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<title>Q2 2003 10Q DOC</title>
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<FONT SIZE="3"><B><P ALIGN="CENTER">UNITED STATES<br>
SECURITIES AND EXCHANGE COMMISSION<br>
Washington, D.C. 20549</B></font></p>

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

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

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

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


<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</B></font></p>
<font size="4" color="FF0000"><B><p align="center">
               For the quarterly period ended June 30, 2003
</B></font></p>

<FONT SIZE="3"><B><P ALIGN="CENTER"> OR </P></font></B>

<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>o</font><font>&nbsp; TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</P></font></B>
<FONT SIZE="3"><B><P ALIGN="CENTER">
 For the transition period from ________to _________
</P></font></B>
<FONT SIZE="3"><B><U><P ALIGN="CENTER">
                       Commission file number 000-30713
</U></B></font></p>
<font size="6" color="#0000FF"><B><U><p align="center">
                                Intuitive Surgical, Inc.
</U></B></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"><B>
<CENTER><u>Delaware</u></CENTER>
</font></B>
</TD>
<TD>
<font size="3"><B>
<CENTER><u>77-0416458</u></CENTER>
</font></B>
</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>



<FONT SIZE="3"><B><P ALIGN="CENTER">
                            950 Kifer Road
<BR><U>
                         Sunnyvale, California  &nbsp;&nbsp;  94086
</U></B></font><br>


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

<FONT SIZE="3"><B><U><P ALIGN="CENTER">
                                    (408) 523-2100
</U></B></font><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>


<font size="3">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). &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 26,692,575 shares of Common Stock, $0.001 par value per
share, outstanding as of July 31, 2003.

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


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

<TD WIDTH="10%">
<font size="3"><B>
<u>Page No.</u>
</font></B>
</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;
         Condensed consolidated balance sheets as of June 30, 2003 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2002

</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;
         Condensed consolidated statements of operations for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
             and six-month periods ended June 30, 2003 and June 30, 2002

</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;
         Condensed consolidated statements of cash flows for the six-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended June 30, 2003 and June 30, 2002
</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 Condensed 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">11</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">26</A></CENTER>
</font>
</TD>
</TR>

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

  <TR vAlign=top>
<TD>
<font size="3">
Item 4.   Controls and Procedures

</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3"><B>
        PART II.  OTHER INFORMATION
</font></B>
</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">27</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">28</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">28</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"><B>
        Signatures
</font></B>
</TD>

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

<font FACE="Times New Roman" SIZE="2">
<P>&nbsp;</P>
<B><P>PART I -- FINANCIAL INFORMATION </P></B>

<P>Item 1. Financial Statements


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="bs"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<br>
                          CONSOLIDATED BALANCE SHEETS
<br>
                       (IN THOUSANDS, EXCEPT SHARE DATA)
</B>
<PRE>

                                                              June 30,   December 31,
                                                               2003          2002
                                                           ------------  -----------
                                                           (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $     17,681  $    17,607
  Short-term investments.................................       25,169       33,232
  Accounts receivable....................................       21,855       16,887
  Inventory, net.........................................       13,601        8,738
  Prepaid expenses.......................................        2,046        2,161
                                                           ------------  -----------
          Total current assets...........................       80,352       78,625
Property and equipment, net..............................       11,630       10,388
Intangible and other assets..............................       10,843        2,568
Goodwill.................................................      142,658           --
                                                           ------------  -----------
          Total assets...................................      245,483       91,581
                                                           ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $     17,204  $     9,282
  Accrued compensation and employee benefits.............        5,282        4,666
  Warranty accrual.......................................        2,005        2,269
  Restructuring accrual..................................        3,444           --
  Other accrued liabilities..............................        2,485        3,497
  Deferred revenue.......................................        7,131        4,838
  Current portion of notes payable.......................        1,244        1,511
                                                           ------------  -----------
          Total current liabilities......................       38,795       26,063
Long-term notes payable..................................        1,235        1,838
Deferred revenue.........................................          877           --
Commitments and contingencies............................           --           --
Stockholders' equity:
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 26,643,541 and 18,357,513 shares
     issued and outstanding as of June 30, 2003
     (see Note 3) and December 31, 2002, respectively....           27           36
  Additional paid-in capital.............................      334,162      191,020
  Deferred compensation..................................         (434)        (223)
  Accumulated deficit....................................     (130,206)    (128,791)
  Accumulated other comprehensive income ................        1,027        1,638
                                                           ------------  -----------
          Total stockholders' equity.....................      204,576       63,680
                                                           ------------  -----------
          Total liabilities and stockholders' equity..... $    245,483  $    91,581
                                                           ============  ===========

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

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="ops"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<br>
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<br>
                                  (UNAUDITED)
<br>
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
</B>
<PRE>

                                              Three Months Ended      Six Months Ended
                                                 June 30,                June 30,
                                           ----------------------  ----------------------
                                              2003        2002        2003        2002
                                           ---------- -----------  ---------- -----------
Sales:
  Products............................... $   19,231  $   18,243  $   36,666  $   31,700
  Services...............................      2,222       1,144       4,022       2,096
                                           ----------  ----------  ----------  ----------
Total sales..............................     21,453      19,387      40,688      33,796
Cost of sales:
  Products...............................      6,906       8,440      14,677      15,167
  Services...............................      1,000         785       1,967       1,565
                                           ----------  ----------  ----------  ----------
Total cost of sales......................      7,906       9,225      16,644      16,732
                                           ----------  ----------  ----------  ----------
    Gross profit.........................     13,547      10,162      24,044      17,064
                                           ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general and
   administrative........................      9,389       9,784      19,598      18,569
  Research and development...............      3,627       4,645       7,050       8,877
                                           ----------  ----------  ----------  ----------
    Total operating costs and
     expenses............................     13,016      14,429      26,648      27,446
                                           ----------  ----------  ----------  ----------
Income (loss) from operations............        531      (4,267)     (2,604)    (10,382)
Other income, net .......................        347         527       1,189       1,025
                                           ----------  ----------  ----------  ----------
Net income (loss)........................ $      878  $   (3,740) $   (1,415) $   (9,357)
                                           ==========  ==========  ==========  ==========
Net earnings (loss) per share:
  Basic ................................. $     0.05  $    (0.21) $    (0.08) $    (0.51)
                                           ==========  ==========  ==========  ==========
  Diluted ............................... $     0.05  $    (0.21) $    (0.08) $    (0.51)
                                           ==========  ==========  ==========  ==========
Shares used in computing net earnings
 (loss) per share:
  Basic..................................     18,580      18,192      18,506      18,173
                                           ==========  ==========  ==========  ==========
  Diluted................................     18,973      18,192      18,506      18,173
                                           ==========  ==========  ==========  ==========

</PRE>

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


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="flows"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<br>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<br>
                                  (UNAUDITED)
<br>
                                 (IN THOUSANDS)
</B>
<PRE>

                                                            For the Six Months
                                                             Ended June 30,
                                                         ------------------------
                                                            2003         2002
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (1,415) $    (9,357)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       1,777        1,409
  Loss on sales of fixed assets........................           5           64
  Amortization of deferred compensation and stock
    compensation.......................................         296          395
  Amortization of intangible and other assets..........         495          390
Changes in operating assets and liabilities, net of
 operating assets and liabilities:
  Accounts receivable..................................        (493)      (1,965)
  Prepaid expenses.....................................         384        1,429
  Inventory............................................        (191)      (1,048)
  Other assets.........................................        (827)          --
  Accounts payable.....................................          30         (267)
  Accrued compensation and employee benefits...........      (1,443)         969
  Warranty accrual.....................................        (564)         363
  Other accrued liabilities............................      (2,012)       1,447
  Accrued royalty expense..............................          --       (1,000)
  Deferred revenue.....................................         944         (164)
                                                         -----------  -----------
Net cash used in operating activities..................      (3,014)      (7,335)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (1,030)      (4,805)
Disposition of property and equipment..................           1           62
Acquisition of business, net of cash acquired..........      (4,088)          --
Purchase of short-term investments.....................      (2,934)      (8,491)
Proceeds from sales of short-term investments..........       5,444       21,216
Proceeds from maturities of short-term investments.....       5,097       12,108
                                                         -----------  -----------
Net cash provided by investing activities..............       2,490       20,090
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,629        1,089
Repurchase of common stock.............................          (6)          (1)
Proceeds from notes payable............................          --          950
Repayment of notes payable.............................        (870)      (1,359)
                                                         -----------  -----------
Net cash provided by financing activities..............         753          679
                                                         -----------  -----------
Foreign currency translation adjustments...............        (155)         (49)
                                                         -----------  -----------
Net increase in cash and cash equivalents..............          74       13,385
Cash and cash equivalents, beginning of period.........      17,607       10,487
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    17,681  $    23,872
                                                         ===========  ===========

Non-cash investing activity:
  Common stock issued in connection with acquisition of
    business........................................... $   141,437  $        --

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

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="notes"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<br>
<br>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<br>
                                  (UNAUDITED)
</B>

<P ALIGN="JUSTIFY">In this report, "Intuitive Surgical," "Intuitive," and the "Company" refer to Intuitive Surgical, Inc.

<B><P>NOTE 1. BASIS OF PRESENTATION</P>
</B><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 notes 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 consolidated balances at December 31, 2002
were derived from the audited financial statements included in  Intuitive
Surgical, Inc.'s Annual Report on Form 10-K/A for the year ended December 31,
2002 (the &quot;Annual Report&quot;). The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2002, included in the Annual Report. The results for the interim period
ended June 30, 2003 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2003 or future operating periods.</P>
<P ALIGN="JUSTIFY">On June 30, 2003, Intuitive Surgical acquired Computer
Motion, Inc. through the merger of Computer Motion with a wholly owned
subsidiary of Intuitive Surgical.  In the merger, each outstanding share of
Computer Motion common stock was converted into 0.51426943 shares of Intuitive
Surgical common stock and Intuitive Surgical assumed all of Computer Motion's
outstanding options and warrants based on the same ratio, see "Note 3:
Acquisition of Computer Motion, Inc."</P>
<P ALIGN="JUSTIFY">The operations of Computer Motion, Inc. have been excluded
from the accompanying unaudited condensed consolidated statements of operations
for the three and six months ended June 30, 2003 and statements of cash flows
for the six months ended June 30, 2003 as the acquisition was not consummated
until June 30, 2003.</P>

<B><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</B><P ALIGN="JUSTIFY">Financial instruments which subject the Company to
potential risk consist of its cash equivalents, short-term investments, accounts
receivable, and foreign exchange contracts. The counterparties to the agreements
relating to the Company's investment securities and foreign exchange contracts
consist of various major corporations and financial institutions of high credit
standing. The Company believes the financial risks associated with these
financial instruments are minimal. For the six months ended June 30, 2003 and
2002, no customer accounted for more than 10% 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 accounted for all of the Company's sales
for the three months and six months ended June 30, 2003 and 2002. Purchases of
key parts and components used to manufacture the Company's products are from
limited supply sources. The inability of any of these suppliers to fulfill the
Company's supply requirements may negatively impact future operating
results.</P>
<P ALIGN="JUSTIFY">The Company operates in one segment, the development and
marketing of products designed to provide the flexibility of open surgery while
operating through ports. For the three months ended June 30, 2003, U.S. and
international sales accounted for 70% and 30%, respectively, of total sales. For
the three months ended June 30, 2002, U.S. and international sales accounted for
80% and 20%, respectively, of total sales.</P>

<B><P>NOTE 3.  ACQUISITION OF COMPUTER MOTION, INC.</P>
</B><P ALIGN="JUSTIFY">On June 30, 2003, the Company acquired all of the
outstanding shares of Computer Motion, Inc. through a merger with a wholly owned
subsidiary of Intuitive Surgical.  In the merger, each outstanding share of
Computer Motion common stock has converted into 0.51426943 shares of Intuitive
Surgical common stock and Intuitive Surgical assumed all of Computer Motion's
outstanding options and warrants to purchase Computer Motion common stock based
on the same ratio. The acquisition of Computer Motion is intended to enhance the
Company's combined competitive position in key industries, while strengthening
its work force.  It also eliminated ongoing intellectual property litigation
between the two companies. The acquisition is intended to enable the Company to
focus on strategic products and customers, achieve significant cost synergies
and economies of scale and improve results of its combined application of
robotics to minimally invasive surgery bringing benefits to patients, surgeons
and medical centers throughout the world.  The exchange ratio in the acquisition
was derived from estimates of future revenue and earnings of the combined
company, in addition to measuring the relative ownership of the combined company
implied by their contributions.  The purchase price of this acquisition was
$148.6 million resulting from the issuance to Computer Motion stockholders the
right to receive approximately 8.0 million shares of Intuitive Surgical common
stock on June 30, 2003, after giving effect to the 1-for-2 stock reverse split
effected on July 1, 2003 (the &quot;Reverse Split), with a fair value of
approximately $125.7 million, the assumption of options and warrants to purchase
approximately 2.2 million shares of Intuitive Surgical common stock, after
giving effect to the Reverse Split, with a Black-Scholes fair value of
approximately $15.7 million, the funding of Computer Motion's second quarter
operations through a working capital loan $5.3 million, and estimated direct
transaction costs of $1.8 million.  The fair value of the Company's common stock
was derived using an average market price per share of the Company common stock
of $7.82, which was based on the closing prices for a range of trading days
prior to and including the date of the acquisition, June 30, 2003 (June 24, June
25, June 26, June 27, and June 30). The measurement date for this transaction
was the June 30, 2003 closing date, as the number of shares to be issued to
Computer Motion stockholders was not fixed until that date.</P>
<P ALIGN="JUSTIFY">In accordance with SFAS No. 141, the Company allocated the
purchase price of the acquisition to the tangible assets, liabilities and
intangible assets acquired, including in-process research and development,
&quot;IPR&amp;D,&quot; based on their estimated fair values.  The excess
purchase price over those fair values is recorded as goodwill.  The fair value
assigned to intangible assets acquired is based on valuations prepared by
independent third party appraisal firms using preliminary estimates and
assumptions provided by management.  The goodwill recorded as a result of the
acquisition is not expected to be deductible for tax purposes. In accordance
with SFAS No. 142, goodwill and purchased intangible assets with indefinite
useful lives acquired after June 30, 2001 are not amortized but will be reviewed
at least annually for impairment.  Purchased intangible assets with finite lives
are amortized on a straight-line basis over their respective useful lives.</P>
<P ALIGN="JUSTIFY">The total purchase price was comprised of the following (in
thousands):</P>

<PRE>

Value of Intuitive Surgical common stock issued....  $ 125,734
Assumption of Computer Motion warrants and options.     15,703
                                                      ---------
Total value of Intuitive Surgical securities.......    141,437

Direct transaction costs...........................      1,827
Bridge loan facility...............................      5,302
                                                      ---------
Total estimated purchase price.....................  $ 148,566
                                                      =========

</PRE>

<P ALIGN="JUSTIFY">The following purchase price allocation is preliminary, as
future business results may differ from inherent estimates contained in the
allocation, including employee severance costs, obligations related to exiting
lease commitments, and other underlying assumptions.  The total purchase price
of has been allocated as follows (in thousands):</P>

<PRE>


Cash and cash equivalents............... $    1,214
Accounts receivable, net................      4,476
Inventories, net........................      4,672
Prepaid and other assets................        269
Property, plant, and equipment..........      1,995
Other assets............................         70
Amortizable intangible assets:.
  Customer relationships................      1,300
  Developed and core technology.........      6,800
  Trademark.............................        200
  Internal use software.................        300
  In-process research and development...        100
Goodwill................................    142,658
Accounts and notes payable..............     (7,892)
Restructuring accrual...................     (3,444)
Other accrued liabilities...............     (2,361)
Deferred revenue........................     (2,225)
Deferred compensation...................        434
                                           ---------
Total purchase price.................... $  148,566
                                           =========

