>
<LI>shortages of qualified personnel; and </LI>
<LI>compliance with state, federal and foreign regulations. </LI></UL>

<P ALIGN="JUSTIFY">Manufacturing our products is a complex process. If demand
for our products exceeds our manufacturing capacity, we could develop a
substantial backlog of customer orders. If we are unable to establish and
maintain larger-scale manufacturing capabilities, our ability to generate
revenues will be limited and our reputation in the marketplace would be
damaged.</P>
<STRONG><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL,
STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY
CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT
DELIVERY DELAYS AND LOST REVENUE.</STRONG> </P>
<P ALIGN="JUSTIFY">Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations (QSR). We are
also required to comply with the ISO 9000 series standards in order to produce
products for sale in Europe. If we fail to continue to comply with Good
Manufacturing Practice requirements or ISO 9000 series standards, we may be
required to cease all or part of our operations until we comply with these
regulations.  We are currently in compliance with ISO 9000 series standards. In
March 2000, the FDA inspected our Mountain View facility and the Good
Manufacturing Practice issues raised during the inspection were satisfactorily
resolved with the FDA. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good
Manufacturing Practice requirements or the ISO 9001 standards in future audits
by regulatory authorities. </P>
<P ALIGN="JUSTIFY">The state of California also requires that we maintain a
license to manufacture medical devices. Our facilities and manufacturing
processes were inspected in February 1998. In March 1998, we passed the
inspection and received a device manufacturing license from the California
Department of Health Services. In March 2002, our facilities and manufacturing
processes in our Sunnyvale facility were re-inspected by the Food and Drug
Branch (FDB).  We passed this audit and are awaiting issuance of our device
manufacturing license renewal.  We will be subject to periodic inspections by
the California Department of Health Services and if we are unable to maintain
this license following any future inspections, we will be unable to manufacture
or ship any products.</P>
<STRONG><P>OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR
ABILITY TO MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET.</STRONG> </P>
<P ALIGN="JUSTIFY">Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget. </P>
<STRONG><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR
BUSINESS.</STRONG> </P>
<P ALIGN="JUSTIFY">Our business exposes us to significant risks of product
liability claims. The medical device industry has historically been litigious,
and we face financial exposure to product liability claims if the use of our
products were to cause injury or death. There is also the possibility that
defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. Particularly as sales
of our products increase, we may be unable to maintain product liability
insurance in the future at satisfactory rates or adequate amounts. A product
liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product
recalls could also harm our reputation or result in a decline in revenues. </P>
<STRONG><P>OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS
AND RESOURCES AND, IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL
AND DEVELOP OUR PRODUCTS MAY BE HARMED.</STRONG> </P>
<P ALIGN="JUSTIFY">In order to complete clinical trials, scale-up manufacturing,
expand marketing and distribution capabilities and develop future products, we
must expand our operations. We expect that future expansion will occur
particularly in the areas of sales and marketing, manufacturing and research and
development. This expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon our
management, operating and financial systems and resources. We plan to sell our
products primarily through direct sales, and we currently have a small sales
organization. Our products require a complex marketing and sales effort targeted
at several levels within a prospective customer's organization. We will need to
expand our sales team significantly over the next 12 months to achieve our sales
growth goals. We will face significant challenges and risks in building and
managing our sales team, including managing geographically dispersed sales
efforts and adequately training our sales people in the use and benefits of our
products. To accommodate our growth and compete effectively, we will be required
to improve our information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. Our future success will
depend in part on the ability of current and future management personnel to
operate effectively, both independently and as a group. We cannot be certain
that our personnel, systems, procedures and controls will be adequate to support
our future operations. </P>
<STRONG><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.</STRONG> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our
management and scientific staff.  In order to pursue our product development,
marketing and commercialization plans, we will need to hire additional qualified
personnel with expertise in research and development, clinical testing,
government regulation, manufacturing, sales and marketing, and finance. Our
product development plans depend in part on our ability to attract and retain
engineers with experience in mechanics, software and optics. Attracting and
retaining qualified personnel will be critical to our success, and competition
for qualified personnel is intense, particularly in Silicon Valley. We may not
be able to attract and retain personnel on acceptable terms given the
competition for such personnel among technology and healthcare companies, and
universities. The loss of any of these persons or our inability to attract and
retain qualified personnel could harm our business and our ability to compete.
</P>
<STRONG><P>INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.</STRONG> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our
activities in Europe, and a component of our growth strategy is to expand our
presence into additional foreign markets. Sales to markets outside of the United
States accounted for approximately 13% of our sales for the three months ended
March 31, 2002 and 52% for the three months ended March 31, 2001. </P>
<P ALIGN="JUSTIFY">We will be subject to a number of challenges that
specifically relate to our international business activities. These challenges
include: </P>

<UL>
<LI>failure of local laws to provide the same degree of protection against
infringement of our intellectual property; </LI>
<LI>protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets; </LI>
<LI>the risks associated with foreign currency exchange rate fluctuation; </LI>
<LI>the expense of establishing facilities and operations in new foreign
markets; and </LI>
<LI>building an organization capable of supporting geographically dispersed
operations. </LI></UL>

<P ALIGN="JUSTIFY">Currently, a majority of our international sales are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would
limit the growth of our business. </P>
<STRONG><P>FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT
CAPITAL NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD
REDUCE OUR ABILITY TO COMPETE, RESULT IN LOWER REVENUES AND MAY PREVENT US FROM
TAKING ADVANTAGE OF MARKET OPPORTUNITIES.</STRONG> </P>
<P ALIGN="JUSTIFY">We expect that our existing capital resources and the revenue
to be derived from the sale of our products will be sufficient to meet our
working capital and capital expenditure needs at least through 2003. After that,
we may need to raise additional funds and we cannot be certain that we will be
able to obtain additional financing on favorable terms, or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be able
to, among other things: </P>

<UL>
<LI>develop or enhance our products and services; </LI>
<LI>acquire technologies, products or businesses; </LI>
<LI>expand operations in the United States or internationally; </LI>
<LI>hire, train and retain employees; or </LI>
<LI>respond to competitive pressures or unanticipated capital requirements.
</LI></UL>

<P>Our failure to do any of these things could result in lower revenues and
could harm our business.</P>
<STRONG><P>SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO
DECLINE.</P>
</STRONG><P ALIGN="JUSTIFY">The market price of our common stock could decline
as a result of sales of a large number of shares in the market. These sales may
also make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate to raise funds through future
offerings of common stock. As of March 31, 2002, several entities beneficially
owned more than 5% of the outstanding shares of our common stock, including Bear
Stearns Asset Management, Allan G. Lozier,  Investor Growth Capital, Ltd.,
Merrill Lynch &amp; Co., and PaTMarK Company, Inc.  <A NAME="market"></A></P>
<STRONG><P>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK</P>
</STRONG><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income we receive on the investment of the remaining
proceeds from our June 2000 initial public offering. </P>
<P ALIGN="JUSTIFY">The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities. We classify our cash
equivalents and marketable securities as &quot;fixed-rate&quot; if the rate of
return on such instruments remains fixed over their term. These &quot;fixed-
rate&quot; investments include commercial paper and government and non-
government debt securities. We classify our cash equivalents and marketable
securities as &quot;variable-rate&quot; if the rate of return on such
investments varies based on the change in a predetermined index or set of
indices during their term.  These &quot;variable-rate&quot; investments
primarily include money market accounts. The average duration of all of our
investments as of March 2002 was approximately 1.78 years.  At March 31, 2002,
approximately 44% of our investment portfolio was composed of investments with
original maturities of one year or less.  </P>