</PRE>


<I><P ALIGN="JUSTIFY">Goodwill</P>
</I><P ALIGN="JUSTIFY">Of the total purchase price, $142.7 million was allocated
to goodwill.  Goodwill represents the excess of the purchase price over the fair
value of the underlying net tangible and intangible assets.  Goodwill is not
deductible for tax purposes.  In accordance with Financial Accounting Standards
No. 142, &quot;Goodwill and Other Intangible Assets,&quot; goodwill will not be
amortized, but instead will be tested for impairment at least annually (more
frequently if certain indicators are present).  In the event management
determines that goodwill has been impaired, the Company will incur an accounting
charge for the impairment during the fiscal quarter in which the determination
is made.  (See Note 7.)</P>
<I><P ALIGN="JUSTIFY">Amortizable Intangible Assets</P>
</I><P ALIGN="JUSTIFY">Of the total purchase price, approximately $8.6 million
was allocated to amortizable intangible assets, comprised of developed
technology of $3.5 million, core technology of $3.3 million, customer
relationships of $1.3 million, and other intangible assets totaling $0.5
million.</P>
<P ALIGN="JUSTIFY">Developed technology, which comprises products that have
reached technological feasibility, includes most of Computer Motion's current
products, including Aesop, Zeus, Socrates, and Hermes.  The balance of developed
technology will be amortized on a straight-line basis over a period of seven
years, representing the weighted average of the remaining product lives of the
developed technology.</P>
<P ALIGN="JUSTIFY">Core technology represents the value of patents, processes,
and trade secrets, including certain designs and product features that Intuitive
may integrate into future products.  Core technology will be amortized on a
straight-line basis over a period of seven years.</P>
<P ALIGN="JUSTIFY">Customer relationships represent the value of Computer
Motion's relationships with existing customers and is valued based upon the fair
value of future business with these customers.  Customer lists and other
intangible assets will be amortized on a straight line basis over a period of
approximately seven years.  (See Note 7.)</P>
<I><P ALIGN="JUSTIFY">In-process research and development</P>
</I><P ALIGN="JUSTIFY">Of the total purchase price, $0.1 million was allocated
to in-process research and development.  Projects which qualify as IPR&amp;D
represent those that have not yet reached technological feasibility and for
which no future alternative uses exist.  IPR&amp;D has been immediately, fully
amortized into Intuitive Surgical's results for the three months ended June 30,
2003.</P>
<I><P ALIGN="JUSTIFY">Deferred Compensation</P>
</I><P ALIGN="JUSTIFY">Of the total purchase price, $0.4 million was allocated
to deferred compensation for unvested options assumed, which represents the
intrinsic value of unvested stock options for employees and fair value for non-
employee. Deferred compensation will be amortized into expense over a three-year
period using the graded vesting method.</P>
<I><P ALIGN="JUSTIFY">Restructuring charges</P>
</I><P ALIGN="JUSTIFY">Upon the consummation of the acquisition of Computer
Motion, Intuitive's management approved plans to restructure the operations of
the combined entity. The current restructuring plan provides for the elimination
of redundant activities and infrastructure and will result in eliminating
approximately 150 employees, or 75%, of the Computer Motion positions over the
next six months with immediate severance payment.  The plan includes vacating
and subleasing 78% of the leased space in Goleta, California, consolidating
European operations into a single site, and closing Computer Motion's Asia
office,and transitioning to the Intuitive distribution sales model for the area.
The Company will have a single sales and marketing organization and consolidate
all manufacturing and administrative functions in Sunnyvale, California.  Based
upon this plan, the Company has recorded a $3.4 million accrual in accordance
with EITF Issue 95-3 (EITF 95-3), &quot;Recognition of Liabilities in Connection
with a Purchase Business Combination.&quot;  In accordance with EITF 95-3, the
restructuring accrual has been recorded as a component of the purchase price.
The accrual is comprised of $2.6 million for employee severance costs and $0.8
million to exit existing lease commitments, based upon total future lease
commitments for facilities to be vacated of $2.6 million, offset by subleasing
proceeds of $1.8 million.  The Company has estimated vacancy periods of between
1 month and 3 years between exiting various sites and realizing subleasing
proceeds.
<I><P ALIGN="JUSTIFY">Pro forma results of operations</P>
</I><P ALIGN="JUSTIFY">The following unaudited pro forma financial information
for the three and six months ended June 30, 2003 and June 30, 2002 give effect
to the proposed merger of Intuitive Surgical and Computer Motion as if it had
occurred on January 1, 2003 and January 1, 2002, respectively.  The unaudited
pro forma financial information is not intended to represent or be indicative of
the consolidated results of operations that Intuitive would have reported had
the acquisition been completed as of the dates presented, and should not be
taken as representative of the future consolidated results or financial position
of Intuitive Surgical.</P>

<PRE>

                                   Three Months Ended          Six Months Ended
                                        June 30,                  June 30,
                                  ---------------------     ---------------------
                                    2003        2002          2003        2002
                                  ---------   ---------     ---------   ---------
Sales........................... $  25,297   $  23,969     $  51,098   $  43,803
Net loss........................ $ (10,357)  $ (10,114)    $ (21,868)  $ (21,197)
Net loss per share.............. $   (0.39)  $   (0.45)    $   (0.88)  $   (0.96)

</PRE>

<B>
<P>NOTE 4. CASH AND CASH EQUIVALENTS</P>
</B><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 June 30, 2003 and December 31, 2002.</P>

<B><P>NOTE 5. SHORT-TERM INVESTMENTS</P>
</B><P ALIGN="JUSTIFY">All short-term investments are classified as available-
for-sale, and therefore, are carried at fair market value. The Company views its
available-for-sale portfolio as available for use in its 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 market value based upon
quoted market prices of the securities. Unrealized gains and losses on such
securities are reported as a separate component of stockholders' equity.
Realized gains and losses on available-for-sale securities, together with
amortization of premiums and discounts on debt 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>

<B><P>NOTE 6. INVENTORY</P>
</B><P ALIGN="JUSTIFY">Inventory consists of the following (in thousands): </P>

<PRE>

                                  June 30,   December 31,
                                   2003          2002
                               ------------  ------------
Raw materials................ $      4,018  $      3,420
Work-in-process..............        3,312           780
Finished goods...............        6,271         4,538
                               ------------  ------------
                              $     13,601  $      8,738
                               ============  ============

</PRE>

<B><P>NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS</P>
</B><P ALIGN="JUSTIFY">Goodwill represents the excess of the purchase price over
the fair value of the underlying net tangible and intangible assets.  In
accordance with Financial Accounting Standards No. 142, &quot;Goodwill and Other
Intangible Assets,&quot; goodwill and intangible assets with indefinite useful
lives can no longer be amortized; however, they will be tested for impairment at
least annually (more frequently if certain indicators are present).  Intangible
assets with finite useful lives will continue to be amortized over their
respective useful lives.  In the event management determines that goodwill has
been impaired, the Company will incur an accounting charge for the impairment
during the fiscal quarter in which the determination is made.  Of the total
purchase price, $142.7 million was allocated to goodwill and $8.6 million was
allocated to amortizable intangible assets, comprised of developed technology of
$3.5 million, core technology of $3.3 million, customer relationships of $1.3
million, and other intangible assets totalling $0.5 million. </P>
<P ALIGN="JUSTIFY">Other 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 or seven years. At
June 30, 2003, gross intangible assets totaled $13.4 million and related
accumulated amortization was $2.6 million.</P>

<B><P>NOTE 8. COMPREHENSIVE INCOME (LOSS)</P>
</B><P ALIGN="JUSTIFY"> The components of comprehensive income (loss) consist of
the following (in thousands):</P>

<PRE>

                                           Three Months Ended    Six Months Ended
                                                  June 30,          June 30,
                                        --------------------  --------------------
                                           2003       2002       2003       2002
                                        ---------  ---------  ---------  ---------
Net income (loss)..................... $     878  $  (3,740) $  (1,415) $  (9,357)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (64)       (91)      (155)       (49)
  Change in unrealized gain (loss)
    on available-for-sale securities..       (15)       659       (456)       158
                                        ---------  ---------  ---------  ---------
Comprehensive income (loss)........... $     799  $  (3,172) $  (2,026) $  (9,248)
                                        =========  =========  =========  =========

</PRE>

<P> The components of accumulated other comprehensive loss were as follows (in
thousands):</P>

<PRE>

                                           June 30,    December 31,
                                             2003         2002
                                          -----------  -----------
Accumulated net unrealized gain on
  available-for-sales securities........ $     1,167  $     1,623
Foreign currency translation
  adjustments...........................        (140)          15

Total accumulated other comprehensive     -----------  -----------
  income................................ $     1,027  $     1,638
                                          ===========  ===========

</PRE>

<B><P>NOTE 9. NET INCOME (LOSS) PER SHARE</P>
</B><P ALIGN="JUSTIFY">The following table presents the computation of basic and
diluted net income (loss) per share (in thousands, except share and per share
data):</P>

<PRE>

                                        Three Months Ended         Six Months Ended
                                             June 30,                 June 30,
                                     -------------------------  -------------------------
                                        2003         2002          2003         2002
                                     -----------  ------------  -----------  ------------
Numerator used for basic and
  diluted net earnings (loss) per
  common share..................... $       878  $     (3,740) $    (1,415) $     (9,357)
Denominator used for basic and
  diluted net earnings (loss)
  per common share:
  Weighted-average shares
    outstanding....................  18,584,894    18,206,725   18,511,514    18,188,968
  Less weighted-average
    shares subject to
    repurchase.....................      (4,758)      (15,284)      (5,863)      (16,252)
                                     -----------  ------------  -----------  ------------
  Weighted-average shares
    used in computing basic
    common share...................  18,580,136    18,191,441   18,505,651    18,172,716
                                     ===========  ============  ===========  ============
  Add common stock equivalents.....     392,593            --           --            --
  Weighted-average shares
    used in computing diluted
    common share...................  18,972,729    18,191,441   18,505,651    18,172,716
                                     ===========  ============  ===========  ============
Net earnings (loss) per common share:
  Basic............................ $      0.05  $      (0.21) $     (0.08) $      (0.51)
                                     ===========  ============  ===========  ============
  Diluted.......................... $      0.05  $      (0.21) $     (0.08) $      (0.51)
                                     ===========  ============  ===========  ============

</PRE>

<P>Common stock equivalents consisting of stock options and warrants (calculated
using the treasury stock method) have been excluded from the computation of
diluted net loss per share for the three months ended June 30, 2002 and the six
months ended June 30, 2003 and 2002, as their inclusion would be anti-
dilutive.</P>
<B><P>NOTE 10. PRODUCT WARRANTY PROVISIONS</P>
</B><P ALIGN="JUSTIFY">The Company's standard policy is to warrant all shipped
systems against defects in design, materials and workmanship by replacing failed
parts during the first year of ownership. The Company's estimate of costs to
service the warranty obligations is based on historical experience and current
product performance trends. These costs are included in cost of goods sold at
the time revenue is recognized. The warranty provision is reduced by material
and labor costs used for replacement activities over the warranty period. A
review of the obligations is performed regularly to determine the adequacy of
the reserve. Based on the outcome of this review, revisions to the estimated
warranty liability are recorded as appropriate.</P>

<P>The following table reconciles the changes to the product warranty liability
for the period indicated (in thousands):</P>

<PRE>

                                     Balance at                         Warranty   Balance at
                                     Beginning   Warranty   Warranties Assumed in   End of
                                     of Period     Usage    Expensed   Acquisition  Period
                                    -----------  ---------  ---------  ----------  ---------
Three months ended June 30, 2003.. $     2,100  $    (337) $     (58) $      300  $   2,005
Six months ended June 30, 2003.... $     2,269  $    (776) $     212  $      300  $   2,005

</PRE>

<P ALIGN="JUSTIFY"> The Company from time to time enters into agreements to
indemnify its customers against liability and damages arising from patent claims
against the Company's product. The term of these agreements vary, but generally,
a maximum obligation is not explicitly stated within the agreements.
Historically, the Company has not been obligated to make any significant
payments related to its customer indeminification clauses and no liabilities
have been recorded for this obligation on its balance sheets as of June 30, 2003
and December 31, 2002.</P>

<B><P>NOTE 11. STOCK-BASED COMPENSATION</P>
</B><P ALIGN="JUSTIFY">The Company applies Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recorded for stock option grants issued with an
exercise price equal to the market value of the underlying stock on the date
granted.  The company has recorded stock-based compensation, primarily related
to deferred compensation arising from the Company's initial public offering in
2000 and plans to record stock-based deferred compensation expense related to
its acquisition of Computer Motion in June 2003.  Had compensation expense for
the stock option grants been determined on the fair value at the grant dates
consistent with the method of Statement of Financial Accounting Standards Board
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss and loss per share would have been adjusted to the pro forma amounts
indicated below (amounts in thousands, except per share amounts):</P>

<PRE>

                                              Three Months Ended   Six Months Ended
                                                   June 30,            June 30,
                                              ------------------  -------------------
                                                2003      2002      2003       2002
                                              --------  --------  ---------  --------
Net income (loss), as reported.............. $    878  $ (3,740) $  (1,415) $ (9,357)
Add:  Total stock-based employee
  compensation expense included in
  reported net loss, net of $0 related tax..      141       181        296       395
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect..   (1,958)   (1,820)    (3,984)   (3,495)
                                              --------  --------  ---------  --------
Pro forma net income (loss)................. $   (939) $ (5,379) $  (5,103) $(12,457)
                                              ========  ========  =========  ========

Earnings (loss) per share:
  Basic and diluted - as reported........... $   0.05  $  (0.21) $   (0.08) $  (0.51)
  Basic and diluted - pro forma............. $  (0.05) $  (0.30) $   (0.28) $  (0.69)


</PRE>

<B><P>NOTE 12.  REVERSE STOCK SPLIT</P>
</B><P ALIGN="JUSTIFY">Intuitive Surgical's stockholders approved a one-for-two
reverse stock split (the&quot;Reverse Split&quot;) on June 30, 2003 and it was
executed on July 1, 2003. The par value of Intuitive's common stock after the
Reverse Split remained at $0.001 per shares.  The rights of the holders of these
securities were not otherwise modified.  All shares outstanding and earnings per
share information for all periods presented in these financial statements give
effect to the Reverse Split.  All shares, per share and market price data
related to Intuitive's common shares outstanding and under employee stock plans
reflect the retroactive effects of the Reverse Split.</P>

<B><P>NOTE 13. REVENUE RECOGNITION</P>
</B><P ALIGN="JUSTIFY">The Company recognizes 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">In certain cases, revenue from direct system sales is
generated from multiple-element arrangements which require judgment in the areas
of customer acceptance, training, installation and collectibility. The Company
accounts for multiple-element arrangements in accordance with the provisions of
SAB 101, "Revenue Recognition in Financial Statements." Revenue is recognized as
specific elements indicated in sales contracts are executed. If an element is
essential to the functionality of an arrangement, the entire arrangement's
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 or delivery occurs. The fair value of an
undelivered element is based upon an estimate made by management. If an
undelivered element exists, the Company will determine the fair value of the
undelivered element and subtract the fair value of the undelivered element from
the total consideration under the arrangement. The residual amount is recognized
as the value of the delivered element. Amounts billed in excess of revenue
recognized are recorded as deferred revenue on the balance sheet. Costs
associated with inconsequential or perfunctory elements in multiple-element
arrangements are accrued at the time of revenue recognition. The Company
accounts for installation as a separate element of a multiple-element
arrangement. The Company therefore recognizes the fair value of installation
services upon the completion of installation.</P>
<P ALIGN="JUSTIFY">The Company's distributors do not have price protection
rights. One of the Company's distributors has return rights under limited
circumstances. Such rights are accounted for under the provisions of SFAS No.
48, "Revenue Recognition When Right of Return Exists." To date, the Company has
not had any system sales returns. </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. All costs
associated with the provision of service and maintenance, including salaries,
benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci </I>Surgical System contains a
software component. The Company believes that the software element in the <I>da
Vinci</I> Surgical System is an incidental part of the system. The software
element within the Company's 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 the Company provides is incidental to the
surgical system as a whole and the software revenue guidance provided in SOP 97-
2 is not applicable to the Company's revenues.</P>

<B><P ALIGN="JUSTIFY">NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS</P>
</B><P ALIGN="JUSTIFY">In June 2002, the FASB issued SFAS 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses accounting
for restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since SFAS 146 does not involve an entity newly acquired in a business
combination, the restructuring accrual, recorded as a component of the purchase
price in connection with the acquisition was established based on the provisions
of EITF Issue No. 95-3, &quot;Recognition of Liabilities in Connection with a
Purchase Business Combination&quot; and SFAS 146 did not impact the Company's
results of operations or financial position during the six months ended June 30,
2003.</P>
<P ALIGN="JUSTIFY">In January 2003, the FASB issued Interpretation No. 46, or
FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A variable interest entity is a corporation, partnership, trust, or any
other legal structures used for business purposes that either (a) does not have
equity investors with voting rights, or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. FIN 46 also requires consolidation of variable interest entities entered
into prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of FIN 46 has not had an
impact on the Company's financial position or results of operations during the
six months ended June 30, 2003.</P>
<P ALIGN="JUSTIFY">In October 2002, the Emerging Issues Task Force reached
consensus on issue 00-21, or EITF 00-21, "Revenue Arrangements with Multiple
Deliverables." The principles and application guidance of EITF 00-21 should be
used to determine (a) how the arrangement consideration should be measured, (b)
whether the arrangement should be divided into separate units of accounting, and
(c) how the arrangement consideration should be allocated among the separate
units of accounting. The guidance in this issue is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is evaluating the possible impact of the adoption of EITF 00-21 on its
results of operations and financial position.</P>

<B><P ALIGN="JUSTIFY">NOTE 15. CONTINGENCIES</P>
</B><P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk")
filed a lawsuit against Intuitive Surgical 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, the Company is 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 the Company. On November 8, 2001, in response to a motion on
one of Intuitive Surgical's noninfringement defenses, the District Court granted
summary judgment of noninfringement of the '003 patent in the Company's favor
and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed
the summary judgment ruling to the U.S. Court of Appeals for the Federal
Circuit. </P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing.  Upon remand, Intuitive Surgical
intends to continue to vigorously defend its rights and, if necessary, is
prepared to continue to dispute the meaning of other portions of the asserted
claim language and to conduct discovery and file further motions on whether the
patent is infringed, valid and/or enforceable. Intuitive Surgical believes that
it will prevail in the litigation and that it has multiple meritorious defenses
to Wilk's allegations. However, litigation is unpredictable and Intuitive
Surgical may not prevail. The case remains in its early stages of discovery in
the District Court.</P>
<P ALIGN="JUSTIFY">If the Company loses Wilk's suit against us, it will hurt our
competitive position, may be costly and may prevent the Company from selling its
products. If the Company loses the patent suit, it may need to obtain from Wilk
a license to this technology to continue to market its products that have been
found to infringe Wilk's patents. This license could be expensive, which could
seriously harm the Company's business. If Wilk is successful in its suit against
the Company and is unwilling to grant a license, the Company may be required to
stop selling its products that are found to infringe Wilk's patents unless the
Company can redesign them so they do not infringe Wilk's patents, which it may
be unable to do. In addition, the Company could be required to pay Wilk damages,
including treble damages, which could be substantial and harm its financial
position. Due to the inherent uncertainties of litigation, however, the Company
cannot accurately predict the ultimate outcome of the litigation against Wilk at
this time and, therefore, cannot estimate the range of possible loss.</P>
<P ALIGN="JUSTIFY">During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the <I>da Vinci</I> System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an <I>EndoWrist</I> instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the <I>da
Vinci</I> System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.  Due to the inherent uncertainties of
the litigation, and the early stage of this case, the Company cannot accurately
predict the outcome of this litigation at this time and therefore, cannot
estimate the range of possible loss.</P>
<P ALIGN="JUSTIFY">The foregoing proceedings could be expensive to litigate, may
be protracted and the Company's confidential information may be compromised.
Whether or not the Company is successful in these lawsuits, these proceedings
could consume substantial amounts of its financial and managerial resources. At
any time, the other parties may file additional claims against the Company, or
the Company may file claims against them, which could increase the risk, expense
and duration of the litigations. For more information on the Company's
litigation with Wilk, see "Part II-Item 1: Legal Proceedings."</P>