<STRONG><P ALIGN="CENTER">PART II. - OTHER INFORMATION <A NAME="item1"></A></P>
<P>ITEM 1. LEGAL PROCEEDINGS</P>
</STRONG><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since publicly accused us of infringing a tenth patent, and
we anticipate they will soon add U.S. Patent No. 6,244,809 to the litigation.
Each of these ten patents concerns methods and devices for conducting various
aspects of robotic surgery. Until February 2001, the litigation was proceeding
in the early stages of discovery, with no trial date set. In February 2001, in
response to Intuitive's request, the District Court stayed -- put on hold -- all
proceedings in the litigation because of the declaration by the U.S. Patent and
Trademark Office ("PTO") of three "interference" proceedings between a single
SRI patent application exclusively licensed to us and three of Computer Motion's
patents (see next paragraph). Now that the PTO has acted in each of the
interferences, the stay has been lifted and trial has been set for late April
2003. We intend to file our first two motions for summary judgment shortly.  The
Computer Motion action seeks damages based upon the making, using, selling and
offering for sale of our products and processes, and seeks to enjoin our
continued activities relating to these products. This action subjects us to
potential liability for damages, including treble damages, and could require us
to cease making, using or selling the affected products, or to obtain a license
in order to continue to manufacture, use or sell the affected products. While we
continue to believe we have multiple meritorious defenses to this action, we
cannot assure you that we ultimately will prevail on any issue in the litigation
or that we will be able to successfully defend Computer Motion's charges, nor
can we provide assurance that any license required would be made available on
commercially acceptable terms, if at all. Failure to successfully defend against
the Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of this matter at this time and,
therefore, cannot estimate the range of possible loss. </P>
<P ALIGN="JUSTIFY">On December 7 and 8, 2000, the PTO declared three
interferences between a single SRI patent application exclusively licensed to
Intuitive and three of Computer Motion's patents, Numbers 5,855,583, 5,878,193
and 5,907,664.  An interference is a proceeding within the U.S. Patent Office to
resolve questions regarding the patentability of inventions and who first
invented subject matter claimed by two or more patents or patent applications.
These three interferences resulted from requests for interference filed in May
through July 1999.  Because the SRI patent application licensed to Intuitive was
filed in January 1992 and Computer Motion's three patents were filed no earlier
than August 1992 and as late as February 1996, SRI/Intuitive is the "Senior
Party" in each interference. As "Junior Party," Computer Motion bears the burden
of proving that it is entitled to keep its patents.  On March 30, 2002, the PTO
issued its decisions on various motions filed by Intuitive and Computer Motion
in each interference.  In the interference involving the 5,878,193 patent, the
PTO denied both of Computer Motion's motions and entered judgment in Intuitive's
favor.  Subject to review by or appeal to a federal court, which could reverse
or modify any or all of the following, this judgment establishes that the
disputed invention of, generally speaking, image-based control of robotic
surgical instruments is prior art to all of Computer Motion's remaining patents,
that Intuitive is entitled to patent that invention for itself, and that
Computer Motion is no longer entitled to any of the three claims of its
5,878,193 patent.  In the interference involving the 5,855,583 patent, the PTO
denied Computer Motion's only motion for judgment. Upon resolution of one
remaining evidentiary issue, the PTO indicated that it will enter judgment in
our favor.  Subject to entry of a final judgment and review by or appeal to a
federal court, which could reverse or modify any or all of the following, this
judgment would establish that the disputed invention of, generally speaking,
proportional movement of articulating robotic surgical instruments is prior art
to all of Computer Motion's remaining patents, and that we are entitled to
patent that invention for ourself. In the interference involving the 5,907,664
patent, the PTO decided that our patent claim is unpatentable for noncompliance
with the &quot;written description&quot; requirement of Title 35 of the U.S.
Code and so entered an Order to Show Cause against us.  We believe good grounds
exist for reconsideration of this decision and we have filed a request for
reconsideration. If the PTO rejects our request for reconsideration, Computer
Motion will be entitled to keep its 5,907,664 patent, subject to review or
appeal.  The PTO declined to decide our motion challenging the validity of
certain claims of the '664 patent, leaving that issue in question.</P>
<P ALIGN="JUSTIFY">In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 0653,922, which
issued to Computer Motion in 1999 and is related to several of the patents now
involved in the U.S. litigation and the interference proceedings. An Opposition
proceeding allows the EPO to determine whether the challenged patent should be
revoked in its entirety, should be amended, or should remain unaltered. In its
Notice of Opposition, Intuitive cited numerous prior art references not cited to
the EPO during the '922 patent's original prosecution. An initial ruling by the
EPO indicates that the EPO is not presently inclined to alter the '922 patent in
any way.  A hearing has been set for July 2002.</P>
<P ALIGN="JUSTIFY">On March 30, 2001, Intuitive and International Business
Machines Corporation ("IBM") jointly filed suit against Computer Motion, Inc. in
the U.S. District Court for the District of Delaware. The complaint alleges that
by continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent which concerns various aspects of voice control of
surgical instruments issued to IBM in early March 2001 and is exclusively
licensed to us.  The '984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Because Computer Motion's
voice-controlled HERMES product interfaces with the AESOP and ZEUS products,
HERMES is also implicated in the patent infringement complaint. Trial is
presently set for August 2002.  The Court so far has denied Computer Motion's
request to add its own U.S. Patent No. 6,244,809 to the Delaware litigation and
has refused to entertain Computer Motion's allegations that we infringe the '809
patent by making, using, selling and offering for sale our <I>da Vinci
</I>Surgical System.  The Delaware Court has also refused Computer Motion's
request to transfer the litigation to California.  The parties will file their
motions for summary judgment on May 1, 2002.  Decisions on these motions are
expected sometime before trial, which is presently scheduled to begin in August
2002. </P>
<P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our <I>da Vinci</I> Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery.  In
March 2001, Wilk withdrew its assertion of infringement of the '015 patent
against Intuitive, leaving only the '003 patent at issue in the suit. On
November 8, 2001, the District Court granted in Intuitive's favor summary
judgment of noninfringement of the '003 patent in our favor and dismissed Wilk's
complaint  in its entirety.  Wilk has since filed a notice with the U.S. Court
of Appeals for the Federal Circuit to appeal the summary judgment ruling.
Briefing on the appeal should conclude in mid-2002, with a hearing date possible
towards the end of 2002 or in early 2003.  We believe the appellate court will
uphold the summary judgment of noninfringement. If we lose Wilk's suit against
us, it will hurt our competitive position, may be costly to us and may prevent
us from selling our products. In addition, if we lose the patent suit, we may
need to obtain from Wilk a license to this technology if we are to continue to
market our products that have been found to infringe Wilk's patents. This
license could be expensive, which could seriously harm our business. We believe
that we have multiple meritorious defenses in this action. However, litigation
is unpredictable and we may not prevail with any of our defenses or on appeal.
If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to
infringe Wilk's patents unless we can redesign them so they do not infringe
Wilk's patents, which we may be unable to do. In addition, if we lose the patent
suit, we could be required to pay Wilk damages, including treble damages, which
could be substantial and harm our financial position.</P>
<P ALIGN="JUSTIFY">The Company is subject to legal proceedings and claims that
arise in the normal course of its business. We cannot assure that we will
prevail in these matters nor can we assure that any remedy could be reached on
commercially viable terms, if at all. Due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of these
matters at this time and, therefore, cannot estimate the range of possible
loss.</P>

<P><A NAME="item2"></A> <BR>
<STRONG><P>ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS</P>
</STRONG><B><I><P>RECENT SALES OF UNREGISTERED SECURITIES</P>
</B></I><P ALIGN="JUSTIFY">Since January 1, 2002, we have sold and issued the
following unregistered securities: </P>
<BLOCKQUOTE ALIGN="JUSTIFY">(1) From January 1, 2002 through March 31, 2002, we
granted stock options to purchase  1,614,150 shares of our common stock, at
prices ranging from $8.60 to $10.03 per share, to employees pursuant to our 2000
Equity Incentive Plan. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(2) On January 31, 2002, we issued 96,781 shares at
an exercise price of $7.12 per share and 25,193 shares at an exercise price of
$7.81, to employees pursuant to our 2000 Employee Stock Purchase Plan.
</BLOCKQUOTE>
<P>The sales and issuance of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 promulgated thereunder in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701. </P>

<P><A NAME="item3"></A> <BR>
<STRONG><P>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</P>
</STRONG><P ALIGN="JUSTIFY">None. <A NAME="item4"></A></P>
<STRONG><P>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS<A
NAME="item5"></A></P>
</STRONG><P>None.</P>
<STRONG><P ALIGN="JUSTIFY">ITEM 5. OTHER INFORMATION</P>
</STRONG><P ALIGN="JUSTIFY">None. <A NAME="item6"></A></P>
<STRONG><P>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</P>
</STRONG><P ALIGN="JUSTIFY">(a) Exhibits. </P>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<P ALIGN="CENTER"><B>Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.1(1) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Amended and Restated Certificate of Incorporation of Intuitive Surgical.
</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.2(2) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Bylaws of Intuitive Surgical. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.1 </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Reference is made to Exhibits 3.1 and 3.2. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.2(3) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Specimen Stock Certificate. </TD>
</TR>
</TABLE>

<P>_____________ </P>
<BLOCKQUOTE ALIGN="JUSTIFY">(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>
<P ALIGN="JUSTIFY">(b) Current Reports on Form 8-K.  We did not file a Current
Report on Form 8-K during the     three month period ending March 31, 2002.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=600>
<TR><TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="25%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="25%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD>
</TR>
</TABLE>
</CENTER></P>


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<P><A NAME="sign"></A></P>
<B><P ALIGN="CENTER">SIGNATURE</P>
</B><P>&#9; Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. </P>
<TABLE CELLSPACING=0 BORDER=0 WIDTH=624>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<P>&nbsp;</TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<P>INTUITIVE SURGICAL, INC. </TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<P>&nbsp;</TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<I><P>(Registrant)</I> </TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<P>&nbsp;</TD>
<TD WIDTH="5%" VALIGN="MIDDLE">
<U><P>By:&nbsp;</U></TD>
<TD WIDTH="60%" VALIGN="MIDDLE">
<U><P>/s/ SUSAN K. BARNES </U></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<P>&nbsp;</TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<P>Susan K. Barnes </TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<P>&nbsp;</TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<I><P>Senior Vice President, Chief Financial Officer and Assistant Secretary
</I></TD>
</TR>
</TABLE>

<P>Date: May 14, 2002 <BR>
<BR>
</P>


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>

<STRONG><P ALIGN="CENTER">EXHIBIT INDEX </P></STRONG>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<P ALIGN="CENTER"><B>Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.1(1) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Amended and Restated Certificate of Incorporation of Intuitive Surgical.
</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.2(2) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Bylaws of Intuitive Surgical. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.1 </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Reference is made to Exhibits 3.1 and 3.2. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.2(3) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Specimen Stock Certificate. </TD>
</TR>
</TABLE>
</CENTER></P>

<P>_____________ </P>
<BLOCKQUOTE ALIGN="JUSTIFY">(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016. </BLOCKQUOTE>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>