<B><P><A NAME="mda"></A>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS</P>
</B><P ALIGN="JUSTIFY">In this report, "Intuitive Surgical,"
&quot;Intuitive,&quot; the &quot;Company,&quot; "we," "us," and "our" refer to
Intuitive Surgical, Inc.</P>
<P ALIGN="JUSTIFY">This Management's Discussion and Analysis of Financial
Condition as of June 30, 2003 and Results of Operations for the three month and
six month periods ended June 30, 2003 and June 30, 2002 should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K/A for the
year ended December 31, 2002. </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&reg;, da Vinci&reg;, InSite&reg;, EndoWrist&reg;,
Zeus&reg;, Hermes&reg;, and Aesop&reg; are registered 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 third generation. The <I>da Vinci</I>
Surgical System consists of a surgeon's console, a patient-side cart, a high
performance vision system and proprietary "wristed" 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 in a manner never before experienced. </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, or 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. In November 2002, we received clearance from
the FDA for use of the <I>da Vinci</I> Surgical System in thoracoscopically-
assisted cardiotomy procedures. In January 2003, we began promoting atrial
septal defect closure surgery under the November 2002 cardiotomy clearance.</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. A small
percentage of 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,
we believe that the percentage of revenue from our <I>EndoWrist </I>instruments
and service will 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.
The percentage of revenue derived from recurring instrument, accessory, and
service revenue has grown from 20% for the quarter ended June 30, 2002 to 30%
for the quarter ended June 30, 2003. </P>
<B><I><P ALIGN="JUSTIFY">COMPUTER MOTION ACQUISITION</P>
</B></I><P ALIGN="JUSTIFY">On June 30, 2003, the Company acquired Computer
Motion, Inc.  In this transaction, Computer Motion merged with a wholly owned
subsidiary of Intuitive Surgical and each share of Computer Motion common stock
was converted into 0.51426943 shares of Intuitive Surgical common stock. The
total purchase price of the transaction was $148.6 million compared to $113.0
million presented on a pro forma basis in the Company's Registration Statement
on Form S-4 filed with the SEC in connection with the transaction (the &quot;pro
forma&quot;) as if the transaction had closed as of March 31, 2003.  The
increase in purchase price resulted primarily from a rise in the Intuitive
Surgical common stock price from $6.20 at the April 29, 2003 measurement date in
the pro forma presentation to the $7.82 value used to measure the value of stock
issued at the June 30, 2003 close date.  The purchase price also increased $5.3
million to reflect funds loaned to Computer Motion during the second quarter of
2003 to fund its operations.  The measurement date for this transaction was the
June 30, 2003 closing date, as the number of shares to be issued to Computer
Motion stockholders was not fixed until that date.  </P>
<P ALIGN="JUSTIFY">The following table compares the allocation of purchase price
between the pro forma financial information presented in the Form S-4 and the
actual transaction:</P>

<PRE>

                                  Actual      Pro forma
                                 ---------    ---------
Tangible assets............... $      218    $  10,136
Intangible assets.............      8,700       32,400
Restructuring accrual.........     (3,444)          --
Deferred compensation.........        434          574
Goodwill......................    142,658       69,854
                                 ---------    ---------
Total purchase price.......... $  148,566    $ 112,964
                                 =========    =========

</PRE>

<P ALIGN="JUSTIFY">The tangible assets acquired were $9.9 million less than pro
forma due primarily to Computer Motion's second quarter loss of $5.9 million and
adjustments made to the fair value of Computer Motion's inventory and fixed
asset historical balances.   Intangible assets acquired were $23.7 million less
than pro forma primarily due to lower developed and core technology valuations
resulting from reduced business forecasts for the acquired Computer Motion Zeus
product line.  The restructuring accrual was recorded in the actual allocation,
as management has now developed a restructuring plan with sufficient detail to
record this reserve, primarily for employee severance pay and facility closure
costs.  Goodwill was higher than pro forma due to the combined impact of the
rise in the purchase price and the changes in the other tangible and intangible
assets acquired.  </P>
<P ALIGN="JUSTIFY">The current restructuring plan provides for the elimination
of approximately 75% of the Computer Motion employees, exiting 78% of the space
in Goleta, California, consolidating European operations into a single site,
closing the Computer Motion's Asia office, and transitioning to the Intuitive
distribution sales model for the area.  The Company will have a single sales and
marketing organization and consolidate all manufacturing and administrative
functions in the Sunnyvale, California headquarters.  Based on these plans, the
Company projects to achieve annual pre-tax cost savings of at least $18 million
to be phased in beginning in the third quarter of 2003.  The Company estimates
that approximately $12.0 million of those savings will result from a substantial
reduction in headcount.  </P>
<B><I><P>RESULTS OF OPERATIONS</P>
</B><P ALIGN="JUSTIFY">Sales</I>. Total sales for the three months ended June
30, 2003 were $21.5 million, up 11% from $19.4 million for the three months
ended June 30, 2002. The increase in second quarter of 2003 sales was driven by
continued recurring revenue growth, consisting of instruments, accessories, and
service.  Second quarter 2003 recurring revenue totaled $6.4 million, up $2.6
million over the prior year and up $1.0 million sequentially over the first
quarter of this year.  Higher recurring revenue was driven by growth in the
installed base of <I>da Vinci</I> Surgical Systems and surgical procedures
performed with the system. We shipped 14 <I>da Vinci</I> Surgical Systems during
the second quarter of 2003, compared to 16 in the second quarter of 2002. During
the second quarter 2003, we launched our fourth arm product, shipping 9 units
during the quarter.  Overall, second quarter 2003 system revenue was down
slightly to $15.1 million, compared to $15.6 million for the second quarter of
2002.  As of June 30, 2003, there were 177 cumulative <I>da Vinci</I> Surgical
Systems shipped, compared to 118 as of June 30, 2002.</P>
<P ALIGN="JUSTIFY">On a year to date basis, total sales for the six months ended
June 30, 2003 were $40.7 million, up 20% from $33.8 million for the six months
ended June 30, 2002.  The increase was driven by continued growth in recurring
revenue.  Sales of instruments, accessories and service grew to $11.8 million
for the first half of 2003 from $6.5 million for the first half of last year.
Overall, system revenue for the first half of 2003 was $28.9 million, up $1.6
million from $27.3 million for the first half of 2002.  The increase was due
primarily to the second quarter of 2003 fourth arm sales.  There were 28 <I>da
Vinci</I> Surgical Systems shipped during the first half of 2003 compared to 29
last year. </P>
<P ALIGN="JUSTIFY">Product sales for the three months ended June 30, 2003 of
$19.2 million were up $1.0 million compared to $18.2 million for the three
months ended June 30, 2002.  The increase was primarily due to higher instrument
and accessory sales, $1.5 million, resulting from a larger installed base of
<I>da Vinci</I> Surgical Systems in 2003, offset by lower <I>da Vinci</I>
Surgical System sales.  </P>
<P ALIGN="JUSTIFY">Product sales for the six months ended June 30, 2003 of $36.7
million were up $5.0 million compared to $31.7 million for the six months ended
June 30, 2002.  The increase was primarily due to higher instrument and
accessory sales, $3.4 million, resulting from a larger installed base of <I>da
Vinci</I> Surgical Systems in 2003 and additional system revenue of $1.6 million
driven by incremental revenue derived from the fourth surgical arm system
enhancement launched during the second quarter of 2003.</P>
<P ALIGN="JUSTIFY">Service sales for the three months ended June 30, 2003 of
$2.2 million were up $1.1 million from $1.1 million for the three months ended
June 30, 2002.  Service sales for the six months ended June 30, 2003 of $4.0
million were up $1.9 million from $2.1 million for the six months ended June 30,
2002.  The year over year increases resulted from a larger base of <I>da
Vinci</I> Surgical systems on annual service contracts.</P>
<I><P ALIGN="JUSTIFY">Gross Profit</I>. Total gross profit for the three months
ended June 30, 2003 was $13.5 million, or 63.2% of sales, compared with $10.2
million, or 52.4% of sales for the three months ended June 30, 2002. The year-
over-year improvement in gross profit resulted primarily from significantly
lower product warranty costs resulting from system reliability improvements,
improved factory productivity, and manufacturing overhead absorption timing.
</P>
<P ALIGN="JUSTIFY">Total gross profit for the six months ended June 30, 2003 was
$24.0 million, or 59.1% of sales, compared with $17.1 million, or 50.5% of sales
for the six months ended June 30, 2002. The year-over-year improvement in gross
profit resulted primarily from significantly lower product warranty costs
resulting from system reliability improvements and improved factory
productivity.   </P>
<P ALIGN="JUSTIFY">Product sales gross profit percentage increased from 53.7%
for the three months ended June 30, 2002 to 64.1% for the three months ended
June 30, 2003.  Product gross profit percentage increased from 52.2% for the six
months ended June 30, 2002 to 60.0% for the six months ended June 30, 2003.  The
year over year increases resulted primarily from significantly lower warranty
costs and improved factory productivity.</P>
<P ALIGN="JUSTIFY">Service sales gross profit percentage increased from 31.4%
for the three months ended June 30, 2002 to 55.0% for the three months ended
June 30, 2003.  Product gross profit percentage increased from 25.3% for the six
months ended June 30, 2002 to 51.1% for the six months ended June 30, 2003.  The
year over year increases resulted primarily from lower per system service costs
resulting from system reliability improvements and field service organization
productivity gains.</P>
<I><P ALIGN="JUSTIFY">Selling, General and Administrative Expenses</I>. Selling,
general and administrative expenses for the three months ended June 30, 2003
were $9.4 million, down 4% from $9.8 million for the three months ended June 30,
2002. The year-over-year decrease was primarily due to the decrease in
litigation expenses of $1.4 million, offset by higher headcount and travel
related costs associated with providing surgical and training support to a
larger installed base of <I>da Vinci</I> Surgical Systems, a $0.5 million
provision for bad debts related to accounts receivables acquired from Computer
Motion and $0.1 million to record immediate expense recognition of the
intangible in-process research and development acquired in the Computer Motion
acquisition.</P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses for the six
months ended June 30, 2003 were $19.6 million, up 6% from $18.6 million for the
six months ended June 30, 2002. The year-over-year increase was primarily due to
higher headcount and travel related costs associated with supporting a larger
installed base of <I>da Vinci</I> Surgical Systems of $0.9 million, bad debt
expense of $0.5 million, offset by a $0.5 million insurance recovery recorded in
the first quarter of 2003 related to the unauthorized purchases made in the
third quarter of 2002. Please see "Part II. Item I. Legal Proceedings - Other
Legal Matters."</P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses include 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 and integrate the Computer Motion business. </P>
<I><P ALIGN="JUSTIFY">Research and Development Expenses</I>. Research and
development expenses for the three months ended June 30, 2003 were $3.6 million,
down 22% from $4.6 million for the three months ended June 30, 2002. The year-
over-year decrease resulted primarily from lower second quarter 2003 project
materials costs of $0.6 million and lower project consulting costs of $0.4
million. </P>
<P ALIGN="JUSTIFY">Research and development expenses for the six months ended
June 30, 2003 were $7.1 million, down 21% from $8.9 million for the six months
ended June 30, 2002. The year-over-year decrease resulted primarily from lower
project materials costs of $0.7 million and lower project consulting costs of
$0.6 million, and deferred compensation of $0.1 million.  The remainder of the
decrease related to lower general operating expenses. </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.
Research and development expenses are expected to increase in the future due to
the impact of the acquisition of Computer Motion. </P>
<I><P ALIGN="JUSTIFY">Deferred Compensation</I>. 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 expense. Non-cash deferred compensation
expense included in research and development expenses was $0.1 million and $0.1
million for the three months ended June 30, 2003 and 2002, respectively. Non-
cash deferred compensation expense included in selling, general and
administrative expenses was $0.1 million and $0.1 million for the three months
ended June 30, 2003 and 2002, respectively. Non-cash deferred compensation
expense included in research and development expenses was $0.1 million and $0.3
million for the six months ended June 30, 2003 and 2002, respectively. Non-cash
deferred compensation expense included in selling, general and administrative
expenses was $0.2 million and $0.1 million for the six months ended June 30,
2003 and 2002, respectively. Deferred compensation related to below market
options granted prior to our initial public offering ($8.9 million) have now
been fully amortized.  In connection with our acquisition of Computer Motion, we
recorded $0.4 million of deferred compensation on unvested options which will be
amortized into compensation expense over a three year period beginning July 1,
2003 using the graded vesting method.</P>
<I><P ALIGN="JUSTIFY">Other Income (Expense). </I>Other income (expense) for the
three months ended June 30, 2003 was $0.3 million, down 0.2 million compared to
$0.5 million for the three months ended June 30, 2002. The decrease resulted in
reduced interest earnings on lower investment balances.  Other income (expense)
for the six months ended June 30, 2003 was $1.2 million, up $0.2 million
compared to $1.0 million for the six months ended June 30, 2002. The increase
resulted primarily from $0.5 million of gains realized during the first quarter
of 2003 on sales of investment securities, partially offset by reduced interest
earnings on lower investment balances.  </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 $10.5 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, at
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 June 30, 2003, we had working capital of $41.6 million,
compared to $52.6 million as of December 31, 2002. The decrease during the first
half of 2003 resulted primarily from the impact of the acquisition of Computer
Motion, reflecting cash used to fund the second quarter 2003 Computer Motion
operations of $5.3 million, establishment of a restructuring accrual of $3.4
million, and the negative fair value of working capital acquired of $1.0
million.  The remainder of the decrease resulted primarily from our year to date
net loss of $1.4 million.</P>
<P ALIGN="JUSTIFY">Net cash provided by operating activities for the three
months ended June 30, 2003 was $2.9 million, comprised primarily of our net
income of $0.9 million, non-cash expenses of $1.3 million, and working capital
provided of $0.7 million.   Cash provided by operating activities was $3.2
million higher in the second quarter of 2003 compared to the second quarter of
2002 primarily due to higher 2003 net income.</P>
<P ALIGN="JUSTIFY">Net cash used by operating activities for the six months
ended June 30, 2003 was $3.0 million, comprised primarily of our net loss of
$1.4 million, and working capital used of $4.2 million, offset by non-cash
expenses of $2.6 million.   Cash used by operating activities was $4.3 million
less than in the first half of 2003 compared to the first half of 2002 primarily
due to lower 2003 net loss of $7.9 million, offset by working capital used of
$3.9 million.</P>
<P ALIGN="JUSTIFY">Net cash used by investing activities was $7.7 million for
the three months ended June 30, 2003, compared to $16.7 million provided for the
three months ended June 30, 2002. Second quarter 2003 cash used in investing
activities consisted of $4.1 million of net cash used to fund the operations of
Computer Motion, $2.9 million to purchase short-term investments, and $0.7
million invested in property and equipment.  Second quarter 2002 cash provided
by investing activities consisted of $17.5 million of proceeds from sales and
maturities of investments, offset by investments in property and equipment of
$0.8 million.  </P>
<P ALIGN="JUSTIFY">Net cash provided by investing activities for the six months
ended June 30, 2003 of $2.5 million was $17.6 million less than $20.1 million
for the six months ended June 30, 2002 primarily due to lower net movement into
cash from short-term investments of $17.2 million resulting from lower 2003
first half net loss and general timing of conversions into cash to support
short-term liquidity.</P>
<P ALIGN="JUSTIFY">Net cash used by financing activities was $0.2 million for
the three months ended June 30, 2003, compared to $0.8 million for the three
months ended June 30, 2002. This decrease resulted from lower long-term
borrowing net proceeds of $0.4 million, offset by higher proceeds from issuance
of common stock of $0.2 million.  Net cash provided by financing activities was
$0.8 million for the six months ended June 30, 2003, compared to $0.7 million
for the six months ended June 30, 2002. This decrease resulted from higher
proceeds from issuance of common stock of $0.5 million, offset by lower long-
term borrowing net proceeds.</P>
<P ALIGN="JUSTIFY">We believe the Company has sufficient cash to complete the
Computer Motion integration and reach sustained cash-positive operations.  We
ended our second quarter 2003 with $42.9 in total cash, cash equivalents, and
short-term investments.  Based upon our current business forecast and our
restructuring plan, we expect year-end 2003 cash, cash equivalents, and short-
term investments to total approximately $25.0 million by which time we expect to
have substantially completed our integration activities, incurred most of our
integration costs, and achieve cash positive operations.  Our ability to achieve
these goals is subject to economic conditions and unanticipated changes in
business conditions, and therefore there can be no assurance that these results
will be achieved.</P>
<P ALIGN="JUSTIFY">Our capital requirements depend on numerous factors,
including the effects of our recently completed merger with Computer Motion,
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 future operations. However, 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>
<I><P ALIGN="JUSTIFY">Contractual Obligations and Commercial Commitments</P>
</I><P ALIGN="JUSTIFY">The following table summarizes all significant
contractual payment obligations by payment due date:</P>
<B><P ALIGN="JUSTIFY">Payments by Periods (Millions)</P></B></FONT>

<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=572>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Contractual Obligation</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Under 1 Year</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">1-3 Years</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">3-5 Years</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Over 5 Years</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Long-term debt</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 2.6</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 1.4</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 1.2</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ -</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ -</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Building lease</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">14.1</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">3.5</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">10.5</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">.1 </FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">-</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 16.7</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 4.9</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 11.7</FONT></TD>
<TD WIDTH="13%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ .1</FONT></TD>
<TD WIDTH="16%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ -</FONT></TD>
</TR>
</TABLE>