</BODY>
</HTML>
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Q1 2002 10Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
77-0416458
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
950 Kifer Road
Sunnyvale, California      94086
(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES
x
NO
o
The Registrant had 36,378,755 shares of Common Stock, $0.001 par value per
share, outstanding as of April 10, 2002.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets as of March 31, 2002 and
December 31, 2001
1
Consolidated statements of operations for the three-month
periods ended March 31, 2002 and March 31, 2001
2
Consolidated statements of cash flows for the three-month
periods ended March 31, 2002 and March 31, 2001
3
Notes to Consolidated Financial Statements
4
Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
8
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
25
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
26
Item 2.   Changes in Securities and Use of Proceeds
28
Item 3.  Defaults Upon Senior Securities
29
Item 4.  Submission of Matters to a Vote of Security Holders
29
Item 5.  Other Information
29
Item 6.   Exhibits and Reports on Form 8-K
29
Signatures
31
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31,  December 31,
                                                             2002          2001
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $      8,335  $    10,487
  Short-term investments...............................       48,294       56,174
  Accounts receivable..................................       15,492       13,248
  Inventory, net.......................................        6,242        6,182
  Prepaid expenses.....................................        2,888        3,128
                                                         ------------  -----------
          Total current assets.........................       81,251       89,219
Property and equipment, net............................       11,124        7,834
Intangible and other assets............................        3,113        3,308
                                                         ------------  -----------
          Total assets.................................       95,488      100,361
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      9,184  $     8,300
  Accrued compensation and employee benefits...........        2,506        2,537
  Warranty accrual.....................................        1,787        1,831
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        2,085        2,128
  Deferred revenue.....................................        3,624        3,870
  Current portion of notes payable.....................        1,587        1,631
                                                         ------------  -----------
          Total current liabilities....................       20,773       21,297
Long-term notes payable................................        1,282          771
Stockholders' equity:
  Preferred stock, 5,000,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of March 31, 2002 and
     December 31, 2001.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,381,465 and 36,223,640 shares
     issued and outstanding as of March 31, 2002
     and December 31, 2001, respectively...............           36           36
  Additional paid-in capital...........................      189,962      188,962
  Deferred compensation................................         (670)        (886)
  Accumulated deficit..................................     (115,987)    (110,370)
  Accumulated other comprehensive income ..............           92          551
                                                         ------------  -----------
          Total stockholders' equity...................       73,433       78,293
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     95,488  $   100,361
                                                         ============  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended
                                            March 31,
                                     ----------------------
                                        2002        2001
                                     ---------- -----------
Sales.............................. $   14,409  $   12,079
Cost of sales......................      7,507       6,563
                                     ----------  ----------
    Gross profit...................      6,902       5,516
                                     ----------  ----------
Operating costs and expenses:
  Research and development.........      4,232       3,231
  Selling, general and
   administrative..................      8,785       6,835
                                     ----------  ----------
    Total operating costs and
     expenses......................     13,017      10,066
                                     ----------  ----------
Loss from operations...............     (6,115)     (4,550)
Other income(expense), net ........        498       1,143
                                     ----------  ----------
Net loss........................... $   (5,617) $   (3,407)
                                     ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.15) $    (0.10)
                                     ==========  ==========
Shares used in computing net
  loss per common share............     36,308      35,401
                                     ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Three Months
                                                             Ended March 31,
                                                         ------------------------
                                                            2002         2001
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (5,617) $    (3,407)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................         622          428
  Loss on sales of fixed assets........................          69           --
  Amortization of deferred compensation................         216          617
  Amortization of intangible and other assets..........         195          194
Changes in operating assets and liabilities:
  Accounts receivable..................................      (2,244)      (3,822)
  Prepaid expenses.....................................         240           99
  Inventory............................................         (60)        (447)
  Accounts payable.....................................         884       (1,588)
  Accrued compensation and employee benefits...........         (31)      (1,157)
  Warranty accrual.....................................         (44)          49
  Other accrued liabilities............................         (43)        (329)
  Accrued royalty expense..............................      (1,000)      (1,000)
  Deferred revenue.....................................        (246)      (1,212)
                                                         -----------  -----------
Net cash used in operating activities..................      (7,059)     (11,575)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (4,024)      (1,562)
Disposition of property and equipment..................          43           --
Purchase of short-term investments.....................      (8,491)     (10,434)
Proceeds from sales of short-term investments..........      11,771          479
Proceeds from maturities of short-term investments.....       4,099       13,746
                                                         -----------  -----------
Net cash provided by investing activities..............       3,398        2,229
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,001          755
Repurchase of common stock.............................          (1)         (61)
Proceeds from notes payable............................         950           --
Repayment of notes payable.............................        (483)        (335)
                                                         -----------  -----------
Net cash provided by financing activities..............       1,467          359
                                                         -----------  -----------
Foreign currency translation adjustments...............          42           --
Net decrease in cash and cash equivalents..............      (2,152)      (8,987)
Cash and cash equivalents, beginning of period.........      10,487       22,657
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     8,335  $    13,670
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In this report, "Intuitive Surgical," "we," "us,"
and "our" refer to Intuitive Surgical, Inc.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for a fair
presentation have been included. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2001, included in the Annual Report on Form 10-K of Intuitive Surgical, Inc,
filed with the Securities and Exchange Commission. The results for the interim
period ended March 31, 2002 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2002 or future operating periods.
NOTE 2. CONCENTRATIONS OF RISK
For the three months ended March 31, 2002, none of
our customers accounted for 10% or more of total sales. For the three months
ended March 31, 2001, two customers, A and B, accounted for 21% and 14%,
respectively, of total sales. The Company extends reasonably short collection
terms but does not require collateral. The Company provides reserves for
potential credit losses but has not experienced significant losses to date.
The Company's
da Vinci
Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the three months ended March 31, 2002 and 2001. Purchases of key parts
and components used to manufacture our products are from limited supply sources.
The inability of any of these suppliers to fulfill our supply requirements may
negatively impact future operating results.
NOTE 3. CASH AND CASH EQUIVALENTS
Intuitive Surgical considers all highly liquid
investments with an original maturity from date of purchase of 90 days or less
to be cash equivalents for the purpose of balance sheet and statement of cash
flows presentation. The carrying value of cash and cash equivalents approximates
market value at March 31, 2002 and December 31, 2001.
NOTE 4. SHORT-TERM INVESTMENTS
All short-term investments are classified as
available-for-sale and therefore carried at fair value. We view our available-
for-sale portfolio as available for use in our current operations. Accordingly,
all investments are classified as short-term, even though the stated maturity
date may be one year or more beyond the current balance sheet date. Available-
for-sale securities are stated at fair value based upon quoted market prices of
the securities. Unrealized gains and losses on such securities, when material,
are reported as a separate component of stockholders' equity. Realized gains and
losses on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income.
NOTE 5. INVENTORY, NET
Inventory, net consists of the following (in
thousands):
March 31,   December 31,
                                   2002           2001
                               -------------  -----------
Raw materials................ $       3,403  $     3,577
Work-in-process..............         1,407        1,330
Finished goods...............         1,432        1,275
                               -------------  -----------
                              $       6,242  $     6,182
                               =============  ===========
NOTE 6. INTANGIBLE AND OTHER ASSETS
Purchased intangible assets represent patents which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six years. At
March 31, 2002 gross intangible assets totaled $4.7 million and related
accumulated amortization was $1.6 million.
NOTE 7. COMPREHENSIVE LOSS
The components of comprehensive loss consist of
the following (in thousands):
Three Months Ended
                                             March 31,
                                      --------------------
                                         2002       2001
                                      ---------  ---------
Net loss............................ $  (5,617) $  (3,407)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................        42         --
  Change in unrealized gain on
    forward exchange contracts......        --        (67)
  Change in unrealized gain (loss)
    on available-for-sale securities      (501)       320
                                      ---------  ---------
Comprehensive loss.................. $  (6,076) $  (3,154)
                                      =========  =========
NOTE 8. NET LOSS PER SHARE
The following table presents the computation of
basic and diluted net loss per share (in thousands, except share and per share
data):
Three Months Ended
                                      March 31,
                               ------------------------
                                  2002         2001
                               -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (5,617) $    (3,407)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,342,421   35,743,685
  Less weighted-average
    shares subject to
    repurchase...............     (34,439)    (342,658)
                               -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,307,982   35,401,027
                               ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.15) $     (0.10)
                               ===========  ===========
NOTE 9. REVENUE RECOGNITION
We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably assured.
Revenue from system sales is generally recognized upon
installation for direct sales and upon shipment for sales to our distributors.
If substantial contractual obligations exist after system installation, revenue
is recognized after such obligations are fulfilled.  In certain instances,
contract terms may provide for customer acceptance and transfer of title to
occur prior to installation for direct sales.  In those instances, we account
for the sale as a multiple element arrangement and defer revenue recognition on
the fair value of any undelivered elements, including installation.  The fair
value of the undelivered elements are then recognized when the outstanding
obligations are fulfilled.
Our distributors do not have price protection rights. One of
our distributors has return rights under limited circumstances. Such rights are
accounted for under the provisions of SFAS No. 48. To date, we have not had any
returns of our systems.
Revenue from sales of instruments and accessories is
recognized upon shipment. Revenue related to future commitments under service
contracts is deferred and recognized ratably over the service period.  Amounts
billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.
Our
da Vinci
Surgical System contains a software
component.  We believe that the software element of our
da Vinci
Surgical
System is an incidental part of the system.  The software element within our
product is not sold or marketed separately to customers and the software does
not operate independently of the surgical system.  Furthermore, the software
development effort does not require a significant cost to the Company relative
to the overall development cost of the product.  As such, the software we
provide is incidental to the surgical system as a whole and the software revenue
guidance provided in SOP 97-2 is not applicable to our revenues.
NOTE 10. SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in
accordance with FASB Statement No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed."  Prior to the
achievement of technological feasibility, software development costs are
expensed as incurred and are included in research and development expense.
Costs incurred between feasibility and the general release of software
enhancements are insignificant.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001.  SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and that the use of the pooling-of-interest method is no longer
allowed.  Under SFAS No. 142 goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to an annual
impairment test in accordance with the new standards.  Other intangible assets
will continue to be amortized over their useful lives. The Company adopted SFAS
No. 141 and SFAS No. 142 as of January 1, 2002.  The adoption of SFAS No. 141
and SFAS No. 142 has not had a significant impact on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets", effective for fiscal
years beginning after December 15, 2001.  SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets and
supersedes SFAS 121.  The Company adopted SFAS No. 144 as of January 1, 2002.
The adoption of SFAS No. 144 has not had a significant impact on our financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of
Financial Condition and Results of Operations as of March 31, 2002 and for the
three month periods ended March 31, 2002 and March 31, 2001 should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in Intuitive Surgical's Annual Report on Form
10-K for the year ended December 31, 2001.
Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere.
Intuitive
â
, Intuitive Surgical
â
, da Vinci™, EndoWrist™, InSite™ and Navigator™ are
trademarks of Intuitive Surgical, Inc.
OVERVIEW
We design, manufacture, and market the
da
Vinci
Surgical System, an advanced surgical system that we believe
represents a new generation of surgery. The
da Vinci
Surgical System
consists of a surgeon's console, a patient-side cart, a high performance vision
system and proprietary instruments. The
da Vinci
Surgical System
seamlessly translates the surgeon's natural hand movements on instrument
controls at a console into corresponding micro-movements of instruments
positioned inside the patient through small puncture incisions, or ports. We
believe that the
da Vinci
Surgical System is the only commercially
available technology that can provide the surgeon with the intuitive control,
range of motion, fine tissue manipulation capability and 3-D visualization
characteristic of open surgery, while simultaneously allowing the surgeons to
work through the small ports of minimally invasive surgery or MIS. By placing
computer-enhanced technology between the surgeon and the patient, we believe
that the
da Vinci
Surgical System enables surgeons to perform better
surgery while giving patients the benefits of MIS surgery, including decreased
trauma and postoperative pain, reduced surgical complications, shorter hospital
stays and lower total treatment costs.
In 1999, we obtained permission from the European Union to
affix the CE Mark to the
da Vinci
Surgical System and
EndoWrist
instruments for general surgical and cardiac surgical use. Based on this
approval, we recognized revenue for the first time in the second quarter of 1999
for the sale of our products. In July 2000, we received clearance from the U.S.
Food and Drug Administration, the FDA, to begin commercialization of our
da
Vinci
Surgical System in the United States for use in laparoscopic surgical
procedures. In March 2001, we received clearance from the FDA for use of our
da Vinci
Surgical System in non-cardiac thoracoscopic surgical
procedures.  In May 2001, we received market clearance from the FDA to promote
use of the
da Vinci
Surgical System for performance of laparoscopic
radical prostatectomy procedures.
To date, the majority of our revenues have come from the
sales of the
da Vinci
Surgical System, which are high revenue dollar
items. A smaller percentage of revenues have come from sales of
EndoWrist
instruments and accessories, which are lower revenue dollar items. In addition,
a portion of our revenue comes from ongoing service of installed
da Vinci
Surgical Systems. Although we expect the majority of our revenues to continue to
come from the sale of
da Vinci
Surgical Systems over the next few years,
the percentage of revenue from our
EndoWrist
instruments and service
should continue to increase. Due to the high dollar revenue per system sold,
small variations in system unit sales may cause revenue to vary significantly
from quarter to quarter. During the useful life of each installed
da
Vinci
Surgical System, we expect to generate recurring revenue through sales
of the
EndoWrist
instruments and accessories and ongoing service.
RESULTS OF OPERATIONS
Sales. Sales for the three months ended March 31,
2002 were $14.4 million, up 19% from $12.1 million for the three months ended
March 31, 2001.  Sales growth was driven by increased recurring revenue and
higher da Vinci™ Surgical System placements.  First quarter 2002 recurring
revenue, consisting of instruments, accessories, and service was $2.7 million,
up 120% from $1.2 million for the same period last year.  We shipped 13 da
Vinci™ Surgical Systems during the first quarter of 2002 compared to 12 in
the first quarter of 2001.  As of March 31, 2002 there were 102 cumulative da
Vinci™ Surgical Systems shipped, compared to 52 as of March 31, 2001.
Gross Profit. Gross profit for the three months ended March
31, 2002 was $6.9 million, or 48% of sales, compared with $5.5 million, or 46%
of sales for the three months ended March 31, 2001. The improvement in gross
profit resulted from sales growth and increased manufacturing efficiencies.
Research and Development Expenses. Research and development
expenses for the three months ended March 31, 2002 were $4.2 million, up 31%
from $3.2 million for the  three months ended March 31, 2001. The year over year
increase resulted primarily from headcount additions to support product
development and enhancements.
Research and development expenses include costs associated
with the design, development, testing and enhancement of our products. These
enhancements represent significant improvements to our products. Research and
development expenses also include expenditures for clinical trials and purchases
of laboratory supplies. Research and development costs are expensed as incurred.
We expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended March 31, 2002
were $8.8 million, up 29% from $6.8 million  for the three months ended March
31, 2001. The year over year increase resulted primarily from headcount
additions in the field service and sales functions to support increased revenue
and a larger installed base of
da Vinci
Surgical Systems.
Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses are expected to increase in the
future to support expanding business activities.
Deferred Compensation. We record deferred compensation as the
difference between the exercise price of options granted and the fair value of
our common stock at the time of grant for financial reporting purposes. Deferred
compensation is amortized to research and development expense and selling,
general and administrative expenses. Non-cash deferred compensation expense
included in research and development expenses was $0.1 million and $0.4 million
for the three months ended March 31, 2002 and 2001, respectively. Non-cash
deferred compensation expense included in selling, general and administrative
expenses was $0.1 million and $0.2 million for the three months ended March 31,
2002 and 2001, respectively. The remaining $0.7 million of deferred compensation
will be amortized over the remaining vesting periods of the options, generally
four years from the date of grant, using a graded vesting method. The amount of
deferred compensation expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been recorded are
subsequently canceled.
Other Income (Expense). Other income (expense) for the three
months ended March 31, 2002 was $0.5 million, down $0.6 million compared to $1.1
million for the three months ended March 31, 2001. The decrease was due
primarily to lower interest income in the first quarter of 2002 resulting
primarily from lower average cash and short-term investment balances than in the
first quarter of 2001 and lower interest rates earned on funds invested.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the sales
of our convertible preferred stock, yielding net proceeds of approximately
$127.3 million, our initial public offering of 5,750,000 shares of our common
stock, yielding approximately $46.8 million, and equipment financing
arrangements, yielding approximately $9.0 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors. As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement.
As of March 31, 2002, we had working capital of $60.5
million, compared to $67.9 million as of December 31, 2001. The decrease in
working capital during the first three months of 2002 resulted primarily from
our first quarter net loss of $5.6 million and investments in fixed assets.
Net cash used in operating activities for the three months
ended March 31, 2002 was $7.0 million, compared to $11.6 million for the three
months ended March 31, 2001.  The decrease was primarily due to lower working
capital requirements in the first quarter of 2002 compared to the prior year.
As a result of timing of payments, combined accounts payable, accrued
compensation, and other accrued liabilities grew by $0.8 million during the
first quarter of 2002 while these liabilities were paid down by $3.0 million
during the first quarter of 2001.
Net cash provided by investing activities was $3.4 million
for the three months ended March 31, 2002, compared to $2.2 million for the
three months ended March 31, 2001.  During the first quarter of 2002, $7.4
million of net short-term investments were converted to cash to support business
operations and to acquire $4.0 million of fixed asset additions.  During the
first quarter of 2001, $3.8 million of investments were converted to cash,
offset by $1.6 million of capital purchases.
Net cash provided by financing activities was $1.5 million
for the three months ended March 31, 2002, compared to $0.4 million for the
three months ended March 31, 2001.  During the first quarter of 2002, $1.0
million was provided from issuance of stock and $0.5 million was provided from a
net increase in long-term borrowings.  During the first quarter of 2001, $0.8
million was provided from the issuance of stock, offset by a $0.3 million net
reduction in long-term borrowings.
Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities and for other general
corporate activities. We believe that our current cash and short-term investment
balances, together with revenue to be derived from the sale of our products,
will be sufficient to fund our operations at least through 2003. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
CRITICAL ACCOUNTING POLICIES
The Company believes the following represent its critical accounting
policies:
Revenue Recognition.  In certain cases, revenue from direct
system sales is generated from multiple element  arrangements which require
judgement in the areas of delivery, customer acceptance, installation and
collectibility.  Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of the
system, revenue is deferred until that essential element is delivered. The fair
value of each undelivered element that is not essential to the functionality of
the system is deferred until performance occurs. The fair value of an
undelivered element is based upon an estimate made by management. Amounts billed
in excess of revenue recognized is recorded as deferred revenue on the balance
sheet.
Warranties.  We provide for the estimated costs of product
warranties at the time revenue is recognized.  The Company's estimate of costs
to service its warranty obligations is based upon historical experience and
expectation of future conditions.  Should warranty claim activity and the costs
associated with servicing those claims differ from the Company's estimates,
revisions to the estimated warranty liability may be required.
Allowance for Doubtful Accounts.  The allowance for doubtful
accounts is based upon management estimates.  Factors underlying these estimates
include analysis of days outstanding, customer payment history and management
judgement.  The allowance is adjusted regularly to reflect current data and
activity.
Inventory Reserves. We write our inventory down 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 future demand or market conditions are
less favorable than those projected by management, additional inventory write-
downs may be required.
Intangible Assets.  We have intangible assets on our balance
sheet related to the acquisition of patents.  The valuation and classification
of these assets and the assignment of useful amortization lives involves
judgments and the use of estimates. The testing of these intangibles for
impairment under established accounting guidelines would be required if
indicators of impairment exist. Changes in business conditions could potentially
require future adjustments to asset valuations.
Contingencies. We are subject to proceedings, lawsuits and
other claims related to our products, patents and other matters. We are required
to assess the likelihood of any adverse judgments or outcomes to these matters
as well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven, and we
may be unable to generate significant commercial revenues. In addition, our
costs may be higher than we, securities analysts or investors expect. If we fail
to generate sufficient revenues or our costs are higher than we expect, our
results of operations will suffer, which in turn could cause our stock price to
decline. Further, future revenue from sales of our products, if any, will be
difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors,
including:
the progress and results of clinical trials;
actions relating to regulatory matters;
the extent to which our products gain market acceptance;
our timing and ability to develop our manufacturing and sales and marketing
capabilities;
demand for our products;
the progress of surgical training in the use of our products;
our ability to develop, introduce and market new or enhanced versions of our
products on a timely basis;
product quality problems;
our ability to protect our proprietary rights;
our ability to license additional intellectual property rights; and
third-party payor reimbursement policies.
Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline.
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since inception and we
expect to incur substantial additional operating losses for at least the next
two years, primarily as a result of expected increases in expenses for our
manufacturing and sales and marketing capabilities, research and development
activities, clinical trials and regulatory approval applications. The extent of
our future losses and the timing of profitability are highly uncertain, and we
may never achieve profitable operations. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, we
may not be able to continue our operations. Our net loss for the three months
ended March 31, 2002 was $5.6 million compared to a net loss of $3.4 million for
the same period last year. As of March 31, 2002, we had an accumulated deficit
of $116.0 million.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A
NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our
da Vinci
Surgical System has a lengthy sales and
purchase order cycle because it is a major capital item and generally requires
the approval of senior management at purchasing institutions. We do not plan to
maintain a significant inventory of assembled
da Vinci
Surgical Systems,
but rather plan to manufacture these systems after receiving customer orders.
These factors may contribute to substantial fluctuations in our quarterly
operating results, particularly during the periods in which our sales volume is
low. Because of these fluctuations, it is likely that in some future quarters,
our operating results could fall below the expectations of securities analysts
or investors. If that happens, the market price of our stock would likely
decrease. These fluctuations also mean that you will not be able to rely upon
our operating results in any particular period as an indication of future
performance.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE
TO ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE
DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.
A relatively small number of customers account for a
significant portion of our total revenues. While no customer accounted for over
10% of total sales for the three months ended March 31, 2002, AB Medica SRL, our
Italian distributor, accounted for 21% of total sales and Marubeni America
Corporation, our Japanse distributor, accounted for 14% of our total sales for
the three months ended March 31, 2001.
We expect that revenues from a limited number of new
customers will account for a large percentage of total revenues in future
quarters. Our ability to attract new customers will depend on a variety of
factors, including the capability, safety, efficacy, ease of use, price, quality
and reliability of our products and effective sales, support, training and
service. The loss or delay of individual orders could have a significant impact
on revenues and operating results. Our failure to add new customers that make
significant purchases of our products would reduce our future revenues.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE
TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
Our products represent a fundamentally new way of performing
surgery. Achieving physician, patient and third-party payor acceptance of
Intuitive
surgery as a preferred method of performing surgery will be
crucial to our success. If our products fail to achieve market acceptance,
hospitals will not purchase our products and we will not be able to generate the
revenue necessary to support our business. We believe that physicians' and
third-party payors' acceptance of the benefits of procedures performed using our
products will be essential for acceptance of our products by patients.
Physicians will not recommend the use of our products unless we can demonstrate
that they produce results comparable or superior to existing surgical
techniques. Even if we can prove the effectiveness of our products through
clinical trials, surgeons may elect not to use our products for any number of
other reasons. For example, cardiologists may continue to recommend conventional
open-heart surgery simply because such surgery is already so widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived
liability risks arising from the use of new products and the uncertainty of
reimbursement from third-party payors.
We expect that there will be a learning process involved for
surgical teams to become proficient in the use of our products. Broad use of our
products will require training of surgical teams. Market acceptance could be
delayed by the time required to complete this training. We may not be able to
rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. Although we are in the process of developing training programs
for surgical teams, we cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER
MOTION AND BROOKHILL-WILK 1, LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE
COSTLY TO US AND MAY PREVENT US FROM SELLING OUR PRODUCTS.
On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our
da Vinci
Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since publicly accused us of infringing a tenth patent, and
we anticipate they will soon add U.S. Patent No. 6,244,809 to the litigation.
These ten patents concern various methods and devices for conducting various
aspects of robotic surgery. On December 7 and 8, 2000, the U.S. Patent and
Trademark Office ("PTO") declared three interferences between a single SRI
patent application exclusively licensed to us and three of Computer Motion's
patents, Numbers 5,855,583, 5,878,193, and 5,907,664, in two of which judgment
has either already been entered or soon will be entered in Intuitive's favor. In
light of those declarations of interference, the District Court on February 2001
stayed -- put on hold -- all proceedings in the litigation for one year while
the PTO conducts the interference proceedings. On March 30, 2002 the PTO
rendered decisions in each of the interferences.  As a result of the decisions
by the PTO, the District Court lifted the stay on May 1, 2002 and set trial to
begin in late April 2003.
If the California litigation proceeds notwithstanding the
interferences, and if we ultimately lose Computer Motion's suit against us, it
will hurt our competitive position, may be costly to us and may prevent us from
selling our products. In addition, if we lose the patent suit, we will need to
obtain from Computer Motion a license to this technology if we are to continue
to market our products that have been found to infringe Computer Motion's
patents. This license could be expensive, or could require us to license to
Computer Motion some of our technology, which would result in a partial loss of
our competitive advantage in the marketplace, each of which could seriously harm
our business.  If Computer Motion is successful in its suit against us and is
unwilling to grant us a license, we will be required to stop selling our
products that are found to infringe Computer Motion's patents unless we can
redesign them so they do not infringe Computer Motion's patents, which we may be
unable to do. In addition, if we lose the patent suit, we could be required to
pay Computer Motion damages, including treble damages, which could be
substantial and harm our financial position.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our
da Vinci
Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery. In March
2001, Wilk withdrew its assertion of the '015 patent against Intuitive. On
November 8, 2001, the District Court granted summary judgment of noninfringement
of the '003 patent in our favor and dismissed Wilk's complaint in its entirety
without prejudice.  Wilk has since filed a notice with the U.S. Court of Appeals
for the Federal Circuit to appeal the summary judgment ruling. Briefing on the
appeal should conclude in mid-2002, with a hearing date possible towards the end
of 2002 or in early 2003. If we lose on appeal and ultimately also lose Wilk's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. If we lose the patent suit, we may
need to obtain from Wilk a license to this technology if we are to continue to
market our products that have been found to infringe Wilk's patents. This
license could be expensive, which could seriously harm our business.  If Wilk is
successful in its suit against us and is unwilling to grant us a license, we may
be required to stop selling our products that are found to infringe Wilk's
patents unless we can redesign them so they do not infringe Wilk's patents,
which we may be unable to do. In addition, if we lose the patent suit, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position.
The foregoing proceedings, will be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in this lawsuit, these proceedings could consume
substantial amounts of our financial and managerial resources. At any time
Computer Motion or Wilk may file additional claims against Intuitive Surgical,
or we may file claims against Computer Motion or Wilk, which could increase the
risk, expense and duration of the litigations. Further, because of the
substantial amount of discovery often involved in connection with this type of
litigation, there is a risk that some of our confidential information could be
compromised by disclosure. For more information on our litigation with Computer
Motion, see "Part II-Item 1: Legal Proceedings."
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN
OUR PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET
WILL BE HARMED.
Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges.
We will incur substantial costs in obtaining patents and, if
necessary, defending our proprietary rights. The patent positions of medical
device companies, including ours, can be highly uncertain and involve complex
and evolving legal and factual questions. We cannot assure you that we will
obtain the patent protection we seek, or that the protection we do obtain will
be found valid and enforceable if challenged. We also cannot assure you that we
will be able to develop additional patentable proprietary technologies. If we
fail to obtain adequate protection of our intellectual property, or if any
protection we obtain is reduced or eliminated, others could use our intellectual
property without compensating us, resulting in harm to our business. We may also
determine that it is in our best interests to voluntarily challenge a third
party's products or patents in litigation or administrative proceedings,
including patent interferences or reexaminations. Given the early priority dates
of some of our licensed patents, we believe one or more patent proceedings may
be in our best interests. In addition, the laws of certain foreign countries do
not protect intellectual property rights to the same extent as do the laws of
the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE
NOT SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery and minimally invasive
surgery. Some of these patents on their face appear broad enough to cover one or
more aspects of our present technology, and may cover aspects of our future
technology. We do not know whether any of these patents, if challenged, would be
held valid, enforceable and infringed. From time to time, we receive, and likely
will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative
proceeding because of one or more of these third parties, regardless of the
merits or likely outcome of such suit or proceeding. We cannot assure you that a
court or administrative body would agree with any arguments or defenses we have
concerning invalidity, unenforceability or noninfringement of any third-party
patent. In addition to the issued patents of which we are aware, other parties
may have filed, and in the future are likely to file, patent applications
covering surgical products that are similar or identical to ours. We cannot
assure you that any patents issuing from applications filed by a third party
will not cover our products or will not have priority over our patent
applications.
The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us as Computer Motion and Brookhill-Wilk 1,
LLC have done, our technical and management personnel will experience a
significant diversion of time and effort and we will incur large expenses
defending ourselves. If third parties in any patent action are successful, our
patent portfolio may be damaged, we may have to pay substantial damages,
including treble damages, and we may be required to stop selling our products or
obtain a license which, if available at all, may require us to pay substantial
royalties. We cannot be certain that we will have the financial resources or the
substantive arguments to defend our patents from infringement or claims of
invalidity or unenforceability, or to defend against allegations of infringement
of third-party patents. In addition, any public announcements related to
litigation or administrative proceedings initiated by us, or initiated or
threatened against us, could cause our stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL
PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES
FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR ABILITY TO COMPETE IN THE
MARKET.
In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
For further information on our intellectual property and the difficulties in
protecting it, see "Item 1: Business -- Intellectual Property," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE
ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Olympus Optical Co.,
Ltd., and Heartport, Inc. now part of Johnson & Johnson. Any of these
agreements may be terminated for breach.  If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK
PRICE.
During the course of our administrative proceedings
and/or lawsuits with Computer Motion and Brookhill-Wilk 1, LLC, there may be
public announcements of the results of hearings, motions, and other interim
proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could have a substantial negative effect on the
trading price of our stock.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC
REGULATORY PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC
REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE
UNITED STATES.
Our products and operations are subject to extensive
regulation in the United States by the U.S. Food and Drug Administration, or
FDA. The FDA regulates the research, testing, manufacturing, safety, labeling,
storage, recordkeeping, promotion, distribution and production of medical
devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first
obtain clearance from the FDA, pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act ("FFDCA"). Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. If we modify our products after they receive FDA clearance, the
FDA may require us to submit a separate 510(k) or PMA for the modified product
before we are permitted to market the products in the U.S. In addition, if we
develop products in the future that are not considered to be substantially
equivalent to a legally marketed device, we will be required to obtain FDA
approval by submitting a premarket approval application ("PMA").
The FDA may not act favorably or quickly in its review of our
510(k) or PMA submissions, or we may encounter significant difficulties and
costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the
FDA may request additional data, require us to conduct further testing, or
compile more data, including clinical data, in support of a 510(k) submission.
The FDA may also, instead of accepting a 510(k) submission, require us to submit
a PMA, which is typically a much more complex application than a 510(k). To
support a PMA, the FDA would likely require that we conduct one or more clinical
studies to demonstrate that the device is safe and effective, rather than
substantially equivalent to another legally marketed device. We may not be able
to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA
may not grant any necessary clearances or approvals. In addition, the FDA may
place significant limitations upon the intended use of our products as a
condition to a 510(k) clearance or PMA approval. Product applications can also
be denied or withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following approval. Any delays or failure
to obtain FDA clearance or approvals of new products we develop, any limitations
imposed by the FDA on new product use or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations.
In order to conduct a clinical investigation involving human
subjects for the purpose of demonstrating the safety and effectiveness of a
device, a company must, among other things, apply for and obtain Institutional
Review Board ("IRB") approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption ("IDE") application. We may not
be able to obtain FDA and/or IRB approval to undertake clinical trials in the
U.S. for any new devices we intend to market in the United States in the future.
If we obtain such approvals, we may not be able to comply with the IDE and other
regulations governing clinical investigations or the data from any such trials
may not support clearance or approval of the investigational device. Failure to
obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.
For additional information concerning regulatory approvals of our products, see
"Item 1: Business -- Government Regulation," included in the Annual Report on
Form 10-K of Intuitive Surgical, Inc., filed with the Securities and Exchange
Commission or SEC.
OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY
PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE
NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND
SELL OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals,
and the time required for regulatory review vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed.
The European Union requires that manufacturers of medical
products obtain the right to affix the CE mark to their products before selling
them in member countries of the European Union. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to products, a manufacturer must obtain certification that its
processes meet certain European quality standards. In January 1999, we received
permission to affix the CE mark to our
da Vinci
Surgical System and
EndoWrist
instruments for general surgical use. We received
additional CE approvals for use of our
da Vinci
Surgical System and
EndoWrist
instruments in cardiac surgery in September 1999, February
2000, and August 2001.
If we modify existing products or develop new
products in the future, including new instruments, we will need to apply for
permission to affix the CE mark to such products. In addition, we will be
subject to annual regulatory audits in order to maintain the CE mark permissions
we have already obtained. We cannot be certain that we will be able to obtain
permission to affix the CE mark for new or modified products or that we will
continue to meet the quality and safety standards required to maintain the
permissions we have already received. If we are unable to maintain permission to
affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
Domestic institutions will typically bill the services
performed with our products to various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans. If hospitals
do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if government and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
In such circumstances, we may have to apply to the American Medical Association
for a unique Current Procedural Terminology code covering computer-enhanced
surgery. If an application for a unique code is required, reimbursement for any
use of our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
Our success in international markets also depends upon the
eligibility of our products for reimbursement through government-sponsored
health care payment systems and third-party payors. Reimbursement practices vary
significantly by country. Many international markets have government-managed
healthcare systems that control reimbursement for new products and procedures.
Other foreign markets have both private insurance systems and government-managed
systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of
reimbursement in any country within a particular time. In addition, health care
cost containment efforts similar to those we face in the United States are
prevalent in many of the other countries in which we intend to sell our products
and these efforts are expected to continue. For further information on third-
party reimbursement policies, see "Item 1: Business -- Third-Party
Reimbursement," included in the Annual Report on Form 10-K of Intuitive
Surgical, Inc., filed with the SEC.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS
MAY CHOOSE TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE
SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive surgery is a new technology that must
compete with established minimally invasive surgery and open surgery. These
procedures are widely accepted in the medical community and in many cases have a
long history of use. We also face competition from several companies that are
developing new approaches and products for the minimally invasive surgery
market. In addition, we presently face increasing competition from companies who
are developing robotic and computer-assisted surgical systems. Our revenues may
be reduced or eliminated if our competitors develop and market products that are
more effective or less expensive than our products. If we are unable to compete
successfully, our revenues will suffer. We may not be able to maintain or
improve our competitive position against current or potential competitors,
especially those with greater resources.
In many cases, the medical conditions that can be treated
using our products can also be treated by pharmaceuticals or other medical
devices and procedures. Many of these alternative treatments are also widely
accepted in the medical community and have a long history of use. In addition,
technological advances could make such treatments more effective or less
expensive than using our products, which could render our products obsolete or
unmarketable. We cannot be certain that physicians will use our products to
replace or supplement established treatments or that our products will be
competitive with current or future technologies.
IF SOFTWARE DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR
ADDITIONAL UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR
REPUTATION MAY SUFFER.
Our products do incorporate computer software. Software can
contain errors or failures, especially when first introduced. In addition, new
products or enhancements may contain undetected errors or performance problems
that, despite testing, are discovered only after commercial shipment. Because
our products are designed to be used to perform complex surgical procedures, we
expect that our customers will have an increased sensitivity to software
defects. We cannot assure you that our software will not experience errors or
performance problems in the future. If we experience software errors or
performance problems, any of the following could occur:
delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
increased service or warranty costs; or
product liability claims.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY
ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST
REVENUE.
We have manufactured a limited number of our products for
sales to customers. We may be unable to establish or maintain reliable, high-volume
manufacturing capacity. Even if this capacity can be established and
maintained, the cost of doing so may increase the cost of our products and
reduce our ability to compete. We may encounter difficulties in scaling up
production of our products, including:
problems involving production yields;
quality control and assurance;
component supply shortages;
shortages of qualified personnel; and
compliance with state, federal and foreign regulations.
Manufacturing our products is a complex process. If demand
for our products exceeds our manufacturing capacity, we could develop a
substantial backlog of customer orders. If we are unable to establish and
maintain larger-scale manufacturing capabilities, our ability to generate
revenues will be limited and our reputation in the marketplace would be
damaged.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL,
STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY
CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT
DELIVERY DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations (QSR). We are
also required to comply with the ISO 9000 series standards in order to produce
products for sale in Europe. If we fail to continue to comply with Good
Manufacturing Practice requirements or ISO 9000 series standards, we may be
required to cease all or part of our operations until we comply with these
regulations.  We are currently in compliance with ISO 9000 series standards. In
March 2000, the FDA inspected our Mountain View facility and the Good
Manufacturing Practice issues raised during the inspection were satisfactorily
resolved with the FDA. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good
Manufacturing Practice requirements or the ISO 9001 standards in future audits
by regulatory authorities.
The state of California also requires that we maintain a
license to manufacture medical devices. Our facilities and manufacturing
processes were inspected in February 1998. In March 1998, we passed the
inspection and received a device manufacturing license from the California
Department of Health Services. In March 2002, our facilities and manufacturing
processes in our Sunnyvale facility were re-inspected by the Food and Drug
Branch (FDB).  We passed this audit and are awaiting issuance of our device
manufacturing license renewal.  We will be subject to periodic inspections by
the California Department of Health Services and if we are unable to maintain
this license following any future inspections, we will be unable to manufacture
or ship any products.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR
ABILITY TO MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET.
Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget.
THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR
BUSINESS.
Our business exposes us to significant risks of product
liability claims. The medical device industry has historically been litigious,
and we face financial exposure to product liability claims if the use of our
products were to cause injury or death. There is also the possibility that
defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. Particularly as sales
of our products increase, we may be unable to maintain product liability
insurance in the future at satisfactory rates or adequate amounts. A product
liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product
recalls could also harm our reputation or result in a decline in revenues.
OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS
AND RESOURCES AND, IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL
AND DEVELOP OUR PRODUCTS MAY BE HARMED.
In order to complete clinical trials, scale-up manufacturing,
expand marketing and distribution capabilities and develop future products, we
must expand our operations. We expect that future expansion will occur
particularly in the areas of sales and marketing, manufacturing and research and
development. This expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon our
management, operating and financial systems and resources. We plan to sell our
products primarily through direct sales, and we currently have a small sales
organization. Our products require a complex marketing and sales effort targeted
at several levels within a prospective customer's organization. We will need to
expand our sales team significantly over the next 12 months to achieve our sales
growth goals. We will face significant challenges and risks in building and
managing our sales team, including managing geographically dispersed sales
efforts and adequately training our sales people in the use and benefits of our
products. To accommodate our growth and compete effectively, we will be required
to improve our information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. Our future success will
depend in part on the ability of current and future management personnel to
operate effectively, both independently and as a group. We cannot be certain
that our personnel, systems, procedures and controls will be adequate to support
our future operations.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.
We are highly dependent on the principal members of our
management and scientific staff.  In order to pursue our product development,
marketing and commercialization plans, we will need to hire additional qualified
personnel with expertise in research and development, clinical testing,