<B><I><FONT SIZE=2><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P>We believe the following represent our 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
judgment in the areas of customer acceptance, training, installation and
collectibility. The Company accounts for multiple-element arrangements in
accordance with the provisions of SAB 101, "Revenue Recognition in Financial
Statements." Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of an
arrangement, the entire arrangement's 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 or
delivery occurs. The fair value of an undelivered element is based upon an
estimate made by management. If an undelivered element exists, the Company will
determine the fair value of the undelivered element and subtract the fair value
of the undelivered element from the total consideration under the arrangement.
The residual amount is recognized as the value of the delivered element. Amounts
billed in excess of revenue recognized are recorded as deferred revenue on the
balance sheet. Costs associated with inconsequential or perfunctory elements in
multiple-element arrangements are accrued at the time revenue is recognized. The
Company accounts for installation as a separate element of a multiple-element
arrangement. The Company therefore recognizes the fair value of the installation
services upon completion of installation.</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. All costs
associated with the provision of service and maintenance, including salaries,
benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheets.</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
judgment. The allowance is adjusted periodically to reflect current data,
activity, and associated risks.</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 in the future.</P>
<P ALIGN="JUSTIFY">Intangible Assets. We have intangible assets on our balance
sheet related to the acquisition of Computer Motion and the acquisition of other
patents. The valuation and classification of these assets and the assignment of
useful amortization lives involves judgments and the use of estimates. The
evaluation of these intangibles for impairment under established accounting
guidelines is required on an ongoing basis. Changes in business conditions could
potentially require future adjustments to asset valuations.</P>
<P ALIGN="JUSTIFY">Goodwill.  We have goodwill on our balance sheet relating to
the acquisition of Computer Motion.  Goodwill is recorded as the excess of the
purchase price over the fair value of the net tangible and intangible assets
acquired.  Goodwill is not amortized, rather is tested for impairment at lease
annually.  In the event we determine that goodwill has been impaired, we will
record an accounting charge for the impairment during the fiscal quarter in
which the determination is made. </P>
<P ALIGN="JUSTIFY">Warranties. We provide for the estimated costs of product
warranties at the time revenue is recognized. Our estimate of costs to service
our warranty obligations is based upon historical experience and expectation of
future conditions. If warranty claim activity and the costs associated with
servicing those claims differ from our estimates, revisions to the estimated
warranty liability may be required.</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>
</I><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR
INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.</P>
</B><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 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 is 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 integration of Computer Motion with our company;</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 and defend against third party
challenges; </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>
<B><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</B> </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. 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 will 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>
<B><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. </P>
</B><P ALIGN="JUSTIFY">A relatively small number of customers account for a
significant portion of our total revenues. During the three months ended June
30, 2003 and 2002, approximately 70% and 80%, respectively, of our revenues came
from the sales of <I>da Vinci</I> Surgical Systems, which are high revenue
dollar items. During the six months ended June 30, 2003 and 2002, approximately
71% and 81%, respectively, of our revenues came from the sales of <I>da
Vinci</I> Surgical Systems During the three and six month periods ended June 30,
2003 and 2002, no customer accounted for more than 10% of total sales. However,
due to the high average selling price of the <I>da Vinci</I> Surgical System,
our failure to add new customers that make significant purchases of our products
could reduce our future revenues. The loss or delay of individual orders could
have a significant impact on revenues and operating results.</P>
<B><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO
GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</B> </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 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. We cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs.</P>
<B><P>WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH BROOKHILL-WILK 1,
LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT
US FROM SELLING OUR PRODUCTS. </P>
</B><P ALIGN="JUSTIFY">On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed
a lawsuit against Intuitive Surgical 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
our company. On November 8, 2001, in response to a motion on one of Intuitive
Surgical's noninfringement defenses, 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 appealed the summary judgment
ruling to the U.S. Court of Appeals for the Federal Circuit. </P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing.  Upon remand, we intend to
continue to vigorously defend our rights and, if necessary, are prepared to
continue to dispute the meaning of other portions of the asserted claim language
and to conduct discovery and file further motions on whether the patent is
infringed, valid and/or enforceable. We believe that we will prevail in the
litigation and that we have multiple meritorious defenses to Wilk's allegations.
However, litigation is unpredictable and we may not prevail. The case remains in
its early stages of discovery in the District Court.</P>
<P ALIGN="JUSTIFY">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. 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, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties
of litigation, however, the Company cannot accurately predict the ultimate
outcome of the litigation against Wilk at this time and, therefore, cannot
estimate the range of possible loss.</P>
<P ALIGN="JUSTIFY">The foregoing proceeding could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in this lawsuit, the proceeding could consume substantial
amounts of our financial and managerial resources. At any time, Wilk may file
additional claims against our company, or we may file claims against Wilk, which
could increase the risk, expense and duration of the litigations. For more
information on our litigation with Wilk, see "Part II-Item 1: Legal
Proceedings."</P>
<B><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.</B> </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 do not know whether 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 do not know whether 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. 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>
<B><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.</B> </P>
<P ALIGN="JUSTIFY">We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery, remote 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 with, one or more of these third
parties. 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 Brookhill-Wilk 1, LLC has, our
technical and management personnel will experience a significant diversion of
time and effort and we will incur large expenses defending our company. 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>
<B><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.</B> </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/A of Intuitive Surgical, Inc., filed with the SEC.
</P>
<B><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO
THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.</B> </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/A
of Intuitive Surgical, Inc., filed with the SEC.</P>
<B><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.</P>
</B><P ALIGN="JUSTIFY">During the course of our administrative proceedings
and/or lawsuits, there may be public announcements of the results of hearings,
motions, and other interim proceedings or developments in the litigation. 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>
<B><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.</B> </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, or 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 premarket approval
application, 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 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 or require us to conduct further testing, or
compile more data, including clinical data and clinical studies, 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
clearance or 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, or 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, or 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/A of Intuitive Surgical, Inc., filed with the SEC.</P>
<B><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>
</B><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. </P>
<P ALIGN="JUSTIFY">If we modify existing products or develop new products in the
future, including new instruments, we may 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. For additional information concerning
regulatory approvals of our products, see "Item 1: Business -- Government
Regulation," included in the Annual Report on Form 10-K/A of Intuitive Surgical,
Inc., filed with the SEC.</P>
<B><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.</B> </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.
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/A of Intuitive Surgical, Inc., filed with the
SEC.</P>
<B><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>
</B><I><P ALIGN="JUSTIFY">Intuitive</I> 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 drugs 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>
<B><P>IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL
UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY
SUFFER.</B> </P>
<P ALIGN="JUSTIFY">Our products incorporate mechanical parts and computer
software, either of which 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 such defects. We cannot assure you that our products will not
experience errors or performance problems in the future. If we experience flaws
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>

<B><P>WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.</B> </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>
<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>
<B><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.</B> </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, or QSR. We are
also required to comply with International Organization for Standardization, or
ISO quality system standards in order to produce products for sale in Europe. If
we fail to continue to comply with Good Manufacturing Practice requirements or
ISO 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
standards. The FDA inspected our Mountain View and Sunnyvale facilities in March
2000 and December 2002, respectively. The Good Manufacturing Practice issues
raised by the FDA during the inspections either were satisfactorily resolved
with the FDA, or we believe can be resolved by us to the FDA's satisfaction,
although we cannot assure you that we will be able to do so. We continue to be
subject to FDA inspections at any time. 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 ISO standards in future
inspections and 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, or FDB, and we were issued an updated device manufacturing license for
our Sunnyvale facility. We are 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>
<B><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.</B> </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>
<B><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.</B>
</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 in 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>
<P ALIGN="JUSTIFY">During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the <I>da Vinci</I> System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an <I>EndoWrist</I> instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the <I>da
Vinci</I> System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.</P>
<B><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our
management and scientific staff. 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. 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>
<B><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.</B> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our
activities in Europe and other foreign markets. Sales to markets outside of the
United States accounted for approximately 30% of our sales for the three months
ended June 30, 2003 and 20% for the three months ended June 30, 2002.  Sales to
markets outside of the United States accounted for approximately 24% of our
sales for the six months ended June 30, 2003 and 17% for the six months ended
June 30, 2002.</P>
<P ALIGN="JUSTIFY">We are 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>
<B><P>RISK FACTORS ASSOCIATED WITH OUR MERGER WITH COMPUTER MOTION</P>
<P>INTUITIVE SURGICAL AND COMPUTER MOTION EACH HAVE INCURRED SUBSTANTIAL LOSSES
SINCE INCEPTION.  THE MERGED COMPANY MAY NOT BE ABLE TO GENERATE OR RAISE
SUFFICIENT CASH TO FUND OPERATIONS.</P>
</B><P ALIGN="JUSTIFY">For the three months ended June 30, 2003 on a stand alone
basis, we generated our first net profit of $0.9 million, while Computer Motions
incurred a net loss of $5.9 million, including the benefit of a $4.4 million
recovery of a litigation judgment accrual with Intuitive originally charged to
expense in 2002.  On a year-to date basis, Intuitive Surgical incurred a $1.4
million loss and Computer Motion incurred a net loss of $13.6 million, including
the litigation judgment recovery. In addition, the integration of the two
companies and the settlement of outstanding Computer Motion liabilities and
commitments will require significant cash resources.  While we expect that we
have enough cash to integrate the companies and achieve profitable operations,
the extent of our future losses and the timing of achieving profitability on a
merged basis are highly uncertain, and we may never achieve profitable
operations.  If achieving profitable operations takes longer than planned, we
will need to raise additional funds. We may not be able to obtain additional
financing on favorable terms, or at all. If we are unable to generate sufficient
capital to fund our operations and cannot raise it on acceptable terms, we may
not be able to further develop, enhance or expand the market for our products
and service, and the combined company could fail.</P>
<B><P>THE COMBINED COMPANY MAY NOT REALIZE ALL OF THE ANTICIPATED BENEFITS OF
THE MERGER.</P>
</B><P ALIGN="JUSTIFY">The success of the merger will depend, in part, on the
ability of the combined company to realize the anticipated synergies, cost
savings and growth opportunities from integrating the business of Computer
Motion with the business of Intuitive Surgical. Our success in realizing these
benefits and the timing of this realization depend upon the successful, rapid
integration of the operations of Computer Motion with those of Intuitive
Surgical. This integration will be a complex, costly and time-consuming process,
and may not succeed as planned. The difficulties of combining the operations of
the companies include, among other things:</P>
<UL>
<P ALIGN="JUSTIFY"><LI>coordinating and consolidating ongoing and future
research and development efforts; </LI></P>
<P ALIGN="JUSTIFY"><LI>consolidating sales and marketing operations; </LI></P>
<P ALIGN="JUSTIFY"><LI>retaining existing customers and attracting new
customers; </LI></P>
<P ALIGN="JUSTIFY"><LI>retaining strategic partners and attracting new strategic
partners; </LI></P>
<P ALIGN="JUSTIFY"><LI>retaining key employees; </LI></P>
<P ALIGN="JUSTIFY"><LI>consolidating corporate and administrative
infrastructures; </LI></P>
<P ALIGN="JUSTIFY"><LI>integrating and managing the technologies and products of
the two companies; </LI></P>
<P ALIGN="JUSTIFY"><LI>identifying and eliminating redundant and underperforming
operations and assets; </LI></P>
<P ALIGN="JUSTIFY"><LI>using capital assets efficiently to develop the business
of the combined company; </LI></P>
<P ALIGN="JUSTIFY"><LI>minimizing the diversion of management's attention from
ongoing business concerns; and </LI></P>
<P ALIGN="JUSTIFY"><LI>coordinating geographically separate organizations.
</LI></P></UL>

<P ALIGN="JUSTIFY">In addition, Computer Motion's products differ in substantial
ways from Intuitive's products, and the companies rely on different distributors
and sales channels to sell their products. Both Computer Motion and Intuitive
Surgical are parties to existing distribution agreements that cannot be
terminated prior to the end of their terms.</P>
<P ALIGN="JUSTIFY">The combined company may not succeed in addressing these
risks or any other problems encountered in connection with the merger, or
whether the integration of Computer Motion with Intuitive Surgical will result
in the realization of the full benefits anticipated by us from the merger.</P>
<B><P>SALES BY INTUITIVE SURGICAL STOCKHOLDERS OR FORMER COMPUTER MOTION
STOCKHOLDERS COULD CAUSE INTUITIVE SURGICAL'S COMMON STOCK PRICE TO DECLINE.</P>
</B><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 the combined company 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 June 30, 2003, Bear Stearns Asset
Management beneficially owned more than 5% of the outstanding shares of our
common stock. In connection with the acquisition, Intuitive Surgical assumed
outstanding Computer Motion options and warrants and converted them into options
and warrants to purchase approximately 2.2 million shares of Intuitive Surgical
commons stock, including 1.4 million option shares, most of which fully vested
upon completion of the merger.  The employment of many of these employee option
holders will be terminated as part of the Company's restructuring plan and will
then have 90 days to exercise any outstanding options.  After the merger closed,
former stockholders of Computer Motion owned approximately 30% of our
outstanding common stock.</P>
<B><P>CUSTOMER, SUPPLIER, AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD
HARM THE COMBINED COMPANY</P>
</B><P ALIGN="JUSTIFY">Intuitive Surgical and Computer Motion customers and
suppliers may, in response to the completion of the merger, delay purchasing or
supply decisions or otherwise alter existing relationships with Intuitive
Surgical or Computer Motion. These decisions or other adverse changes in the
business relationships of Intuitive Surgical and Computer Motion with their
respective customers and suppliers could adversely affect the business of the
combined company. Similarly, current and prospective Computer Motion employees
may experience uncertainty about their future as employees of the combined
company until strategies with regard to Computer Motion are implemented. This
may adversely affect the Company's ability to attract and retain, and may affect
the performance during the transition period of, key management, sales,
marketing and technical personnel.</P>
<B><P>THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES
MAY ADVERSELY AFFECT ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM
THE PROVISION OF AUDITING SERVICES TO COMPUTER MOTION AND MAY IMPEDE THE
COMBINED COMPANY'S ACCESS TO CAPITAL MARKETS.</P>
</B><P ALIGN="JUSTIFY">Arthur Andersen LLP audited Computer Motion's financial
statements for the years ended December 31, 2001 and December 31, 2000. On March
14, 2002, an indictment was unsealed charging Arthur Andersen with federal
obstruction of justice arising from the government's investigation of Enron
Corp. On June 15, 2002, Arthur Andersen was convicted of these charges. The
impact of this conviction on Arthur Andersen's financial condition may adversely
affect the ability of Arthur Andersen to satisfy any claims arising from its
provision of auditing services to Computer Motion.</P>
<P ALIGN="JUSTIFY">Should Intuitive Surgical seek to access the public capital
markets, SEC rules will require Intuitive Surgical to include or incorporate by
reference in any prospectus three years of audited financial statements. The
SEC's current rules would require Intuitive Surgical to present audited
financial statements for one or more fiscal years audited by Arthur Andersen and
use reasonable efforts to obtain its consent until the audited financial
statements for the fiscal year ending December 31, 2004 become available. If
prior to that time the SEC ceases accepting financial statements audited by
Arthur Andersen, it is possible that the available audited financial statements
for the years ended December 31, 2001 and December 31, 2000 audited by Arthur
Andersen might not satisfy the SEC's requirements. In that case, Intuitive
Surgical would be unable to access the public capital markets unless an
independent accounting firm were able to audit the financial statements
originally audited by Arthur Andersen. Any delay or inability to access the
public capital markets caused by these circumstances could have a material
adverse effect on the combined company's business, profitability and growth
prospects.</P>

<B><P><A NAME="market"></A>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK</P>
</B><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 "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 time to
maturity of all of our investments as of June 30, 2003 was approximately 1.41
years.  At June 30, 2003, approximately 31% of our investment portfolio was
composed of investments with original maturities of one year or less. </P>

<B><P ALIGN="JUSTIFY"><A NAME="control"></A>ITEM 4. CONTROLS AND PROCEDURES</P>
</B><P ALIGN="JUSTIFY">We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.  </P>
<P ALIGN="JUSTIFY">As required by SEC Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of the our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report.&nbsp; Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level. </P>
<P ALIGN="JUSTIFY">There has been no change in our internal controls over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.</P>
<B><P ALIGN="CENTER">PART II. - OTHER INFORMATION </P>
<P><A NAME="item1"></A>ITEM 1. LEGAL PROCEEDINGS</P>
</B><P>BROOKHILL-WILK 1, LLC</P>
<P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit against Intuitive Surgical 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 our Company. On November 8, 2001, in response to a motion on one
of Intuitive Surgical's noninfringement defenses, 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 appealed the
summary judgment ruling to the U.S. Court of Appeals for the Federal Circuit.
</P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing. Upon remand, Intuitive Surgical
intends to continue to vigorously defend its rights and, if necessary, is
prepared to continue to dispute the meaning of other portions of the asserted
claim language and to conduct discovery and file further motions on whether the
patent is infringed, valid and/or enforceable. Intuitive Surgical believes that
it will prevail in the litigation and that it has multiple meritorious defenses
to Wilk's allegations. However, litigation is unpredictable and Intuitive
Surgical may not prevail. The case remains in its early stages of discovery in
the District Court. </P>
<P ALIGN="JUSTIFY">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. 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, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties
of litigation, however, the Company cannot accurately predict the ultimate
outcome of the litigation against Wilk at this time and, therefore, cannot
estimate the range of possible loss. </P>
<P ALIGN="JUSTIFY">OTHER LEGAL MATTERS</P>
<P ALIGN="JUSTIFY">In September 2002, we discovered that one of our employees
had purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of the Company's management. This matter was
investigated by law enforcement authorities and Company advisors. We have since
terminated this employee's employment and have taken actions intended to ensure
that no similar incidents can occur in the future, including implementing
additional controls relating to our cash disbursement process. In addition, we
are seeking to recover our loss. We have filed a claim with our insurance
carrier, from which we received proceeds of $500,000, and filed suit against the
sellers of the administrative supplies in December 2002. Our complaint alleged
that each of the defendants has (i) violated various sections of the Racketeer
Influenced and Corrupt Organization ("RICO") Act through their extortion,
coercion, intimidation, fraud, bribery and racketeering activity in connection
with the unauthorized purchase of office supplies, and (ii) committed unlawful
business acts and practices in violation of Cal. Bus. &amp; Prof. Code Section
17200 et seq. Our suit seeks to recover actual and treble damages, costs and
attorney fees for the damage caused by each of defendants through their illegal
conduct. In January 2003, we amended our complaint to allege that each defendant
further unlawfully offered prizes and gifts in violation of Cal. Bus. &amp;
Prof. Code Section 17537 and unlawfully failed to advertise limitations on the
quantity of its sales in violation of Cal. Bus. &amp; Prof. Code Section
17500.5. The amended complaint reiterates our claim to recover actual and treble
damages, costs and attorney fees. Discovery has not yet begun.  Defendants have
demurred to the complaint, alleging that the complaint does not contain
sufficiently pled information to support each of Intuitive's causes of action.
The Court will resolve the demurrer before the case continues.</P>
<P ALIGN="JUSTIFY">During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the <I>da Vinci</I> System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an <I>EndoWrist</I> instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the <I>da
Vinci</I> System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.</P>
<P ALIGN="JUSTIFY">We are subject to legal proceedings and claims that arise in
the normal course of our business. We do not know whether 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, we
cannot accurately predict the ultimate outcome of these matters at this time
and, therefore, cannot estimate the range of possible loss.</P>

<B><P><A NAME="item2"></A>ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS</P>
</B><P>None.</P>

<B><P><A NAME="item3"></A>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</P>
</B><P ALIGN="JUSTIFY">None. </P>

<B><P><A NAME="item4"></A>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS</P>
</B><P ALIGN="JUSTIFY">At the Annual Meeting of Stockholders held on June 30,
2003, the stockholders of Intuitive Surgical, Inc.:</P>
<OL>
<P ALIGN="JUSTIFY"><LI>Approved the issuance of  Intuitive Surgical common
stock, par value $0.001, pursuant to the agreement and plan of merger, dated
March 7, 2003, by and among Intuitive Surgical, Intuitive Merger Corporation and
Computer Motion, Inc.  The voting results were 21,293,411 - For; 24,373 -
Against; and 13,159,259 - Abstained.</LI></P>
<P ALIGN="JUSTIFY"><LI>Approved an amendment to Intuitive Surgical's Amended and
Restated Certification of Incorporation to effect a 1-for-2 reverse stock split
of Intuitive Surgical's common stock.  The voting results were 33,912,057 - For;
439,389 - Against; and 125,597 - Abstained.</LI></P>
<P ALIGN="JUSTIFY"><LI>Elected Lonnie M. Smith, Richard J. Kramer, and James A.
Lawrence to the Board of Directors of the Company to terms expiring at the
Annual Meeting of Stockholders in the year 2006.  The following table sets forth
the votes for each director:</LI></P>


<P ALIGN="LEFT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=504>
<TR><TD WIDTH="31%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="36%" VALIGN="TOP">
<U><FONT SIZE=2><P ALIGN="CENTER">Votes For</U></FONT></TD>
<TD WIDTH="33%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Withheld</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Lonnie M. Smith</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">34,451,360</FONT></TD>
<TD WIDTH="33%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">25,683</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Richard J. Kramer</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">34,434,375</FONT></TD>
<TD WIDTH="33%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">42,668</FONT></TD>
</TR>
<TR><TD WIDTH="31%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">James A. Lawrence</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31,913,499</FONT></TD>
<TD WIDTH="33%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">2,563,544</FONT></TD>
</TR>
</TABLE>
</P>

<FONT SIZE=2>
<P ALIGN="JUSTIFY"><LI>Amended Intuitive Surgical's 2002 Non-Employee Directors'
Stock Option Plan to increase the annual stock option grant for non-employee
directors from 5,000 to 10,000 shares, to provide for an additional annual grant
of options to purchase 5,000 shares to committee chairs and to amend the
automatic share increase provision.  The voting results were 15,246,601 - For;
6,058,432 - Against; and 13,172,010 - Abstained.</LI></P>
<P ALIGN="JUSTIFY"><LI>Ratified the selection of Ernst &amp; Young, LLP as the
Company's independent auditors for the current fiscal year ending December 31,
2003.  The voting results were 34,294,312 - For; 164,421 - Against; and 18,310 -
Abstained. </LI></P></OL>

<B><P ALIGN="JUSTIFY"><A NAME="item5"></A>ITEM 5. OTHER INFORMATION</P>
</B><P ALIGN="JUSTIFY">None. </P>

<P ALIGN="JUSTIFY"> <A NAME="item6"></A><B>ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K</P>
</B><P ALIGN="JUSTIFY">(a) Exhibits. </P></FONT>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=600>
<TR><TD WIDTH="14%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P ALIGN="CENTER">Exhibit Number</B></FONT></TD>
<TD WIDTH="86%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002</FONT></TD>
</TR>
</TABLE>
<FONT SIZE=2><P>__________ </P>
<P ALIGN="JUSTIFY">&nbsp;(b) Reports on Form 8-K. </P>
<P ALIGN="JUSTIFY">The Company filed a Current Report on Form 8-K on April 24,
2003 (File No. 000- 30713).</P>

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<B><P ALIGN="CENTER"><A NAME="sign"></A>SIGNATURE</P>
</B><P>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></FONT>

<TABLE CELLSPACING=0 BORDER=0 WIDTH=624>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<FONT SIZE=2><P>&nbsp;</FONT></TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<FONT SIZE=2><P>INTUITIVE SURGICAL, INC. </FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<FONT SIZE=2><P>&nbsp;</FONT></TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<I><FONT SIZE=2><P>(Registrant)</I> </FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<FONT SIZE=2><P>&nbsp;</FONT></TD>
<TD WIDTH="5%" VALIGN="MIDDLE">
<U><FONT SIZE=2><P>By:&nbsp;</U></FONT></TD>
<TD WIDTH="60%" VALIGN="MIDDLE">
<U><FONT SIZE=2><P>/s/ SUSAN K. BARNES </U></FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<FONT SIZE=2><P>&nbsp;</FONT></TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<FONT SIZE=2><P>Susan K. Barnes </FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="MIDDLE">
<FONT SIZE=2><P>&nbsp;</FONT></TD>
<TD WIDTH="65%" VALIGN="MIDDLE" COLSPAN=2>
<I><FONT SIZE=2><P>Senior Vice President, Chief Financial Officer and Assistant
Secretary </P>
<P></I></FONT></TD>
</TR>
</TABLE>
<FONT SIZE=2><P>Date: August 14, 2003 </P>

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<B><P ALIGN="CENTER">EXHIBIT INDEX </P></B></FONT>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=611>
<TR><TD WIDTH="14%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P ALIGN="CENTER">Exhibit Number</B></FONT></TD>
<TD WIDTH="86%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002</FONT></TD>
</TR>
</TABLE>
</CENTER></P>

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{"company-data": {"conformed-name": "INTUITIVE SURGICAL INC", "cik": "0001035267", "assigned-sic": "3842", "irs-number": "770416458", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-30713", "film-number": "03846319"}, "business-address": {"street1": "950 KIFER ROAD", "city": "SUNNYVALE", "state": "CA", "zip": "94086", "phone": "4085232100"}, "mail-address": {"street1": "950 KIFER ROAD", "city": "SUNNYVALE", "state": "CA", "zip": "94086"}}
Q2 2003 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 June 30, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).    YES
x
NO
o
The Registrant had 26,692,575 shares of Common Stock, $0.001 par value per
share, outstanding as of July 31, 2003.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets as of June 30, 2003 and
December 31, 2002
1
Condensed consolidated statements of operations for the three-month
and six-month periods ended June 30, 2003 and June 30, 2002
2
Condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2003 and June 30, 2002
3
Notes to Condensed consolidated financial statements
4
Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
11
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.   Controls and Procedures
26
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
27
Item 2.   Changes in Securities and Use of Proceeds
28
Item 3.  Defaults Upon Senior Securities
28
Item 4.  Submission of Matters to a Vote of Security Holders
28
Item 5.  Other Information
29
Item 6.   Exhibits and Reports on Form 8-K
29
Signatures
29
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30,   December 31,
                                                               2003          2002
                                                           ------------  -----------
                                                           (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $     17,681  $    17,607
  Short-term investments.................................       25,169       33,232
  Accounts receivable....................................       21,855       16,887
  Inventory, net.........................................       13,601        8,738
  Prepaid expenses.......................................        2,046        2,161
                                                           ------------  -----------
          Total current assets...........................       80,352       78,625
Property and equipment, net..............................       11,630       10,388
Intangible and other assets..............................       10,843        2,568
Goodwill.................................................      142,658           --
                                                           ------------  -----------
          Total assets...................................      245,483       91,581
                                                           ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $     17,204  $     9,282
  Accrued compensation and employee benefits.............        5,282        4,666
  Warranty accrual.......................................        2,005        2,269
  Restructuring accrual..................................        3,444           --
  Other accrued liabilities..............................        2,485        3,497
  Deferred revenue.......................................        7,131        4,838
  Current portion of notes payable.......................        1,244        1,511
                                                           ------------  -----------
          Total current liabilities......................       38,795       26,063
Long-term notes payable..................................        1,235        1,838
Deferred revenue.........................................          877           --
Commitments and contingencies............................           --           --
Stockholders' equity:
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 26,643,541 and 18,357,513 shares
     issued and outstanding as of June 30, 2003
     (see Note 3) and December 31, 2002, respectively....           27           36
  Additional paid-in capital.............................      334,162      191,020
  Deferred compensation..................................         (434)        (223)
  Accumulated deficit....................................     (130,206)    (128,791)
  Accumulated other comprehensive income ................        1,027        1,638
                                                           ------------  -----------
          Total stockholders' equity.....................      204,576       63,680
                                                           ------------  -----------
          Total liabilities and stockholders' equity..... $    245,483  $    91,581
                                                           ============  ===========
See accompanying notes to condensed consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended      Six Months Ended
                                                 June 30,                June 30,
                                           ----------------------  ----------------------
                                              2003        2002        2003        2002
                                           ---------- -----------  ---------- -----------
Sales:
  Products............................... $   19,231  $   18,243  $   36,666  $   31,700
  Services...............................      2,222       1,144       4,022       2,096
                                           ----------  ----------  ----------  ----------
Total sales..............................     21,453      19,387      40,688      33,796
Cost of sales:
  Products...............................      6,906       8,440      14,677      15,167
  Services...............................      1,000         785       1,967       1,565
                                           ----------  ----------  ----------  ----------
Total cost of sales......................      7,906       9,225      16,644      16,732
                                           ----------  ----------  ----------  ----------
    Gross profit.........................     13,547      10,162      24,044      17,064
                                           ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general and
   administrative........................      9,389       9,784      19,598      18,569
  Research and development...............      3,627       4,645       7,050       8,877
                                           ----------  ----------  ----------  ----------
    Total operating costs and
     expenses............................     13,016      14,429      26,648      27,446
                                           ----------  ----------  ----------  ----------
Income (loss) from operations............        531      (4,267)     (2,604)    (10,382)
Other income, net .......................        347         527       1,189       1,025
                                           ----------  ----------  ----------  ----------
Net income (loss)........................ $      878  $   (3,740) $   (1,415) $   (9,357)
                                           ==========  ==========  ==========  ==========
Net earnings (loss) per share:
  Basic ................................. $     0.05  $    (0.21) $    (0.08) $    (0.51)
                                           ==========  ==========  ==========  ==========
  Diluted ............................... $     0.05  $    (0.21) $    (0.08) $    (0.51)
                                           ==========  ==========  ==========  ==========
Shares used in computing net earnings
 (loss) per share:
  Basic..................................     18,580      18,192      18,506      18,173
                                           ==========  ==========  ==========  ==========
  Diluted................................     18,973      18,192      18,506      18,173
                                           ==========  ==========  ==========  ==========
See accompanying notes to condensed consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Six Months
                                                             Ended June 30,
                                                         ------------------------
                                                            2003         2002
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (1,415) $    (9,357)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       1,777        1,409
  Loss on sales of fixed assets........................           5           64
  Amortization of deferred compensation and stock
    compensation.......................................         296          395
  Amortization of intangible and other assets..........         495          390
Changes in operating assets and liabilities, net of
 operating assets and liabilities:
  Accounts receivable..................................        (493)      (1,965)
  Prepaid expenses.....................................         384        1,429
  Inventory............................................        (191)      (1,048)
  Other assets.........................................        (827)          --
  Accounts payable.....................................          30         (267)
  Accrued compensation and employee benefits...........      (1,443)         969
  Warranty accrual.....................................        (564)         363
  Other accrued liabilities............................      (2,012)       1,447
  Accrued royalty expense..............................          --       (1,000)
  Deferred revenue.....................................         944         (164)
                                                         -----------  -----------
Net cash used in operating activities..................      (3,014)      (7,335)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (1,030)      (4,805)
Disposition of property and equipment..................           1           62
Acquisition of business, net of cash acquired..........      (4,088)          --
Purchase of short-term investments.....................      (2,934)      (8,491)
Proceeds from sales of short-term investments..........       5,444       21,216
Proceeds from maturities of short-term investments.....       5,097       12,108
                                                         -----------  -----------
Net cash provided by investing activities..............       2,490       20,090
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,629        1,089
Repurchase of common stock.............................          (6)          (1)
Proceeds from notes payable............................          --          950
Repayment of notes payable.............................        (870)      (1,359)
                                                         -----------  -----------
Net cash provided by financing activities..............         753          679
                                                         -----------  -----------
Foreign currency translation adjustments...............        (155)         (49)
                                                         -----------  -----------
Net increase in cash and cash equivalents..............          74       13,385
Cash and cash equivalents, beginning of period.........      17,607       10,487
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    17,681  $    23,872
                                                         ===========  ===========

Non-cash investing activity:
  Common stock issued in connection with acquisition of
    business........................................... $   141,437  $        --
See accompanying notes to condensed consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In this report, "Intuitive Surgical," "Intuitive," and the "Company" refer to Intuitive Surgical, Inc.
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes 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 consolidated balances at December 31, 2002
were derived from the audited financial statements included in  Intuitive
Surgical, Inc.'s Annual Report on Form 10-K/A for the year ended December 31,
2002 (the "Annual Report"). The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2002, included in the Annual Report. The results for the interim period
ended June 30, 2003 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2003 or future operating periods.
On June 30, 2003, Intuitive Surgical acquired Computer
Motion, Inc. through the merger of Computer Motion with a wholly owned
subsidiary of Intuitive Surgical.  In the merger, each outstanding share of
Computer Motion common stock was converted into 0.51426943 shares of Intuitive
Surgical common stock and Intuitive Surgical assumed all of Computer Motion's
outstanding options and warrants based on the same ratio, see "Note 3:
Acquisition of Computer Motion, Inc."
The operations of Computer Motion, Inc. have been excluded
from the accompanying unaudited condensed consolidated statements of operations
for the three and six months ended June 30, 2003 and statements of cash flows
for the six months ended June 30, 2003 as the acquisition was not consummated
until June 30, 2003.
NOTE 2. CONCENTRATIONS OF RISK
Financial instruments which subject the Company to
potential risk consist of its cash equivalents, short-term investments, accounts
receivable, and foreign exchange contracts. The counterparties to the agreements
relating to the Company's investment securities and foreign exchange contracts
consist of various major corporations and financial institutions of high credit
standing. The Company believes the financial risks associated with these
financial instruments are minimal. For the six months ended June 30, 2003 and
2002, no customer accounted for more than 10% 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 accounted for all of the Company's sales
for the three months and six months ended June 30, 2003 and 2002. Purchases of
key parts and components used to manufacture the Company's products are from
limited supply sources. The inability of any of these suppliers to fulfill the
Company's supply requirements may negatively impact future operating
results.
The Company operates in one segment, the development and
marketing of products designed to provide the flexibility of open surgery while
operating through ports. For the three months ended June 30, 2003, U.S. and
international sales accounted for 70% and 30%, respectively, of total sales. For
the three months ended June 30, 2002, U.S. and international sales accounted for
80% and 20%, respectively, of total sales.
NOTE 3.  ACQUISITION OF COMPUTER MOTION, INC.
On June 30, 2003, the Company acquired all of the
outstanding shares of Computer Motion, Inc. through a merger with a wholly owned
subsidiary of Intuitive Surgical.  In the merger, each outstanding share of
Computer Motion common stock has converted into 0.51426943 shares of Intuitive
Surgical common stock and Intuitive Surgical assumed all of Computer Motion's
outstanding options and warrants to purchase Computer Motion common stock based
on the same ratio. The acquisition of Computer Motion is intended to enhance the
Company's combined competitive position in key industries, while strengthening
its work force.  It also eliminated ongoing intellectual property litigation
between the two companies. The acquisition is intended to enable the Company to
focus on strategic products and customers, achieve significant cost synergies
and economies of scale and improve results of its combined application of
robotics to minimally invasive surgery bringing benefits to patients, surgeons
and medical centers throughout the world.  The exchange ratio in the acquisition
was derived from estimates of future revenue and earnings of the combined
company, in addition to measuring the relative ownership of the combined company
implied by their contributions.  The purchase price of this acquisition was
$148.6 million resulting from the issuance to Computer Motion stockholders the
right to receive approximately 8.0 million shares of Intuitive Surgical common
stock on June 30, 2003, after giving effect to the 1-for-2 stock reverse split
effected on July 1, 2003 (the "Reverse Split), with a fair value of
approximately $125.7 million, the assumption of options and warrants to purchase
approximately 2.2 million shares of Intuitive Surgical common stock, after
giving effect to the Reverse Split, with a Black-Scholes fair value of
approximately $15.7 million, the funding of Computer Motion's second quarter
operations through a working capital loan $5.3 million, and estimated direct
transaction costs of $1.8 million.  The fair value of the Company's common stock
was derived using an average market price per share of the Company common stock
of $7.82, which was based on the closing prices for a range of trading days
prior to and including the date of the acquisition, June 30, 2003 (June 24, June
25, June 26, June 27, and June 30). The measurement date for this transaction
was the June 30, 2003 closing date, as the number of shares to be issued to
Computer Motion stockholders was not fixed until that date.
In accordance with SFAS No. 141, the Company allocated the
purchase price of the acquisition to the tangible assets, liabilities and
intangible assets acquired, including in-process research and development,
"IPR&D," based on their estimated fair values.  The excess
purchase price over those fair values is recorded as goodwill.  The fair value
assigned to intangible assets acquired is based on valuations prepared by
independent third party appraisal firms using preliminary estimates and
assumptions provided by management.  The goodwill recorded as a result of the
acquisition is not expected to be deductible for tax purposes. In accordance
with SFAS No. 142, goodwill and purchased intangible assets with indefinite
useful lives acquired after June 30, 2001 are not amortized but will be reviewed
at least annually for impairment.  Purchased intangible assets with finite lives
are amortized on a straight-line basis over their respective useful lives.
The total purchase price was comprised of the following (in
thousands):
Value of Intuitive Surgical common stock issued....  $ 125,734
Assumption of Computer Motion warrants and options.     15,703
                                                      ---------
Total value of Intuitive Surgical securities.......    141,437