government regulation, manufacturing, sales and marketing, and finance. Our
product development plans depend in part on our ability to attract and retain
engineers with experience in mechanics, software and optics. Attracting and
retaining qualified personnel will be critical to our success, and competition
for qualified personnel is intense, particularly in Silicon Valley. We may not
be able to attract and retain personnel on acceptable terms given the
competition for such personnel among technology and healthcare companies, and
universities. The loss of any of these persons or our inability to attract and
retain qualified personnel could harm our business and our ability to compete.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.
Our business currently depends in large part on our
activities in Europe, and a component of our growth strategy is to expand our
presence into additional foreign markets. Sales to markets outside of the United
States accounted for approximately 13% of our sales for the three months ended
March 31, 2002 and 52% for the three months ended March 31, 2001.
We will be subject to a number of challenges that
specifically relate to our international business activities. These challenges
include:
failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
the risks associated with foreign currency exchange rate fluctuation;
the expense of establishing facilities and operations in new foreign
markets; and
building an organization capable of supporting geographically dispersed
operations.
Currently, a majority of our international sales are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would
limit the growth of our business.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT
CAPITAL NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD
REDUCE OUR ABILITY TO COMPETE, RESULT IN LOWER REVENUES AND MAY PREVENT US FROM
TAKING ADVANTAGE OF MARKET OPPORTUNITIES.
We expect that our existing capital resources and the revenue
to be derived from the sale of our products will be sufficient to meet our
working capital and capital expenditure needs at least through 2003. After that,
we may need to raise additional funds and we cannot be certain that we will be
able to obtain additional financing on favorable terms, or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be able
to, among other things:
develop or enhance our products and services;
acquire technologies, products or businesses;
expand operations in the United States or internationally;
hire, train and retain employees; or
respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could harm our business.
SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO
DECLINE.
The market price of our common stock could decline
as a result of sales of a large number of shares in the market. These sales may
also make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate to raise funds through future
offerings of common stock. As of March 31, 2002, several entities beneficially
owned more than 5% of the outstanding shares of our common stock, including Bear
Stearns Asset Management, Allan G. Lozier,  Investor Growth Capital, Ltd.,
Merrill Lynch & Co., and PaTMarK Company, Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income we receive on the investment of the remaining
proceeds from our June 2000 initial public offering.
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities. We classify our cash
equivalents and marketable securities as "fixed-rate" if the rate of
return on such instruments remains fixed over their term. These "fixed-
rate" investments include commercial paper and government and non-
government debt securities. We classify our cash equivalents and marketable
securities as "variable-rate" if the rate of return on such
investments varies based on the change in a predetermined index or set of
indices during their term.  These "variable-rate" investments
primarily include money market accounts. The average duration of all of our
investments as of March 2002 was approximately 1.78 years.  At March 31, 2002,
approximately 44% of our investment portfolio was composed of investments with
original maturities of one year or less.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our
da Vinci
Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since publicly accused us of infringing a tenth patent, and
we anticipate they will soon add U.S. Patent No. 6,244,809 to the litigation.
Each of these ten patents concerns methods and devices for conducting various
aspects of robotic surgery. Until February 2001, the litigation was proceeding
in the early stages of discovery, with no trial date set. In February 2001, in
response to Intuitive's request, the District Court stayed -- put on hold -- all
proceedings in the litigation because of the declaration by the U.S. Patent and
Trademark Office ("PTO") of three "interference" proceedings between a single
SRI patent application exclusively licensed to us and three of Computer Motion's
patents (see next paragraph). Now that the PTO has acted in each of the
interferences, the stay has been lifted and trial has been set for late April
2003. We intend to file our first two motions for summary judgment shortly.  The
Computer Motion action seeks damages based upon the making, using, selling and
offering for sale of our products and processes, and seeks to enjoin our
continued activities relating to these products. This action subjects us to
potential liability for damages, including treble damages, and could require us
to cease making, using or selling the affected products, or to obtain a license
in order to continue to manufacture, use or sell the affected products. While we
continue to believe we have multiple meritorious defenses to this action, we
cannot assure you that we ultimately will prevail on any issue in the litigation
or that we will be able to successfully defend Computer Motion's charges, nor
can we provide assurance that any license required would be made available on
commercially acceptable terms, if at all. Failure to successfully defend against
the Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of this matter at this time and,
therefore, cannot estimate the range of possible loss.
On December 7 and 8, 2000, the PTO declared three
interferences between a single SRI patent application exclusively licensed to
Intuitive and three of Computer Motion's patents, Numbers 5,855,583, 5,878,193
and 5,907,664.  An interference is a proceeding within the U.S. Patent Office to
resolve questions regarding the patentability of inventions and who first
invented subject matter claimed by two or more patents or patent applications.
These three interferences resulted from requests for interference filed in May
through July 1999.  Because the SRI patent application licensed to Intuitive was
filed in January 1992 and Computer Motion's three patents were filed no earlier
than August 1992 and as late as February 1996, SRI/Intuitive is the "Senior
Party" in each interference. As "Junior Party," Computer Motion bears the burden
of proving that it is entitled to keep its patents.  On March 30, 2002, the PTO
issued its decisions on various motions filed by Intuitive and Computer Motion
in each interference.  In the interference involving the 5,878,193 patent, the
PTO denied both of Computer Motion's motions and entered judgment in Intuitive's
favor.  Subject to review by or appeal to a federal court, which could reverse
or modify any or all of the following, this judgment establishes that the
disputed invention of, generally speaking, image-based control of robotic
surgical instruments is prior art to all of Computer Motion's remaining patents,
that Intuitive is entitled to patent that invention for itself, and that
Computer Motion is no longer entitled to any of the three claims of its
5,878,193 patent.  In the interference involving the 5,855,583 patent, the PTO
denied Computer Motion's only motion for judgment. Upon resolution of one
remaining evidentiary issue, the PTO indicated that it will enter judgment in
our favor.  Subject to entry of a final judgment and review by or appeal to a
federal court, which could reverse or modify any or all of the following, this
judgment would establish that the disputed invention of, generally speaking,
proportional movement of articulating robotic surgical instruments is prior art
to all of Computer Motion's remaining patents, and that we are entitled to
patent that invention for ourself. In the interference involving the 5,907,664
patent, the PTO decided that our patent claim is unpatentable for noncompliance
with the "written description" requirement of Title 35 of the U.S.
Code and so entered an Order to Show Cause against us.  We believe good grounds
exist for reconsideration of this decision and we have filed a request for
reconsideration. If the PTO rejects our request for reconsideration, Computer
Motion will be entitled to keep its 5,907,664 patent, subject to review or
appeal.  The PTO declined to decide our motion challenging the validity of
certain claims of the '664 patent, leaving that issue in question.
In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 0653,922, which
issued to Computer Motion in 1999 and is related to several of the patents now
involved in the U.S. litigation and the interference proceedings. An Opposition
proceeding allows the EPO to determine whether the challenged patent should be
revoked in its entirety, should be amended, or should remain unaltered. In its
Notice of Opposition, Intuitive cited numerous prior art references not cited to
the EPO during the '922 patent's original prosecution. An initial ruling by the
EPO indicates that the EPO is not presently inclined to alter the '922 patent in
any way.  A hearing has been set for July 2002.
On March 30, 2001, Intuitive and International Business
Machines Corporation ("IBM") jointly filed suit against Computer Motion, Inc. in
the U.S. District Court for the District of Delaware. The complaint alleges that
by continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent which concerns various aspects of voice control of
surgical instruments issued to IBM in early March 2001 and is exclusively
licensed to us.  The '984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Because Computer Motion's
voice-controlled HERMES product interfaces with the AESOP and ZEUS products,
HERMES is also implicated in the patent infringement complaint. Trial is
presently set for August 2002.  The Court so far has denied Computer Motion's
request to add its own U.S. Patent No. 6,244,809 to the Delaware litigation and
has refused to entertain Computer Motion's allegations that we infringe the '809
patent by making, using, selling and offering for sale our
da Vinci
Surgical System.  The Delaware Court has also refused Computer Motion's
request to transfer the litigation to California.  The parties will file their
motions for summary judgment on May 1, 2002.  Decisions on these motions are
expected sometime before trial, which is presently scheduled to begin in August
2002.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our
da Vinci
Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery.  In
March 2001, Wilk withdrew its assertion of infringement of the '015 patent
against Intuitive, leaving only the '003 patent at issue in the suit. On
November 8, 2001, the District Court granted in Intuitive's favor summary
judgment of noninfringement of the '003 patent in our favor and dismissed Wilk's
complaint  in its entirety.  Wilk has since filed a notice with the U.S. Court
of Appeals for the Federal Circuit to appeal the summary judgment ruling.
Briefing on the appeal should conclude in mid-2002, with a hearing date possible
towards the end of 2002 or in early 2003.  We believe the appellate court will
uphold the summary judgment of noninfringement. If we lose Wilk's suit against
us, it will hurt our competitive position, may be costly to us and may prevent
us from selling our products. In addition, if we lose the patent suit, we may
need to obtain from Wilk a license to this technology if we are to continue to
market our products that have been found to infringe Wilk's patents. This
license could be expensive, which could seriously harm our business. We believe
that we have multiple meritorious defenses in this action. However, litigation
is unpredictable and we may not prevail with any of our defenses or on appeal.
If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to
infringe Wilk's patents unless we can redesign them so they do not infringe
Wilk's patents, which we may be unable to do. In addition, if we lose the patent
suit, we could be required to pay Wilk damages, including treble damages, which
could be substantial and harm our financial position.
The Company is subject to legal proceedings and claims that
arise in the normal course of its business. We cannot assure that we will
prevail in these matters nor can we assure that any remedy could be reached on
commercially viable terms, if at all. Due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of these
matters at this time and, therefore, cannot estimate the range of possible
loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 2002, we have sold and issued the
following unregistered securities:
(1) From January 1, 2002 through March 31, 2002, we
granted stock options to purchase  1,614,150 shares of our common stock, at
prices ranging from $8.60 to $10.03 per share, to employees pursuant to our 2000
Equity Incentive Plan.
(2) On January 31, 2002, we issued 96,781 shares at
an exercise price of $7.12 per share and 25,193 shares at an exercise price of
$7.81, to employees pursuant to our 2000 Employee Stock Purchase Plan.
The sales and issuance of securities described in paragraphs (1) and (2)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 promulgated thereunder in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number
Description
3.1(1)
Amended and Restated Certificate of Incorporation of Intuitive Surgical.
3.2(2)
Bylaws of Intuitive Surgical.
4.1
Reference is made to Exhibits 3.1 and 3.2.
4.2(3)
Specimen Stock Certificate.
_____________
(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.
(b) Current Reports on Form 8-K.  We did not file a Current
Report on Form 8-K during the     three month period ending March 31, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
(Registrant)
By:
/s/ SUSAN K. BARNES
Susan K. Barnes
Senior Vice President, Chief Financial Officer and Assistant Secretary
Date: May 14, 2002
EXHIBIT INDEX
Exhibit Number
Description
3.1(1)
Amended and Restated Certificate of Incorporation of Intuitive Surgical.
3.2(2)
Bylaws of Intuitive Surgical.
4.1
Reference is made to Exhibits 3.1 and 3.2.
4.2(3)
Specimen Stock Certificate.
_____________
(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.