Direct transaction costs...........................      1,827
Bridge loan facility...............................      5,302
                                                      ---------
Total estimated purchase price.....................  $ 148,566
                                                      =========
The following purchase price allocation is preliminary, as
future business results may differ from inherent estimates contained in the
allocation, including employee severance costs, obligations related to exiting
lease commitments, and other underlying assumptions.  The total purchase price
of has been allocated as follows (in thousands):
Cash and cash equivalents............... $    1,214
Accounts receivable, net................      4,476
Inventories, net........................      4,672
Prepaid and other assets................        269
Property, plant, and equipment..........      1,995
Other assets............................         70
Amortizable intangible assets:.
  Customer relationships................      1,300
  Developed and core technology.........      6,800
  Trademark.............................        200
  Internal use software.................        300
  In-process research and development...        100
Goodwill................................    142,658
Accounts and notes payable..............     (7,892)
Restructuring accrual...................     (3,444)
Other accrued liabilities...............     (2,361)
Deferred revenue........................     (2,225)
Deferred compensation...................        434
                                           ---------
Total purchase price.................... $  148,566
                                           =========
Goodwill
Of the total purchase price, $142.7 million was allocated
to goodwill.  Goodwill represents the excess of the purchase price over the fair
value of the underlying net tangible and intangible assets.  Goodwill is not
deductible for tax purposes.  In accordance with Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," goodwill will not be
amortized, but instead will be tested for impairment at least annually (more
frequently if certain indicators are present).  In the event management
determines that goodwill has been impaired, the Company will incur an accounting
charge for the impairment during the fiscal quarter in which the determination
is made.  (See Note 7.)
Amortizable Intangible Assets
Of the total purchase price, approximately $8.6 million
was allocated to amortizable intangible assets, comprised of developed
technology of $3.5 million, core technology of $3.3 million, customer
relationships of $1.3 million, and other intangible assets totaling $0.5
million.
Developed technology, which comprises products that have
reached technological feasibility, includes most of Computer Motion's current
products, including Aesop, Zeus, Socrates, and Hermes.  The balance of developed
technology will be amortized on a straight-line basis over a period of seven
years, representing the weighted average of the remaining product lives of the
developed technology.
Core technology represents the value of patents, processes,
and trade secrets, including certain designs and product features that Intuitive
may integrate into future products.  Core technology will be amortized on a
straight-line basis over a period of seven years.
Customer relationships represent the value of Computer
Motion's relationships with existing customers and is valued based upon the fair
value of future business with these customers.  Customer lists and other
intangible assets will be amortized on a straight line basis over a period of
approximately seven years.  (See Note 7.)
In-process research and development
Of the total purchase price, $0.1 million was allocated
to in-process research and development.  Projects which qualify as IPR&D
represent those that have not yet reached technological feasibility and for
which no future alternative uses exist.  IPR&D has been immediately, fully
amortized into Intuitive Surgical's results for the three months ended June 30,
2003.
Deferred Compensation
Of the total purchase price, $0.4 million was allocated
to deferred compensation for unvested options assumed, which represents the
intrinsic value of unvested stock options for employees and fair value for non-
employee. Deferred compensation will be amortized into expense over a three-year
period using the graded vesting method.
Restructuring charges
Upon the consummation of the acquisition of Computer
Motion, Intuitive's management approved plans to restructure the operations of
the combined entity. The current restructuring plan provides for the elimination
of redundant activities and infrastructure and will result in eliminating
approximately 150 employees, or 75%, of the Computer Motion positions over the
next six months with immediate severance payment.  The plan includes vacating
and subleasing 78% of the leased space in Goleta, California, consolidating
European operations into a single site, and closing Computer Motion's Asia
office,and transitioning to the Intuitive distribution sales model for the area.
The Company will have a single sales and marketing organization and consolidate
all manufacturing and administrative functions in Sunnyvale, California.  Based
upon this plan, the Company has recorded a $3.4 million accrual in accordance
with EITF Issue 95-3 (EITF 95-3), "Recognition of Liabilities in Connection
with a Purchase Business Combination."  In accordance with EITF 95-3, the
restructuring accrual has been recorded as a component of the purchase price.
The accrual is comprised of $2.6 million for employee severance costs and $0.8
million to exit existing lease commitments, based upon total future lease
commitments for facilities to be vacated of $2.6 million, offset by subleasing
proceeds of $1.8 million.  The Company has estimated vacancy periods of between
1 month and 3 years between exiting various sites and realizing subleasing
proceeds.
Pro forma results of operations
The following unaudited pro forma financial information
for the three and six months ended June 30, 2003 and June 30, 2002 give effect
to the proposed merger of Intuitive Surgical and Computer Motion as if it had
occurred on January 1, 2003 and January 1, 2002, respectively.  The unaudited
pro forma financial information is not intended to represent or be indicative of
the consolidated results of operations that Intuitive would have reported had
the acquisition been completed as of the dates presented, and should not be
taken as representative of the future consolidated results or financial position
of Intuitive Surgical.
Three Months Ended          Six Months Ended
                                        June 30,                  June 30,
                                  ---------------------     ---------------------
                                    2003        2002          2003        2002
                                  ---------   ---------     ---------   ---------
Sales........................... $  25,297   $  23,969     $  51,098   $  43,803
Net loss........................ $ (10,357)  $ (10,114)    $ (21,868)  $ (21,197)
Net loss per share.............. $   (0.39)  $   (0.45)    $   (0.88)  $   (0.96)
NOTE 4. 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 June 30, 2003 and December 31, 2002.
NOTE 5. SHORT-TERM INVESTMENTS
All short-term investments are classified as available-
for-sale, and therefore, are carried at fair market value. The Company views its
available-for-sale portfolio as available for use in its 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 market value based upon
quoted market prices of the securities. Unrealized gains and losses on such
securities are reported as a separate component of stockholders' equity.
Realized gains and losses on available-for-sale securities, together with
amortization of premiums and discounts on debt 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 6. INVENTORY
Inventory consists of the following (in thousands):
June 30,   December 31,
                                   2003          2002
                               ------------  ------------
Raw materials................ $      4,018  $      3,420
Work-in-process..............        3,312           780
Finished goods...............        6,271         4,538
                               ------------  ------------
                              $     13,601  $      8,738
                               ============  ============
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over
the fair value of the underlying net tangible and intangible assets.  In
accordance with Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," goodwill and intangible assets with indefinite useful
lives can no longer be amortized; however, they will be tested for impairment at
least annually (more frequently if certain indicators are present).  Intangible
assets with finite useful lives will continue to be amortized over their
respective useful lives.  In the event management determines that goodwill has
been impaired, the Company will incur an accounting charge for the impairment
during the fiscal quarter in which the determination is made.  Of the total
purchase price, $142.7 million was allocated to goodwill and $8.6 million was
allocated to amortizable intangible assets, comprised of developed technology of
$3.5 million, core technology of $3.3 million, customer relationships of $1.3
million, and other intangible assets totalling $0.5 million.
Other 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 or seven years. At
June 30, 2003, gross intangible assets totaled $13.4 million and related
accumulated amortization was $2.6 million.
NOTE 8. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) consist of
the following (in thousands):
Three Months Ended    Six Months Ended
                                                  June 30,          June 30,
                                        --------------------  --------------------
                                           2003       2002       2003       2002
                                        ---------  ---------  ---------  ---------
Net income (loss)..................... $     878  $  (3,740) $  (1,415) $  (9,357)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (64)       (91)      (155)       (49)
  Change in unrealized gain (loss)
    on available-for-sale securities..       (15)       659       (456)       158
                                        ---------  ---------  ---------  ---------
Comprehensive income (loss)........... $     799  $  (3,172) $  (2,026) $  (9,248)
                                        =========  =========  =========  =========
The components of accumulated other comprehensive loss were as follows (in
thousands):
June 30,    December 31,
                                             2003         2002
                                          -----------  -----------
Accumulated net unrealized gain on
  available-for-sales securities........ $     1,167  $     1,623
Foreign currency translation
  adjustments...........................        (140)          15

Total accumulated other comprehensive     -----------  -----------
  income................................ $     1,027  $     1,638
                                          ===========  ===========
NOTE 9. NET INCOME (LOSS) PER SHARE
The following table presents the computation of basic and
diluted net income (loss) per share (in thousands, except share and per share
data):
Three Months Ended         Six Months Ended
                                             June 30,                 June 30,
                                     -------------------------  -------------------------
                                        2003         2002          2003         2002
                                     -----------  ------------  -----------  ------------
Numerator used for basic and
  diluted net earnings (loss) per
  common share..................... $       878  $     (3,740) $    (1,415) $     (9,357)
Denominator used for basic and
  diluted net earnings (loss)
  per common share:
  Weighted-average shares
    outstanding....................  18,584,894    18,206,725   18,511,514    18,188,968
  Less weighted-average
    shares subject to
    repurchase.....................      (4,758)      (15,284)      (5,863)      (16,252)
                                     -----------  ------------  -----------  ------------
  Weighted-average shares
    used in computing basic
    common share...................  18,580,136    18,191,441   18,505,651    18,172,716
                                     ===========  ============  ===========  ============
  Add common stock equivalents.....     392,593            --           --            --
  Weighted-average shares
    used in computing diluted
    common share...................  18,972,729    18,191,441   18,505,651    18,172,716
                                     ===========  ============  ===========  ============
Net earnings (loss) per common share:
  Basic............................ $      0.05  $      (0.21) $     (0.08) $      (0.51)
                                     ===========  ============  ===========  ============
  Diluted.......................... $      0.05  $      (0.21) $     (0.08) $      (0.51)
                                     ===========  ============  ===========  ============
Common stock equivalents consisting of stock options and warrants (calculated
using the treasury stock method) have been excluded from the computation of
diluted net loss per share for the three months ended June 30, 2002 and the six
months ended June 30, 2003 and 2002, as their inclusion would be anti-
dilutive.
NOTE 10. PRODUCT WARRANTY PROVISIONS
The Company's standard policy is to warrant all shipped
systems against defects in design, materials and workmanship by replacing failed
parts during the first year of ownership. The Company's estimate of costs to
service the warranty obligations is based on historical experience and current
product performance trends. These costs are included in cost of goods sold at
the time revenue is recognized. The warranty provision is reduced by material
and labor costs used for replacement activities over the warranty period. A
review of the obligations is performed regularly to determine the adequacy of
the reserve. Based on the outcome of this review, revisions to the estimated
warranty liability are recorded as appropriate.
The following table reconciles the changes to the product warranty liability
for the period indicated (in thousands):
Balance at                         Warranty   Balance at
                                     Beginning   Warranty   Warranties Assumed in   End of
                                     of Period     Usage    Expensed   Acquisition  Period
                                    -----------  ---------  ---------  ----------  ---------
Three months ended June 30, 2003.. $     2,100  $    (337) $     (58) $      300  $   2,005
Six months ended June 30, 2003.... $     2,269  $    (776) $     212  $      300  $   2,005
The Company from time to time enters into agreements to
indemnify its customers against liability and damages arising from patent claims
against the Company's product. The term of these agreements vary, but generally,
a maximum obligation is not explicitly stated within the agreements.
Historically, the Company has not been obligated to make any significant
payments related to its customer indeminification clauses and no liabilities
have been recorded for this obligation on its balance sheets as of June 30, 2003
and December 31, 2002.
NOTE 11. STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recorded for stock option grants issued with an
exercise price equal to the market value of the underlying stock on the date
granted.  The company has recorded stock-based compensation, primarily related
to deferred compensation arising from the Company's initial public offering in
2000 and plans to record stock-based deferred compensation expense related to
its acquisition of Computer Motion in June 2003.  Had compensation expense for
the stock option grants been determined on the fair value at the grant dates
consistent with the method of Statement of Financial Accounting Standards Board
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
loss and loss per share would have been adjusted to the pro forma amounts
indicated below (amounts in thousands, except per share amounts):
Three Months Ended   Six Months Ended
                                                   June 30,            June 30,
                                              ------------------  -------------------
                                                2003      2002      2003       2002
                                              --------  --------  ---------  --------
Net income (loss), as reported.............. $    878  $ (3,740) $  (1,415) $ (9,357)
Add:  Total stock-based employee
  compensation expense included in
  reported net loss, net of $0 related tax..      141       181        296       395
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect..   (1,958)   (1,820)    (3,984)   (3,495)
                                              --------  --------  ---------  --------
Pro forma net income (loss)................. $   (939) $ (5,379) $  (5,103) $(12,457)
                                              ========  ========  =========  ========

Earnings (loss) per share:
  Basic and diluted - as reported........... $   0.05  $  (0.21) $   (0.08) $  (0.51)
  Basic and diluted - pro forma............. $  (0.05) $  (0.30) $   (0.28) $  (0.69)
NOTE 12.  REVERSE STOCK SPLIT
Intuitive Surgical's stockholders approved a one-for-two
reverse stock split (the"Reverse Split") on June 30, 2003 and it was
executed on July 1, 2003. The par value of Intuitive's common stock after the
Reverse Split remained at $0.001 per shares.  The rights of the holders of these
securities were not otherwise modified.  All shares outstanding and earnings per
share information for all periods presented in these financial statements give
effect to the Reverse Split.  All shares, per share and market price data
related to Intuitive's common shares outstanding and under employee stock plans
reflect the retroactive effects of the Reverse Split.
NOTE 13. REVENUE RECOGNITION
The Company recognizes 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.
In certain cases, revenue from direct system sales is
generated from multiple-element arrangements which require judgment in the areas
of customer acceptance, training, installation and collectibility. The Company
accounts for multiple-element arrangements in accordance with the provisions of
SAB 101, "Revenue Recognition in Financial Statements." Revenue is recognized as
specific elements indicated in sales contracts are executed. If an element is
essential to the functionality of an arrangement, the entire arrangement's
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 or delivery occurs. The fair value of an
undelivered element is based upon an estimate made by management. If an
undelivered element exists, the Company will determine the fair value of the
undelivered element and subtract the fair value of the undelivered element from
the total consideration under the arrangement. The residual amount is recognized
as the value of the delivered element. Amounts billed in excess of revenue
recognized are recorded as deferred revenue on the balance sheet. Costs
associated with inconsequential or perfunctory elements in multiple-element
arrangements are accrued at the time of revenue recognition. The Company
accounts for installation as a separate element of a multiple-element
arrangement. The Company therefore recognizes the fair value of installation
services upon the completion of installation.
The Company's distributors do not have price protection
rights. One of the Company's distributors has return rights under limited
circumstances. Such rights are accounted for under the provisions of SFAS No.
48, "Revenue Recognition When Right of Return Exists." To date, the Company has
not had any system sales returns.
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. All costs
associated with the provision of service and maintenance, including salaries,
benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheets.
The Company's
da Vinci
Surgical System contains a
software component. The Company believes that the software element in the
da
Vinci
Surgical System is an incidental part of the system. The software
element within the Company's 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 the Company provides is incidental to the
surgical system as a whole and the software revenue guidance provided in SOP 97-
2 is not applicable to the Company's revenues.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses accounting
for restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since SFAS 146 does not involve an entity newly acquired in a business
combination, the restructuring accrual, recorded as a component of the purchase
price in connection with the acquisition was established based on the provisions
of EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination" and SFAS 146 did not impact the Company's
results of operations or financial position during the six months ended June 30,
2003.
In January 2003, the FASB issued Interpretation No. 46, or
FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A variable interest entity is a corporation, partnership, trust, or any
other legal structures used for business purposes that either (a) does not have
equity investors with voting rights, or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003. FIN 46 also requires consolidation of variable interest entities entered
into prior to January 31, 2003 in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply to
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of FIN 46 has not had an
impact on the Company's financial position or results of operations during the
six months ended June 30, 2003.
In October 2002, the Emerging Issues Task Force reached
consensus on issue 00-21, or EITF 00-21, "Revenue Arrangements with Multiple
Deliverables." The principles and application guidance of EITF 00-21 should be
used to determine (a) how the arrangement consideration should be measured, (b)
whether the arrangement should be divided into separate units of accounting, and
(c) how the arrangement consideration should be allocated among the separate
units of accounting. The guidance in this issue is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is evaluating the possible impact of the adoption of EITF 00-21 on its
results of operations and financial position.
NOTE 15. CONTINGENCIES
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk")
filed a lawsuit against Intuitive Surgical 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, the Company is 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 the Company. On November 8, 2001, in response to a motion on
one of Intuitive Surgical's noninfringement defenses, the District Court granted
summary judgment of noninfringement of the '003 patent in the Company's favor
and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed
the summary judgment ruling to the U.S. Court of Appeals for the Federal
Circuit.
On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing.  Upon remand, Intuitive Surgical
intends to continue to vigorously defend its rights and, if necessary, is
prepared to continue to dispute the meaning of other portions of the asserted
claim language and to conduct discovery and file further motions on whether the
patent is infringed, valid and/or enforceable. Intuitive Surgical believes that
it will prevail in the litigation and that it has multiple meritorious defenses
to Wilk's allegations. However, litigation is unpredictable and Intuitive
Surgical may not prevail. The case remains in its early stages of discovery in
the District Court.
If the Company loses Wilk's suit against us, it will hurt our
competitive position, may be costly and may prevent the Company from selling its
products. If the Company loses the patent suit, it may need to obtain from Wilk
a license to this technology to continue to market its products that have been
found to infringe Wilk's patents. This license could be expensive, which could
seriously harm the Company's business. If Wilk is successful in its suit against
the Company and is unwilling to grant a license, the Company may be required to
stop selling its products that are found to infringe Wilk's patents unless the
Company can redesign them so they do not infringe Wilk's patents, which it may
be unable to do. In addition, the Company could be required to pay Wilk damages,
including treble damages, which could be substantial and harm its financial
position. Due to the inherent uncertainties of litigation, however, the Company
cannot accurately predict the ultimate outcome of the litigation against Wilk at
this time and, therefore, cannot estimate the range of possible loss.
During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the
da Vinci
System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an
EndoWrist
instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the
da
Vinci
System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.  Due to the inherent uncertainties of
the litigation, and the early stage of this case, the Company cannot accurately
predict the outcome of this litigation at this time and therefore, cannot
estimate the range of possible loss.
The foregoing proceedings could be expensive to litigate, may
be protracted and the Company's confidential information may be compromised.
Whether or not the Company is successful in these lawsuits, these proceedings
could consume substantial amounts of its financial and managerial resources. At
any time, the other parties may file additional claims against the Company, or
the Company may file claims against them, which could increase the risk, expense
and duration of the litigations. For more information on the Company's
litigation with Wilk, see "Part II-Item 1: Legal Proceedings."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this report, "Intuitive Surgical,"
"Intuitive," the "Company," "we," "us," and "our" refer to
Intuitive Surgical, Inc.
This Management's Discussion and Analysis of Financial
Condition as of June 30, 2003 and Results of Operations for the three month and
six month periods ended June 30, 2003 and June 30, 2002 should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K/A for the
year ended December 31, 2002.
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®, da Vinci®, InSite®, EndoWrist®,
Zeus®, Hermes®, and Aesop® are registered 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 third generation. The
da Vinci
Surgical System consists of a surgeon's console, a patient-side cart, a high
performance vision system and proprietary "wristed" 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 in a manner never before experienced.
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, or 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. In November 2002, we received clearance from
the FDA for use of the
da Vinci
Surgical System in thoracoscopically-
assisted cardiotomy procedures. In January 2003, we began promoting atrial
septal defect closure surgery under the November 2002 cardiotomy clearance.
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. A small
percentage of 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,
we believe that the percentage of revenue from our
EndoWrist
instruments
and service will 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.
The percentage of revenue derived from recurring instrument, accessory, and
service revenue has grown from 20% for the quarter ended June 30, 2002 to 30%
for the quarter ended June 30, 2003.
COMPUTER MOTION ACQUISITION
On June 30, 2003, the Company acquired Computer
Motion, Inc.  In this transaction, Computer Motion merged with a wholly owned
subsidiary of Intuitive Surgical and each share of Computer Motion common stock
was converted into 0.51426943 shares of Intuitive Surgical common stock. The
total purchase price of the transaction was $148.6 million compared to $113.0
million presented on a pro forma basis in the Company's Registration Statement
on Form S-4 filed with the SEC in connection with the transaction (the "pro
forma") as if the transaction had closed as of March 31, 2003.  The
increase in purchase price resulted primarily from a rise in the Intuitive
Surgical common stock price from $6.20 at the April 29, 2003 measurement date in
the pro forma presentation to the $7.82 value used to measure the value of stock
issued at the June 30, 2003 close date.  The purchase price also increased $5.3
million to reflect funds loaned to Computer Motion during the second quarter of
2003 to fund its operations.  The measurement date for this transaction was the
June 30, 2003 closing date, as the number of shares to be issued to Computer
Motion stockholders was not fixed until that date.
The following table compares the allocation of purchase price
between the pro forma financial information presented in the Form S-4 and the
actual transaction:
Actual      Pro forma
                                 ---------    ---------
Tangible assets............... $      218    $  10,136
Intangible assets.............      8,700       32,400
Restructuring accrual.........     (3,444)          --
Deferred compensation.........        434          574
Goodwill......................    142,658       69,854
                                 ---------    ---------
Total purchase price.......... $  148,566    $ 112,964
                                 =========    =========
The tangible assets acquired were $9.9 million less than pro
forma due primarily to Computer Motion's second quarter loss of $5.9 million and
adjustments made to the fair value of Computer Motion's inventory and fixed
asset historical balances.   Intangible assets acquired were $23.7 million less
than pro forma primarily due to lower developed and core technology valuations
resulting from reduced business forecasts for the acquired Computer Motion Zeus
product line.  The restructuring accrual was recorded in the actual allocation,
as management has now developed a restructuring plan with sufficient detail to
record this reserve, primarily for employee severance pay and facility closure
costs.  Goodwill was higher than pro forma due to the combined impact of the
rise in the purchase price and the changes in the other tangible and intangible
assets acquired.
The current restructuring plan provides for the elimination
of approximately 75% of the Computer Motion employees, exiting 78% of the space
in Goleta, California, consolidating European operations into a single site,
closing the Computer Motion's Asia office, and transitioning to the Intuitive
distribution sales model for the area.  The Company will have a single sales and
marketing organization and consolidate all manufacturing and administrative
functions in the Sunnyvale, California headquarters.  Based on these plans, the
Company projects to achieve annual pre-tax cost savings of at least $18 million
to be phased in beginning in the third quarter of 2003.  The Company estimates
that approximately $12.0 million of those savings will result from a substantial
reduction in headcount.
RESULTS OF OPERATIONS
Sales
. Total sales for the three months ended June
30, 2003 were $21.5 million, up 11% from $19.4 million for the three months
ended June 30, 2002. The increase in second quarter of 2003 sales was driven by
continued recurring revenue growth, consisting of instruments, accessories, and
service.  Second quarter 2003 recurring revenue totaled $6.4 million, up $2.6
million over the prior year and up $1.0 million sequentially over the first
quarter of this year.  Higher recurring revenue was driven by growth in the
installed base of
da Vinci
Surgical Systems and surgical procedures
performed with the system. We shipped 14
da Vinci
Surgical Systems during
the second quarter of 2003, compared to 16 in the second quarter of 2002. During
the second quarter 2003, we launched our fourth arm product, shipping 9 units
during the quarter.  Overall, second quarter 2003 system revenue was down
slightly to $15.1 million, compared to $15.6 million for the second quarter of
2002.  As of June 30, 2003, there were 177 cumulative
da Vinci
Surgical
Systems shipped, compared to 118 as of June 30, 2002.
On a year to date basis, total sales for the six months ended
June 30, 2003 were $40.7 million, up 20% from $33.8 million for the six months
ended June 30, 2002.  The increase was driven by continued growth in recurring
revenue.  Sales of instruments, accessories and service grew to $11.8 million
for the first half of 2003 from $6.5 million for the first half of last year.
Overall, system revenue for the first half of 2003 was $28.9 million, up $1.6
million from $27.3 million for the first half of 2002.  The increase was due
primarily to the second quarter of 2003 fourth arm sales.  There were 28
da
Vinci
Surgical Systems shipped during the first half of 2003 compared to 29
last year.
Product sales for the three months ended June 30, 2003 of
$19.2 million were up $1.0 million compared to $18.2 million for the three
months ended June 30, 2002.  The increase was primarily due to higher instrument
and accessory sales, $1.5 million, resulting from a larger installed base of
da Vinci
Surgical Systems in 2003, offset by lower
da Vinci
Surgical System sales.
Product sales for the six months ended June 30, 2003 of $36.7
million were up $5.0 million compared to $31.7 million for the six months ended
June 30, 2002.  The increase was primarily due to higher instrument and
accessory sales, $3.4 million, resulting from a larger installed base of
da
Vinci
Surgical Systems in 2003 and additional system revenue of $1.6 million
driven by incremental revenue derived from the fourth surgical arm system
enhancement launched during the second quarter of 2003.
Service sales for the three months ended June 30, 2003 of
$2.2 million were up $1.1 million from $1.1 million for the three months ended
June 30, 2002.  Service sales for the six months ended June 30, 2003 of $4.0
million were up $1.9 million from $2.1 million for the six months ended June 30,
2002.  The year over year increases resulted from a larger base of
da
Vinci
Surgical systems on annual service contracts.
Gross Profit
. Total gross profit for the three months
ended June 30, 2003 was $13.5 million, or 63.2% of sales, compared with $10.2
million, or 52.4% of sales for the three months ended June 30, 2002. The year-
over-year improvement in gross profit resulted primarily from significantly
lower product warranty costs resulting from system reliability improvements,
improved factory productivity, and manufacturing overhead absorption timing.
Total gross profit for the six months ended June 30, 2003 was
$24.0 million, or 59.1% of sales, compared with $17.1 million, or 50.5% of sales
for the six months ended June 30, 2002. The year-over-year improvement in gross
profit resulted primarily from significantly lower product warranty costs
resulting from system reliability improvements and improved factory
productivity.
Product sales gross profit percentage increased from 53.7%
for the three months ended June 30, 2002 to 64.1% for the three months ended
June 30, 2003.  Product gross profit percentage increased from 52.2% for the six
months ended June 30, 2002 to 60.0% for the six months ended June 30, 2003.  The
year over year increases resulted primarily from significantly lower warranty
costs and improved factory productivity.
Service sales gross profit percentage increased from 31.4%
for the three months ended June 30, 2002 to 55.0% for the three months ended
June 30, 2003.  Product gross profit percentage increased from 25.3% for the six
months ended June 30, 2002 to 51.1% for the six months ended June 30, 2003.  The
year over year increases resulted primarily from lower per system service costs
resulting from system reliability improvements and field service organization
productivity gains.
Selling, General and Administrative Expenses
. Selling,
general and administrative expenses for the three months ended June 30, 2003
were $9.4 million, down 4% from $9.8 million for the three months ended June 30,
2002. The year-over-year decrease was primarily due to the decrease in
litigation expenses of $1.4 million, offset by higher headcount and travel
related costs associated with providing surgical and training support to a
larger installed base of
da Vinci
Surgical Systems, a $0.5 million
provision for bad debts related to accounts receivables acquired from Computer
Motion and $0.1 million to record immediate expense recognition of the
intangible in-process research and development acquired in the Computer Motion
acquisition.
Selling, general and administrative expenses for the six
months ended June 30, 2003 were $19.6 million, up 6% from $18.6 million for the
six months ended June 30, 2002. The year-over-year increase was primarily due to
higher headcount and travel related costs associated with supporting a larger
installed base of
da Vinci
Surgical Systems of $0.9 million, bad debt
expense of $0.5 million, offset by a $0.5 million insurance recovery recorded in
the first quarter of 2003 related to the unauthorized purchases made in the
third quarter of 2002. Please see "Part II. Item I. Legal Proceedings - Other
Legal Matters."
Selling, general and administrative expenses include 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 and integrate the Computer Motion business.
Research and Development Expenses
. Research and
development expenses for the three months ended June 30, 2003 were $3.6 million,
down 22% from $4.6 million for the three months ended June 30, 2002. The year-
over-year decrease resulted primarily from lower second quarter 2003 project
materials costs of $0.6 million and lower project consulting costs of $0.4
million.
Research and development expenses for the six months ended
June 30, 2003 were $7.1 million, down 21% from $8.9 million for the six months
ended June 30, 2002. The year-over-year decrease resulted primarily from lower
project materials costs of $0.7 million and lower project consulting costs of
$0.6 million, and deferred compensation of $0.1 million.  The remainder of the
decrease related to lower general operating expenses.
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.
Research and development expenses are expected to increase in the future due to
the impact of the acquisition of Computer Motion.
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 expense. Non-cash deferred compensation
expense included in research and development expenses was $0.1 million and $0.1
million for the three months ended June 30, 2003 and 2002, respectively. Non-
cash deferred compensation expense included in selling, general and
administrative expenses was $0.1 million and $0.1 million for the three months
ended June 30, 2003 and 2002, respectively. Non-cash deferred compensation
expense included in research and development expenses was $0.1 million and $0.3
million for the six months ended June 30, 2003 and 2002, respectively. Non-cash
deferred compensation expense included in selling, general and administrative
expenses was $0.2 million and $0.1 million for the six months ended June 30,
2003 and 2002, respectively. Deferred compensation related to below market
options granted prior to our initial public offering ($8.9 million) have now
been fully amortized.  In connection with our acquisition of Computer Motion, we
recorded $0.4 million of deferred compensation on unvested options which will be
amortized into compensation expense over a three year period beginning July 1,
2003 using the graded vesting method.
Other Income (Expense).
Other income (expense) for the
three months ended June 30, 2003 was $0.3 million, down 0.2 million compared to
$0.5 million for the three months ended June 30, 2002. The decrease resulted in
reduced interest earnings on lower investment balances.  Other income (expense)
for the six months ended June 30, 2003 was $1.2 million, up $0.2 million
compared to $1.0 million for the six months ended June 30, 2002. The increase
resulted primarily from $0.5 million of gains realized during the first quarter
of 2003 on sales of investment securities, partially offset by reduced interest
earnings on lower investment balances.
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 $10.5 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, at
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 June 30, 2003, we had working capital of $41.6 million,
compared to $52.6 million as of December 31, 2002. The decrease during the first
half of 2003 resulted primarily from the impact of the acquisition of Computer
Motion, reflecting cash used to fund the second quarter 2003 Computer Motion
operations of $5.3 million, establishment of a restructuring accrual of $3.4
million, and the negative fair value of working capital acquired of $1.0
million.  The remainder of the decrease resulted primarily from our year to date
net loss of $1.4 million.
Net cash provided by operating activities for the three
months ended June 30, 2003 was $2.9 million, comprised primarily of our net
income of $0.9 million, non-cash expenses of $1.3 million, and working capital
provided of $0.7 million.   Cash provided by operating activities was $3.2
million higher in the second quarter of 2003 compared to the second quarter of
2002 primarily due to higher 2003 net income.
Net cash used by operating activities for the six months
ended June 30, 2003 was $3.0 million, comprised primarily of our net loss of
$1.4 million, and working capital used of $4.2 million, offset by non-cash
expenses of $2.6 million.   Cash used by operating activities was $4.3 million
less than in the first half of 2003 compared to the first half of 2002 primarily
due to lower 2003 net loss of $7.9 million, offset by working capital used of
$3.9 million.
Net cash used by investing activities was $7.7 million for
the three months ended June 30, 2003, compared to $16.7 million provided for the
three months ended June 30, 2002. Second quarter 2003 cash used in investing
activities consisted of $4.1 million of net cash used to fund the operations of
Computer Motion, $2.9 million to purchase short-term investments, and $0.7
million invested in property and equipment.  Second quarter 2002 cash provided
by investing activities consisted of $17.5 million of proceeds from sales and
maturities of investments, offset by investments in property and equipment of
$0.8 million.
Net cash provided by investing activities for the six months
ended June 30, 2003 of $2.5 million was $17.6 million less than $20.1 million
for the six months ended June 30, 2002 primarily due to lower net movement into
cash from short-term investments of $17.2 million resulting from lower 2003
first half net loss and general timing of conversions into cash to support
short-term liquidity.
Net cash used by financing activities was $0.2 million for
the three months ended June 30, 2003, compared to $0.8 million for the three
months ended June 30, 2002. This decrease resulted from lower long-term
borrowing net proceeds of $0.4 million, offset by higher proceeds from issuance
of common stock of $0.2 million.  Net cash provided by financing activities was
$0.8 million for the six months ended June 30, 2003, compared to $0.7 million
for the six months ended June 30, 2002. This decrease resulted from higher
proceeds from issuance of common stock of $0.5 million, offset by lower long-
term borrowing net proceeds.
We believe the Company has sufficient cash to complete the
Computer Motion integration and reach sustained cash-positive operations.  We
ended our second quarter 2003 with $42.9 in total cash, cash equivalents, and
short-term investments.  Based upon our current business forecast and our
restructuring plan, we expect year-end 2003 cash, cash equivalents, and short-
term investments to total approximately $25.0 million by which time we expect to
have substantially completed our integration activities, incurred most of our
integration costs, and achieve cash positive operations.  Our ability to achieve
these goals is subject to economic conditions and unanticipated changes in
business conditions, and therefore there can be no assurance that these results
will be achieved.
Our capital requirements depend on numerous factors,
including the effects of our recently completed merger with Computer Motion,
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 future operations. However, 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.
Contractual Obligations and Commercial Commitments
The following table summarizes all significant
contractual payment obligations by payment due date:
Payments by Periods (Millions)
Contractual Obligation
Total
Under 1 Year
1-3 Years
3-5 Years
Over 5 Years
Long-term debt
$ 2.6
$ 1.4
$ 1.2
$ -
$ -
Building lease
14.1
3.5
10.5
.1
-
Total
$ 16.7
$ 4.9
$ 11.7
$ .1
$ -
CRITICAL ACCOUNTING POLICIES
We believe the following represent our critical accounting
policies:
Revenue Recognition. In certain cases, revenue from direct
system sales is generated from multiple-element arrangements which require
judgment in the areas of customer acceptance, training, installation and
collectibility. The Company accounts for multiple-element arrangements in
accordance with the provisions of SAB 101, "Revenue Recognition in Financial
Statements." Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of an
arrangement, the entire arrangement's 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 or
delivery occurs. The fair value of an undelivered element is based upon an
estimate made by management. If an undelivered element exists, the Company will
determine the fair value of the undelivered element and subtract the fair value
of the undelivered element from the total consideration under the arrangement.
The residual amount is recognized as the value of the delivered element. Amounts
billed in excess of revenue recognized are recorded as deferred revenue on the
balance sheet. Costs associated with inconsequential or perfunctory elements in
multiple-element arrangements are accrued at the time revenue is recognized. The
Company accounts for installation as a separate element of a multiple-element
arrangement. The Company therefore recognizes the fair value of the installation
services upon completion of installation.
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. All costs
associated with the provision of service and maintenance, including salaries,
benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as
deferred revenue in the accompanying consolidated balance sheets.
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
judgment. The allowance is adjusted periodically to reflect current data,
activity, and associated risks.
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 in the future.
Intangible Assets. We have intangible assets on our balance
sheet related to the acquisition of Computer Motion and the acquisition of other
patents. The valuation and classification of these assets and the assignment of
useful amortization lives involves judgments and the use of estimates. The
evaluation of these intangibles for impairment under established accounting
guidelines is required on an ongoing basis. Changes in business conditions could
potentially require future adjustments to asset valuations.
Goodwill.  We have goodwill on our balance sheet relating to
the acquisition of Computer Motion.  Goodwill is recorded as the excess of the
purchase price over the fair value of the net tangible and intangible assets
acquired.  Goodwill is not amortized, rather is tested for impairment at lease
annually.  In the event we determine that goodwill has been impaired, we will
record an accounting charge for the impairment during the fiscal quarter in
which the determination is made.
Warranties. We provide for the estimated costs of product
warranties at the time revenue is recognized. Our estimate of costs to service
our warranty obligations is based upon historical experience and expectation of
future conditions. If warranty claim activity and the costs associated with
servicing those claims differ from our estimates, revisions to the estimated
warranty liability may be required.
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 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 is 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 integration of Computer Motion with our company;
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 and defend against third party
challenges;
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 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. 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 will 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.
A relatively small number of customers account for a
significant portion of our total revenues. During the three months ended June
30, 2003 and 2002, approximately 70% and 80%, respectively, of our revenues came
from the sales of
da Vinci
Surgical Systems, which are high revenue
dollar items. During the six months ended June 30, 2003 and 2002, approximately
71% and 81%, respectively, of our revenues came from the sales of
da
Vinci
Surgical Systems During the three and six month periods ended June 30,
2003 and 2002, no customer accounted for more than 10% of total sales. However,
due to the high average selling price of the
da Vinci
Surgical System,
our failure to add new customers that make significant purchases of our products
could reduce our future revenues. The loss or delay of individual orders could
have a significant impact on revenues and operating results.
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 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. 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 BROOKHILL-WILK 1,
LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT
US FROM SELLING OUR PRODUCTS.
On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed
a lawsuit against Intuitive Surgical 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
our company. On November 8, 2001, in response to a motion on one of Intuitive
Surgical's noninfringement defenses, 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 appealed the summary judgment
ruling to the U.S. Court of Appeals for the Federal Circuit.
On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing.  Upon remand, we intend to
continue to vigorously defend our rights and, if necessary, are prepared to
continue to dispute the meaning of other portions of the asserted claim language
and to conduct discovery and file further motions on whether the patent is
infringed, valid and/or enforceable. We believe that we will prevail in the
litigation and that we have multiple meritorious defenses to Wilk's allegations.
However, litigation is unpredictable and we may not prevail. The case remains in
its early stages of discovery in the District Court.
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. 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, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties
of litigation, however, the Company cannot accurately predict the ultimate
outcome of the litigation against Wilk at this time and, therefore, cannot
estimate the range of possible loss.
The foregoing proceeding could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in this lawsuit, the proceeding could consume substantial
amounts of our financial and managerial resources. At any time, Wilk may file
additional claims against our company, or we may file claims against Wilk, which
could increase the risk, expense and duration of the litigations. For more
information on our litigation with Wilk, 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 do not know whether 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 do not know whether 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. 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, remote 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 with, one or more of these third
parties. 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 Brookhill-Wilk 1, LLC has, our
technical and management personnel will experience a significant diversion of
time and effort and we will incur large expenses defending our company. 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/A 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/A
of Intuitive Surgical, Inc., filed with the SEC.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
During the course of our administrative proceedings
and/or lawsuits, there may be public announcements of the results of hearings,
motions, and other interim proceedings or developments in the litigation. 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, or 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 premarket approval
application, 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 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 or require us to conduct further testing, or
compile more data, including clinical data and clinical studies, 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
clearance or 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, or 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, or 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/A of Intuitive Surgical, Inc., filed with the 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.
If we modify existing products or develop new products in the
future, including new instruments, we may 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. For additional information concerning
regulatory approvals of our products, see "Item 1: Business -- Government
Regulation," included in the Annual Report on Form 10-K/A of Intuitive Surgical,
Inc., filed with the SEC.
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.
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/A 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 drugs 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 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 incorporate mechanical parts and computer
software, either of which 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 such defects. We cannot assure you that our products will not
experience errors or performance problems in the future. If we experience flaws
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, or QSR. We are
also required to comply with International Organization for Standardization, or
ISO quality system standards in order to produce products for sale in Europe. If
we fail to continue to comply with Good Manufacturing Practice requirements or
ISO 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
standards. The FDA inspected our Mountain View and Sunnyvale facilities in March
2000 and December 2002, respectively. The Good Manufacturing Practice issues
raised by the FDA during the inspections either were satisfactorily resolved
with the FDA, or we believe can be resolved by us to the FDA's satisfaction,
although we cannot assure you that we will be able to do so. We continue to be
subject to FDA inspections at any time. 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 ISO standards in future
inspections and 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, or FDB, and we were issued an updated device manufacturing license for
our Sunnyvale facility. We are 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 in 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.
During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the
da Vinci
System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an
EndoWrist
instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the
da
Vinci
System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.
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. 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. 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 other foreign markets. Sales to markets outside of the
United States accounted for approximately 30% of our sales for the three months
ended June 30, 2003 and 20% for the three months ended June 30, 2002.  Sales to
markets outside of the United States accounted for approximately 24% of our
sales for the six months ended June 30, 2003 and 17% for the six months ended
June 30, 2002.
We are 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.
RISK FACTORS ASSOCIATED WITH OUR MERGER WITH COMPUTER MOTION
INTUITIVE SURGICAL AND COMPUTER MOTION EACH HAVE INCURRED SUBSTANTIAL LOSSES
SINCE INCEPTION.  THE MERGED COMPANY MAY NOT BE ABLE TO GENERATE OR RAISE
SUFFICIENT CASH TO FUND OPERATIONS.
For the three months ended June 30, 2003 on a stand alone
basis, we generated our first net profit of $0.9 million, while Computer Motions
incurred a net loss of $5.9 million, including the benefit of a $4.4 million
recovery of a litigation judgment accrual with Intuitive originally charged to
expense in 2002.  On a year-to date basis, Intuitive Surgical incurred a $1.4
million loss and Computer Motion incurred a net loss of $13.6 million, including
the litigation judgment recovery. In addition, the integration of the two
companies and the settlement of outstanding Computer Motion liabilities and
commitments will require significant cash resources.  While we expect that we
have enough cash to integrate the companies and achieve profitable operations,
the extent of our future losses and the timing of achieving profitability on a
merged basis are highly uncertain, and we may never achieve profitable
operations.  If achieving profitable operations takes longer than planned, we
will need to raise additional funds. We may not be able to obtain additional
financing on favorable terms, or at all. If we are unable to generate sufficient
capital to fund our operations and cannot raise it on acceptable terms, we may
not be able to further develop, enhance or expand the market for our products
and service, and the combined company could fail.
THE COMBINED COMPANY MAY NOT REALIZE ALL OF THE ANTICIPATED BENEFITS OF
THE MERGER.
The success of the merger will depend, in part, on the
ability of the combined company to realize the anticipated synergies, cost
savings and growth opportunities from integrating the business of Computer
Motion with the business of Intuitive Surgical. Our success in realizing these
benefits and the timing of this realization depend upon the successful, rapid
integration of the operations of Computer Motion with those of Intuitive
Surgical. This integration will be a complex, costly and time-consuming process,
and may not succeed as planned. The difficulties of combining the operations of
the companies include, among other things:
coordinating and consolidating ongoing and future
research and development efforts;
consolidating sales and marketing operations;
retaining existing customers and attracting new
customers;
retaining strategic partners and attracting new strategic
partners;
retaining key employees;
consolidating corporate and administrative
infrastructures;
integrating and managing the technologies and products of
the two companies;
identifying and eliminating redundant and underperforming
operations and assets;
using capital assets efficiently to develop the business
of the combined company;
minimizing the diversion of management's attention from
ongoing business concerns; and
coordinating geographically separate organizations.
In addition, Computer Motion's products differ in substantial
ways from Intuitive's products, and the companies rely on different distributors
and sales channels to sell their products. Both Computer Motion and Intuitive
Surgical are parties to existing distribution agreements that cannot be
terminated prior to the end of their terms.
The combined company may not succeed in addressing these
risks or any other problems encountered in connection with the merger, or
whether the integration of Computer Motion with Intuitive Surgical will result
in the realization of the full benefits anticipated by us from the merger.
SALES BY INTUITIVE SURGICAL STOCKHOLDERS OR FORMER COMPUTER MOTION
STOCKHOLDERS COULD CAUSE INTUITIVE SURGICAL'S 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 the combined company 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 June 30, 2003, Bear Stearns Asset
Management beneficially owned more than 5% of the outstanding shares of our
common stock. In connection with the acquisition, Intuitive Surgical assumed
outstanding Computer Motion options and warrants and converted them into options
and warrants to purchase approximately 2.2 million shares of Intuitive Surgical
commons stock, including 1.4 million option shares, most of which fully vested
upon completion of the merger.  The employment of many of these employee option
holders will be terminated as part of the Company's restructuring plan and will
then have 90 days to exercise any outstanding options.  After the merger closed,
former stockholders of Computer Motion owned approximately 30% of our
outstanding common stock.
CUSTOMER, SUPPLIER, AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD
HARM THE COMBINED COMPANY
Intuitive Surgical and Computer Motion customers and
suppliers may, in response to the completion of the merger, delay purchasing or
supply decisions or otherwise alter existing relationships with Intuitive
Surgical or Computer Motion. These decisions or other adverse changes in the
business relationships of Intuitive Surgical and Computer Motion with their
respective customers and suppliers could adversely affect the business of the
combined company. Similarly, current and prospective Computer Motion employees
may experience uncertainty about their future as employees of the combined
company until strategies with regard to Computer Motion are implemented. This
may adversely affect the Company's ability to attract and retain, and may affect
the performance during the transition period of, key management, sales,
marketing and technical personnel.
THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES
MAY ADVERSELY AFFECT ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM
THE PROVISION OF AUDITING SERVICES TO COMPUTER MOTION AND MAY IMPEDE THE
COMBINED COMPANY'S ACCESS TO CAPITAL MARKETS.
Arthur Andersen LLP audited Computer Motion's financial
statements for the years ended December 31, 2001 and December 31, 2000. On March
14, 2002, an indictment was unsealed charging Arthur Andersen with federal
obstruction of justice arising from the government's investigation of Enron
Corp. On June 15, 2002, Arthur Andersen was convicted of these charges. The
impact of this conviction on Arthur Andersen's financial condition may adversely
affect the ability of Arthur Andersen to satisfy any claims arising from its
provision of auditing services to Computer Motion.
Should Intuitive Surgical seek to access the public capital
markets, SEC rules will require Intuitive Surgical to include or incorporate by
reference in any prospectus three years of audited financial statements. The
SEC's current rules would require Intuitive Surgical to present audited
financial statements for one or more fiscal years audited by Arthur Andersen and
use reasonable efforts to obtain its consent until the audited financial
statements for the fiscal year ending December 31, 2004 become available. If
prior to that time the SEC ceases accepting financial statements audited by
Arthur Andersen, it is possible that the available audited financial statements
for the years ended December 31, 2001 and December 31, 2000 audited by Arthur
Andersen might not satisfy the SEC's requirements. In that case, Intuitive
Surgical would be unable to access the public capital markets unless an
independent accounting firm were able to audit the financial statements
originally audited by Arthur Andersen. Any delay or inability to access the
public capital markets caused by these circumstances could have a material
adverse effect on the combined company's business, profitability and growth
prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
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 time to
maturity of all of our investments as of June 30, 2003 was approximately 1.41
years.  At June 30, 2003, approximately 31% of our investment portfolio was
composed of investments with original maturities of one year or less.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of the our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report.  Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level.
There has been no change in our internal controls over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BROOKHILL-WILK 1, LLC
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit against Intuitive Surgical 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 our Company. On November 8, 2001, in response to a motion on one
of Intuitive Surgical's noninfringement defenses, 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 appealed the
summary judgment ruling to the U.S. Court of Appeals for the Federal Circuit.
On April 11, 2003, the Court of Appeals reversed the District
Court's judgment and remanded the case for further proceedings. This reversal is
based on the Court of Appeals' determination that the particular claim
limitation at issue should be interpreted differently than as construed by the
District Court. The Court of Appeals has since clarified its opinion in response
to Intuitive Surgical's petition for rehearing. Upon remand, Intuitive Surgical
intends to continue to vigorously defend its rights and, if necessary, is
prepared to continue to dispute the meaning of other portions of the asserted
claim language and to conduct discovery and file further motions on whether the
patent is infringed, valid and/or enforceable. Intuitive Surgical believes that
it will prevail in the litigation and that it has multiple meritorious defenses
to Wilk's allegations. However, litigation is unpredictable and Intuitive
Surgical may not prevail. The case remains in its early stages of discovery in
the District Court.
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. 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, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties
of litigation, however, the Company cannot accurately predict the ultimate
outcome of the litigation against Wilk at this time and, therefore, cannot
estimate the range of possible loss.
OTHER LEGAL MATTERS
In September 2002, we discovered that one of our employees
had purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of the Company's management. This matter was
investigated by law enforcement authorities and Company advisors. We have since
terminated this employee's employment and have taken actions intended to ensure
that no similar incidents can occur in the future, including implementing
additional controls relating to our cash disbursement process. In addition, we
are seeking to recover our loss. We have filed a claim with our insurance
carrier, from which we received proceeds of $500,000, and filed suit against the
sellers of the administrative supplies in December 2002. Our complaint alleged
that each of the defendants has (i) violated various sections of the Racketeer
Influenced and Corrupt Organization ("RICO") Act through their extortion,
coercion, intimidation, fraud, bribery and racketeering activity in connection
with the unauthorized purchase of office supplies, and (ii) committed unlawful
business acts and practices in violation of Cal. Bus. & Prof. Code Section
17200 et seq. Our suit seeks to recover actual and treble damages, costs and
attorney fees for the damage caused by each of defendants through their illegal
conduct. In January 2003, we amended our complaint to allege that each defendant
further unlawfully offered prizes and gifts in violation of Cal. Bus. &
Prof. Code Section 17537 and unlawfully failed to advertise limitations on the
quantity of its sales in violation of Cal. Bus. & Prof. Code Section
17500.5. The amended complaint reiterates our claim to recover actual and treble
damages, costs and attorney fees. Discovery has not yet begun.  Defendants have
demurred to the complaint, alleging that the complaint does not contain
sufficiently pled information to support each of Intuitive's causes of action.
The Court will resolve the demurrer before the case continues.
During the second quarter 2003, two former patients of The
Valley Hospital in New Jersey filed suit against The Valley Hospital, their
surgeon(s) and Intuitive Surgical, Inc. alleging various harms caused during
their earlier surgeries.  Intuitive was named because the
da Vinci
System
was utilized for a portion of the complained-of surgeries and a small portion of
the tip of an
EndoWrist
instrument remained in each patient after each
surgery.  Each suit presents multiple claims variously alleging, among others,
negligence, carelessness and/or recklessness by each defendant, that the
da
Vinci
System was defectively designed and manufactured, that Intuitive
failed to properly instruct and train its surgeon in its use, and that the
defendants failed to properly apprise the patients of the risks involved.  Each
suit seeks an unspecified amount of general, special and punitive damages from
the defendants, in addition to a request to recover the costs of suit and
attorney fees.  As each suit was just recently filed, both are in very early
stages and discovery has not yet begun.
We are subject to legal proceedings and claims that arise in
the normal course of our business. We do not know whether 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, we
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
At the Annual Meeting of Stockholders held on June 30,
2003, the stockholders of Intuitive Surgical, Inc.:
Approved the issuance of  Intuitive Surgical common
stock, par value $0.001, pursuant to the agreement and plan of merger, dated
March 7, 2003, by and among Intuitive Surgical, Intuitive Merger Corporation and
Computer Motion, Inc.  The voting results were 21,293,411 - For; 24,373 -
Against; and 13,159,259 - Abstained.
Approved an amendment to Intuitive Surgical's Amended and
Restated Certification of Incorporation to effect a 1-for-2 reverse stock split
of Intuitive Surgical's common stock.  The voting results were 33,912,057 - For;
439,389 - Against; and 125,597 - Abstained.
Elected Lonnie M. Smith, Richard J. Kramer, and James A.
Lawrence to the Board of Directors of the Company to terms expiring at the
Annual Meeting of Stockholders in the year 2006.  The following table sets forth
the votes for each director:
Votes For
Withheld
Lonnie M. Smith
34,451,360
25,683
Richard J. Kramer
34,434,375
42,668
James A. Lawrence
31,913,499
2,563,544
Amended Intuitive Surgical's 2002 Non-Employee Directors'
Stock Option Plan to increase the annual stock option grant for non-employee
directors from 5,000 to 10,000 shares, to provide for an additional annual grant
of options to purchase 5,000 shares to committee chairs and to amend the
automatic share increase provision.  The voting results were 15,246,601 - For;
6,058,432 - Against; and 13,172,010 - Abstained.
Ratified the selection of Ernst & Young, LLP as the
Company's independent auditors for the current fiscal year ending December 31,
2003.  The voting results were 34,294,312 - For; 164,421 - Against; and 18,310 -
Abstained.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K
(a) Exhibits.
Exhibit Number
Description
31
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
__________
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on April 24,
2003 (File No. 000- 30713).
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: August 14, 2003
EXHIBIT INDEX
Exhibit Number
Description
31
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002